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Fail to Plan: Plan to Fail

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Part of the MaRS Entrepreneurship 101 series http://www.marsdd.com/ent101 Building a succesful business is about more than simply running a research project. This coming Tuesday's speaker, Ms. Kerri Golden (a chartered accountant and Venture Capitalist), will talk about building realistic budgets for running a start up company - budgets that help you not only identify where you will spend money, but where you will make money! Speaker: Kerry Golden, Managing Partner at Primaxis Technology Ventures This is available as an audio presentation at: http://blog.marsdd.com/2007/03/07/entrepreneurship-101-competitive-intelligence-getting-the-information-you-need-for-your-financial-plan/
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Kerri Golden, CA Managing Partner Primaxis Technology Ventures March 6, 2007 Fail to Plan: Plan to Fail Developing a Financial Plan For your Business
Transcript
Page 1: Fail to Plan: Plan to Fail

Kerri Golden, CA

Managing Partner

Primaxis Technology Ventures

March 6, 2007

Fail to Plan: Plan to Fail

Developing a Financial Plan

For your Business

Page 2: Fail to Plan: Plan to Fail

2Fail to Plan: Plan to Fail – March 2007

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.

! Balance Sheet - Working Capital and Equipment

! Cash Flow – the most important tool for theEntrepreneur

! Closing Remarks

Page 3: Fail to Plan: Plan to Fail

3Fail to Plan: Plan to Fail – March 2007

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

Page 4: Fail to Plan: Plan to Fail

4Fail to Plan: Plan to Fail – March 2007

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…

Page 5: Fail to Plan: Plan to Fail

5Fail to Plan: Plan to Fail – March 2007

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

Page 6: Fail to Plan: Plan to Fail

6Fail to Plan: Plan to Fail – March 2007

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

Page 7: Fail to Plan: Plan to Fail

7Fail to Plan: Plan to Fail – March 2007

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 30,000patients

! Product pricing:! Annual patient revenues of $1,000 per year

! Pricing starts at $1,200 per year, competition drives averageprice down 20% over period of the plan

! Require 6 regional sales and support reps tosupport Doctor Network

Page 8: Fail to Plan: Plan to Fail

8Fail to Plan: Plan to Fail – March 2007

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

Page 9: Fail to Plan: Plan to Fail

9Fail to Plan: Plan to Fail – March 2007

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

Page 10: Fail to Plan: Plan to Fail

10Fail to Plan: Plan to Fail – March 2007

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 apercentage of costs over time

! Planning for cost reductions – it is common for technology companiesto get version of product to market & then re-engineer it for lowest cost

! Gross Margin! Expressed in dollars and often a percentage – you should understand

margin targets for your industry/sector (Software – 80-90%, ProductCompanies – 45-60%)

Page 11: Fail to Plan: Plan to Fail

11Fail to Plan: Plan to Fail – March 2007

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

Year ThreeYear TwoYear One

*ITDA = Interest, Taxes, Depreciation and Amortization

Page 12: Fail to Plan: Plan to Fail

12Fail to Plan: Plan to Fail – March 2007

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 - shouldconsider 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 other’s technologies

! Consider tax credits and grants that can help stretchyour R&D budget

Page 13: Fail to Plan: Plan to Fail

13Fail to Plan: Plan to Fail – March 2007

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 - $307.6M

Newbridge spent 50%+ on selling and only 33% on

R&D to generate spectacular sales growth

Page 14: Fail to Plan: Plan to Fail

14Fail to Plan: Plan to Fail – March 2007

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

Page 15: Fail to Plan: Plan to Fail

15Fail to Plan: Plan to Fail – March 2007

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

Page 16: Fail to Plan: Plan to Fail

16Fail to Plan: Plan to Fail – March 2007

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

Year ThreeYear TwoYear One

Business case discipline should be added to ensure that future

development projects contribute to financial success.

Page 17: Fail to Plan: Plan to Fail

17Fail to Plan: Plan to Fail – March 2007

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

Year ThreeYear TwoYear One

*Financing could be Debt, Equity or combination thereof

Page 18: Fail to Plan: Plan to Fail

18Fail to Plan: Plan to Fail – March 2007

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 financingto 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

Page 19: Fail to Plan: Plan to Fail

19Fail to Plan: Plan to Fail – March 2007

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 Receivableand maybe Inventory assets

! Long-term Equipment Loan – may be available for capital-intensivebusiness

! Equity Financing! Proceeds from sale of either common or preferred shares

Page 20: Fail to Plan: Plan to Fail

20Fail to Plan: Plan to Fail – March 2007

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

Page 21: Fail to Plan: Plan to Fail

21Fail to Plan: Plan to Fail – March 2007

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 andthought 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 planand 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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