[MUSIC] Welcome to Finance for Startups. I'm Steve Ahn, a Professor of K-School at KAIST. Let me ask you this question, why do you need to learn finance? You may already have your answer but here is my version. Startup is a process where you start a company with a relatively small input of money but hope to achieve a very large output. But many entrepreneurs do not have this relatively small amount of money to start your business and so you need to find this seed money. Once you find this money, then you want to know how to use this money in the best way You then want to monitor your startup's progress. And you want to predict and plan for the future of your startup. For all these, you need to understand finance. Founders should also make sure that the startup is adequately funded all the time. You wont to know when your startup needs money and how much. For this, you need the plan of financial planning. Then you go out and meet investors like Angel and Venture Capital investors and get funding. Funding is a process where you exchange part of your company with investment money. For this exchange, you need to know the value of your company is. In this course, we'll also cover all these topics, Financial Planning, Funding and Valuation. Study of finance should start with understanding financial statements and there are three key financial statements. These financial statements will give perspectives on the health of a business. The first is a balance sheet and it shows how a company finds money and how it uses the money, by showing a company's assets, liabilities, and equity. The second statement is an income statement and it shows how profitable your company is in a given period. You should understand that cash is king and with the third statement, a cash flow statement, we monitor cash movements. This slide shows the course schedule. This week, after this short introduction, we will talk about balance sheet and income statement. Next week, we will learn about a cash flow statement and financial ratios. In the third week, we will do financial planning and being to talk about funding. In the fourth week, we will talk about the venture capital term sheet and company valuation methods. Let's talk about a balance sheet. A balance sheet shows assets on the left side and it's what the company has. On the right side, it shows liabilities, what a company owes. And the difference between assets and liabilities is a company's net worth and is called owner's equity. So this relationship holds, Assets- Liabilities = Owners' equity. If we rearrange this, we get this relationship, Assets = Liabilities + Owners' equity. This equation is called the Accounting Equation and balance sheet is based on this Accounting Equation. This statement is called a Balance Sheet because the left side and the right side of the statement balance. Let's see why a Balance Sheet Balances. When a company receives investment, it is new cash, so you records cash on the left side. On the right side, it records how the cash is obtained. In this case, the cash is the investment money, so it is recorded as Equity. These two amounts are the same so the balance sheet balances. When the company borrows money, it has more cash which is recorded on the left side and this cash is a loan which is shown on the right side. If you buy an equipment, you spend cash and so there is a decrease in cash. But now you have a new asset in the form of an equipment with the same value. In this case, there's no change on the right side. The net changes on the left and the right sides are both zero and the balance sheet again balances. If the company generates profit, either increase cash or account receivable if the company does not collect cash yet, and we'll talk about this when you learn income statement. On the right side, it is recorded as retained earning and it becomes part of owners equity. For all these cases, the left side and the right side balance. Let's talk about the Meaning of a Balance Sheet. On the right side, the balance sheet shows how the company is funded. Loan is a part of Liability and investment money and retained earning belong to Owner's Equity. The left side shows how the company uses the money to have various forms of assets which are resources the company has for its business. The company uses money to buy raw materials and production equipment for the production of it's products for example. In Summary, we learn the accounting equation which is Assets are the sum of Liabilities and Owners' equity. From the right side of a balance sheet, we know how a company is funded and the left side shows how the company uses the money.
