financial planning – january 2011 - amazon s3€¦ · 5 financial planning – january 2011 she...

Financial Planning – January 2011

Presented by: Kerri Golden January 19, 2011

Developing a Financial Plan for your Business

Alex Osterwalder Business Model Canvas

Financial Planning – January 2011 3

 You need the following:

 A business model, an understanding of elements of financial model and benchmarks from others using similar business model

 Assumptions for Your Revenue Streams (Cash Inflows) •  Market information including overview of competitive offerings

•  Revenue unit targets and pricing by customer segment and channels

 Assumptions for Your Cost Structure (Cash Outflows) •  Key resources and how they are compensated/used

•  Key activities and what they cost

•  Key partnerships, their compensation based on contribution and other costs to support partnerships


 www.trizle.com/topics/985-how-to-budget-your-startup has this little story: 1. Sally gets a new idea 2. Sally gets funding 3. Sally spends 100% of $$ developing the idea 4. Sally runs out of cash 5. Sally goes bankrupt

 Sad but frequent ending to the entrepreneurial dream!


  She spent all/ most of her funding on the development of the technology, product or service and almost no time and money selling and marketing her product to customers

  Like many entrepreneurs, she assumed that marketing/sales was easy --- once she’d developed the perfect product the customers would come knocking & in meantime investors would be impressed with the perfect product she’d developed

  She didn’t use her funding to achieve milestones needed for more funding --- investors are always looking for investment prospects that have customer traction and that’s more likely in tough times

  Finally, she missed the opportunity to lower her start-up’s dependence on outside financing by securing early sales dollars


  Income Statement

 Revenue forecast, fixed and variable expenses (Cost of Revenue, Development, Sales & Marketing, General & Administrative costs, etc) and Net Profit/Loss

 Should consider 3 scenarios: optimistic, pessimistic and probable

 Should help you/investors determine the level of revenue needed to generate a profit in the business and timing of break-even and profitability

 What changes/factors will have greatest impact on profitability, break-even & timing?

  Balance Sheet

 Important if seeking outside investment or loans – measures Key Assets/Liabilities

  Cash Flow Forecast based on Business Model/Execution Plan

 How much funding do you need over forecast period, where will it come from and what milestones will you accomplish with the funding?


 Revenues should be derived from:   Bottom up view of customer relationships correlated with market data   Pricing and cost assumptions for your product or servicel   Social entrepreneurs: consider “sponsorship contributions” or donations   Need to consider the pros and cons of the “hockey stick”

 Expenses:   Develop bottom-up forecast based on your expectations   Review benchmark targets for your industry (later years in your plan)   Identify fixed versus variable items in your plan – i.e. those costs that

may vary with your top-line performance or activity volume   Identify unique costs of delivering social impact for investors

 EBITDA – Operating Income for the business   Earnings before interest, taxes, depreciation and other amortization   Benchmark for exit values in M&A and performance of public companies


•  On-line company data gathered from Yahoo Finance (http://finance.yahoo.com/) •  Analyst Research reports may provide additional detail on a sector •  Public data is for larger companies, need to consider start-up differences •  Wide range of gross margin results – 34-100% (allocation of costs) •  May want to adjust averages for outlier data points (High/Low, Negative EBITDA)


All Competitors

Your Company

Entrepreneur says: We only need to get 1% of the projected $3 billion market by year five and have worked backward to develop earlier year sales projections in the plan…

Year five projected sales = $30 million

Tip:

•  Better to segment the market and calculate your market share on smaller target segment.

• You’ll create a more realistic plan for your business.

• Investors like to back focused companies who will be significant players in their market segment (15-25%).


 Distribution Channel = Doctors  Recruit Doctors as follows:

 150 in year one at trade shows/cold calling (60 signed up already)  2,400 doctors by year five of the plan, serving up to 30,000 patients

 Product pricing:  Annual patient revenues of $1,000 per year – resulting in $30M of

revenue in year 5 of plan  Pricing starts at $1,200 per year, competition drives average price

down 20% over period of the plan

 Resources required:  6 regional sales/support representatives to call on the Doctor Network

across North America


•  Sample company is an on-line business with paid subscriptions from customers


 Businesses with several distribution channels may have multiple selling prices for products  End User Selling Price for product sold directly to customers  Wholesale Price for sales to distribution partners  Consider discount practices in industry (list price no one pays)

 Currency  Most Canadian companies sell their products in US and other markets  Develop pricing strategies for individual markets, validate and state

assumptions in your plan  Volatility can be challenging – err on side of conservatism in your plan

 Professional Service Revenues  Dependent on salary/consulting rates which generally increase over time


 The direct costs of delivering your product or service  Products: Material, Labor, Warehousing, Shipping and Warranty  On-line businesses: hosting/connectivity, content, software licenses  Services: Headcount and costs related directly to service delivery

 Costs will evolve over time  Volume will often impact unit cost on variable cost items  Product companies often plan for engineered cost reductions in plan  Labor costs increase over time, but productivity gains may offset

 Gross Margin  Expressed in dollars and benchmarked as a percentage  Need to understand margin targets for your industry/sector  Rules of thumb – Software: 80-90%, Product Companies: 45-60%, Service

companies: 35-50%, On-line businesses: 34-100% (allocation of costs)


 Teams tend to be comfortable forecasting these costs  Typically - largest component is labor costs for the team

- should consider evolution of team over time from research to product design/development, testing and QA

 Should address future sustaining work on product line  Costs of patenting/protecting trade secrets  Any licensing costs to use technologies from 3rd parties  Tax credits/grants can help stretch your R&D budget

  Scientific Research & Experimental Dev (SRED) - http://www.cra-arc.gc.ca/sred/   Ontario Innovation Tax Credit (OITC) http://www.rev.gov.on.ca/en/credit/oitc/index.html   Ontario Interactive Digital Media Tax Credit - http://www.omdc.on.ca/Page3400.aspx   NRC-IRAP programs – advisory services and R&D funding (matching) - http://

www.nrc-cnrc.gc.ca/eng/ibp/irap.html


 Newbridge early sales – a nice “hockey stick” result

 If Sally had been Terry Matthews, she might have spent 50% of expenses on sales/marketing and only 33% on R&D to generate spectacular sales growth!


