Budgeting: If you fail to plan, will your plan fail?

Kerri Golden, CAPartner – Primaxis Technology Ventures

CFO – Infobright Inc.

February 13, 2008

If you fail to Plan: will your Plan fail?

Developing a Financial Planfor your Business

3 Financial Planning – February 2008

Presentation OverviewPresentation Overview

Financial Plan: part of your Business Plan

The Top Line – Sales, Cost of Sales and Margin

Operating Expenses – R&D, Selling and Admin.

Business Case Tool

Balance Sheet - Working Capital, Equipment andDebt/Equity Financing

Cash Flow – Entrepreneur’s most important tool

Closing Remarks


The Business Plan ~ 30 pagesThe Business Plan ~ 30 pages

Executive Summary

Company and Opportunity Summary

Product and Technology

Market Size and Growth

Sales and Marketing Plan

Competitive Overview

Operations Plan

Management Team

Financials and Investment Requirements – focus for today


Before you start your Financial PlanBefore you start your Financial Plan……

You need an outline of your Business Plan including:

Product and Technology• R&D budget for development of technology and initial products

• Specification of products - bill of material and labor cost to build

• Product’s evolution over time - cost reduction projects/estimates

Market Information, including Competitive Overview• Sales Unit Targets, Pricing, Sales Team and Partner Compensation

Sales and Marketing Plan• Go to Market Plan, Distribution Strategy, Marketing activities

Operations Plan• Details of support program, team, equipment required…


Income Statement Income Statement –– the Top Lines the Top Lines

($4.0M)($4.9M)($3.0M)Net (Loss) Income

$400K$300K$200KITDA*

($3.6M)($4.6M)($2.8M)EBITDA

$1.5M$1.2M$0.6MAdmin Expenses

$3.7M$2.2M$0.7MSelling Expenses

$3.0M$2.3M$1.5MR&D Expenses

$4.6M$1.1M$0Gross Margin

$1.1M$0.3M$0Cost of Sales

$5.7M$1.4M$0Sales

Year ThreeYear TwoYear One

*ITDA = Interest, Taxes, Depreciation and Amortization


Translating Market Share to Sales?Translating Market Share to Sales?

All Competitors

My Company

Target 1% of the projected $3 billion market by year five, work backward to earlier year sales projections

Year five projected sales = $30 million

Tip:

It can be better to segment themarket and show your marketshare in relation to segment –investors like to back companieswho will be significant players intheir market segment


Sales Forecast Sales Forecast –– bottom up more credible! bottom up more credible!

Distribution Channel = Doctors Recruit Doctors as follows:

150 in year one through trade shows (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 Pricing starts at $1,200 per year, competition drives average

price down 20% over period of the plan

Require 6 regional sales and support reps tosupport Doctor Network


Other Sales Forecast ConsiderationsOther Sales Forecast Considerations

Mixed Distribution Model may result in multiple sellingprices for products End User Selling Price for product sold directly to customers Wholesale Price for sales distribution partners

Currency Most Canadian companies sell their products in US and other markets

– Develop pricing strategies for individual markets, validate and stateassumptions in your plan

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

time


Always ask: Is Your Plan Realistic?Always ask: Is Your Plan Realistic?


Cost of Sales and Gross MarginCost of Sales and Gross Margin

The direct costs of producing your product Bill of Material, Labor, Warehousing, Shipping…for products Service Team Labor and Material Costs

Costs will evolve over time Production volume will impact unit cost Labor costs will generally increase, although they often drop as a

percentage of costs over time Planning for cost reductions – it is common for technology companies

to get version of product to market & then re-engineer it for lowest cost Gross Margin

Expressed in dollars and often a percentage – you should understandmargin targets for your industry/sector (Software – 80-90%, ProductCompanies – 45-60%)


