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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
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
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
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…
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
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
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
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
9Fail to Plan: Plan to Fail – March 2007
Always ask: Is Your Plan Realistic?Always ask: Is Your Plan Realistic?
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%)
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
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
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
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
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
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.
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
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
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
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
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)