% of Operating

Expense 2009

Cisco

$36B

Adobe

$2.9B

F5 Networks

$650M

R&D Expenses 35% 31% 26%

Sales & Marketing Exp.

55% 53% 60%

General & Admin. Exp.

10% 16% 14%


 Labor costs for sales, marketing and customer service team members – some may be geographically remote

 Commissions – how does your plan compare with industry to enable recruiting top resources?

 Marketing Costs – Public Relations, Advertising, Trade Shows, Website, Lead Generation, Case Studies, Customer Documentation, Channel recruiting/support costs

 Travel, Living and Entertainment – strategy to ensure customer coverage and policy to control costs

 Over time, performance metrics to ensure the costs of pursuing customers are matched with margin on sales

 Some grants/tax credits include marketing costs


 Labor costs for operations, customer support, finance, HR, IT and admin teams, including CEO

 Billing costs – credit card fees (Paypal, Moneris)  Rent and related costs (telephone, internet, supplies…)

associated with running the office and operation  Recruiting and other HR costs – may be significant as

team is ramped up  Professional Fees including legal, audit, tax, insurance  Board/Investor Relations costs  Misc. Costs – bank charges, courier, postage


•  Data from Yahoo Finance, highlighted items are basics for start-up •  Less relevant for benchmarking – Days in A/R and Days In A/P may be useful


 Accounts Receivable (A/R)  Amounts owing from customers, partners, tax credit, grant program, HST

input tax credits – assumptions regarding terms/collection  As business grows, company may require cash or alternative financing

to fund A/R growth (e.g. customers pay 30-60 days from billing)

  Inventory and Prepaid Expenses  For product business, inventory build plan and management are critical  Need product on hand to ensure sales targets can be met  Some expenses (insurance, trade shows, rent) may be paid in advance

 Capital Assets  Equipment to be used in the business, expensed over longer-term  Some businesses can be very capital-intensive


 Accounts Payable and Liabilities (A/P)  Need to reflect terms with suppliers, should be negotiated based on your

business cycle to minimize cash flow impact  Other liabilities can include: Leases, Sales Tax Payable

 Debt Financing  Bank loan with personal guarantee from business owner  Small Business Loan for equipment  Operating Line of Credit – usually secured against Accounts Receivable

and maybe Inventory assets  Long-term Equipment Loan – may be available for capital-intensive

business

 Equity Financing  Proceeds from sale of either common or preferred shares


  “Cash is king” in start-ups   Your cash balance needs to be monitored frequently (daily or weekly)   Understanding & managing cash flow is key to success

 You’ll need to forecast: 1. How much total funding your business will require over its life? 2. What is the logical timing and available sources for getting funding or

revenue and what milestones will you have to achieve to ensure you get next required investment?

3. Based on the above, what is estimated round size and how much can you reasonably invest yourself or raise from your network of investors?

 Develop forecasts for time horizons that make sense   Monthly/weekly in near-term for your own management tool   For investors: monthly for first year, quarterly thereafter usually works


•  Calculations come from cash inflow and cash outflow estimates •  Manager’s tool generally built to look at daily, weekly and monthly cash


•  More common format used by professional accountants and public companies •  Early-stage investors indifferent on form but will ensure reporting tool is in place


 How do you count for sweat equity and how much equity or stock options should I give?  Generally recommend keeping it simple and only recording the number

of shares in your share register and nothing in the financial statements  At early-stage – difficult to equate dollar for dollar without giving away

100% of business, need to consider upside potential  Article on MaRS website -

http://www.marsdd.com/entrepreneurs-toolkit/articles/Company-101-Allocating-stock-options.html

  How is sweat equity different than stock options?  Equity represents shares issued today for ownership in the business

whereby options are future right to own shares and can vest

 Shouldn’t the value of developing my product or service be an asset my company’s balance sheet?  Either approach is acceptable under GAAP; however, most start-ups

expense the costs as they go for simplicity – investors are indifferent


 Your business model is quantified in your financial model  The assumptions/content must be consistent  The key aspects of the business model need to be researched and

thought through before starting the financial model

 Your financial model can be a work in progress  Not all elements of the plan need to be finalized before seeking funding  Be honest about where there is higher degree of confidence in the plan

and where more work is required to complete

 Monitoring your business’ progress against your financial plan is as important as developing the plan

  In today’s economic times, it is important to develop plans that generate early revenue & cash flow


Workbooks:  Developing a Financing Strategy for your Company  The Business Plan and Executive Summary Articles:  Basics of Raising Money

 Developing a financing roadmap  What is an execution plan?  How much money should I raise?

  Investor Engagement: The Tools you need to Raise Money

 Planning and Modeling your Social Business  Business Plans for Social Enterprises (non-profit) and Social Purpose

Businesses (for-profits)

financial planning – january 2011 - amazon s3€¦ · 5 financial planning – january 2011 she...

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