Expense Projections - Income StatementExpense Projections - Income Statement

($4.0M)($4.9M)($3.0M)Net (Loss) Income

$400K$300K$200KITDA*

($3.6M)($4.6M)($2.8M)EBITDA

$1.5M$1.2M$0.6MAdmin Expenses

$3.7M$2.2M$0.7MSelling Expenses

$3.0M$2.3M$1.5MR&D Expenses

$4.6M$1.1M$0Gross Margin

$1.1M$0.3M$0Cost of Sales

$5.7M$1.4M$0Sales


*ITDA = Interest, Taxes, Depreciation and Amortization


R&D expenses may be your comfort zoneR&D expenses may be your comfort zone

Teams generally comfortable forecasting these costs Largest component is labor costs for the team - should

consider evolution of team over time from research toproduct design/development, testing and QA

Must address sustaining work on product line, fieldsupport for customers and future product cost reductions

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 and Experimental Development (SRED) – federal Ontario Innovation Tax Credit (OITC) and other provincial programs NRC-IRAP programs – advisory services and R&D funding (matching)


But selling expenses often drive growth!But selling expenses often drive growth!

Newbridge – sales results for the early years 1987 - $1.3M 1988 - $17.6M 1989 - $67.4M 1990 - $121.2M 1991 - $149.1M 1992 - $181.M 1993 - $307.6MNewbridge spent 50%+ on selling and only 33% onR&D to generate spectacular sales growth


WhatWhat’’s in Selling Expenses?s in Selling Expenses?

Labor costs for sales and marketing team members –usually a team that is geographically remote

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

Marketing Costs – Public Relations, Advertising, TradeShows, Website, Lead Generation, Case Studies,Customer Documentation, Partner recruiting costs

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

Performance measures to ensure the costs of pursuingcustomers are matched with margin on sales


WhatWhat’’s in Admin Expenses?s in Admin Expenses?

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

Rent and related costs (telephone, internet, supplies…)associated with running the office and operation

Recruiting and other HR costs – may be significant asteam is ramped up

Professional Fees including legal, audit, tax, insurance Board/Investor Relations costs Travel expenses for CEO/CFO Misc. Costs – bank charges, courier, postage


The Business Case ToolThe Business Case Tool

$1,300$0($1,250K)Total Margin

$1,700$1,000K$1,250KTotal Costs

$300K$200K$100KG&A Costs

$1,200K$500K$150KSelling Costs

$200K$300K$1,000KR&D Costs

$3,000K$1,000K$0Incr. Margin

$6,000K$2,000K$0IncrementalRevenue


Business case discipline should be added to ensure that futuredevelopment projects contribute to financial success.


The Balance Sheet The Balance Sheet –– an example an example

$343K$304K$203KFixed Assets

$2,939K$6,101K$619KTotal Liab/Equity

($12,170K)($8,006K)($3,037K)Ret. (Loss) Income

$13,324K$13,008K$3,227KFinancing*

$1,786K$1,020K$429KAP & Liabilities

$2,939K$6,101K$619KTotal Assets

$328K$190K$223KInventory/Prepaid

$1,371K$929K$176KAccounts Rec.

$898K$4,738K$17KCash


*Financing could be Debt, Equity or combination thereof


Asset increase = use of cashAsset increase = use of cash

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

GST 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 60 days after delivery)

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

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


Liability/Equity increase = source of cashLiability/Equity increase = source of cash

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 Small Business Loan for equipment Venture Debt, may be available along with equity funding 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 Flow Statement Cash Flow Statement –– key tool key tool

Often regarded as something accountant prepares formonthly/quarterly/annual financial statements

Should be used as a weekly or daily planning tool tomanage your business Opening Cash Balance + Cash Receipts from customers/other Receivable - Payroll Costs - Cash Payments to suppliers for Expenses/Inventory/Fixed Assets + Cash received from lenders or equity financing - Cash Payments, including interest for repayment of debt = Closing Cash Balance

Understanding & managing cash flow is key to success


Some Final ThoughtsSome Final Thoughts

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

thought through before starting the financial plan

Your financial plan 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 financialplan is as important as developing the plan

“Cash is king” in start-ups and the balance should bemonitored on a regular basis (daily or weekly)

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Budgeting: If you fail to plan, will your plan fail?

Economy & Finance