Business StartUp

Resource Requirements and Cost Estimation

Ray CrispinUniversity of Bristol

Research and Enterprise DevelopmentRay.Crispin@bris.ac.uk

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Content of session

• Review role of Balance Sheet and Profit/Loss statement

• Discuss role of planning and estimating

• The Cash Flow Forecast

• Estimation examples

• How cash flow relates to financing strategies

• Estimation in practice

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Management Accounts – A summary

Debit Credit

Balance Sheet Bank balance

Debtors

Capital assets

CreditorsShare capital

Reserves

Profit year to date Balances P&L below

Balances BS above

Profit & Loss Expenses Sales

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Management Accounts

Debit Credit

Balance Sheet Bank balance

Debtors

Capital assets

CreditorsShare capital

Reserves

Profit year to date Balances P&L below

Balances BS above

Profit & Loss Expenses Sales

Current position

Past Performance

Role of Planning and Estimating

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Planning and Estimating

• A view of the future incorporating– Effects of management decisions

• Both already made and proposed– Informed judgement about uncertain events

• Both magnitude and timing• Both sales and expenses

– An attitude to risk• And risk management strategy

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Goals

• Don’t run out of cash and go broke!

• Know how much finance is needed to take company through peak cash demands

• Pinpoint the key events and do ‘what ifs’– Highlight management actions that could be taken to improve the

situation and/or reduce risk

• Make explicit the assumptions underlying the business– Enormously helpful for the management team and the business

owners

• Hence enable a learning process

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Influence of type of business on planning

• Physical capital intensive businesses– Financing is influenced by the re-sale value of capital

items such as equipment– Stock in trade: working stock must be financed –

amounts depend on the pipeline and stock turns per year

• People intensive businesses– 70+% of costs are people-driven

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Cash Flow Forecast

Spreadsheet Jan’12 Feb’12…etc

Source Notes

Opening bank balance [A] [A]+[B]

-[C]

BS As per bank statement

Receipts

-Existing Debtors

-New items Total = [B]

BS (current)

Forecast

When will they pay?

Probabilities

Payments (Exp’s)

-Existing Creditors

-New items Total = [C]

BS (current)

Forecast

When will we have to pay?

Probabilities

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Expense estimation examples

• People

• Space

• Equipment and Infrastructure

• Variable Operating Costs

• Annual costs

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People

• Skills, salary levels, timing of recruitment?

• Employees or subcontractors?

• One-off– Recruitment and relocation costs

• Monthly– Salary

– Employers National Insurance (12.8%)

– Employers Pension Contribution [if any]

– Payroll and personnel administration overhead

• Annual– Employers Liability Insurance [legal requirement]

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Space

• Location? Temporary or long-term?

• Buy or rent? How long a lease?

• How much rent?

• What about – Local taxes, heating, lighting, power, maintenance, cleaning,

fixtures and fittings, security, building insurance etc?

• Typical package for short term space– £350 per month per person (i.e. ‘workstation’) in central Bristol

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How much space?

• Workstation 7.0 m2

• Central storage 1.0 m2

• Additional space for non-open plan 1.0 m2

• Reception, post, comms,print room 1.0 m2

• Board room and meeting rooms 1.5 m2

• Rest room and break space 0.7 m2

• Corridors etc 1.8 m2

• Total space per person 14.0 m2

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Office rental cost

• Check the current prices! £8.50 per sq foot?• Rent only: other costs could add 50%• Up to date figures, see: www.actiumconsult.co.uk

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Equipment and Infrastructure

• Is it capital or expense?

• Capital policy (example)– Over £250 in value

– Trackable and identifiable (labelled)

– Not ‘used up’ in course of business – i.e. has a (reduced) resale value

– Depreciation rate? (An expense)

• Special rules for SME IT equipment in the UK– Can be counted as ‘written off’ for tax purposes in year of

acquisition (but only relevant if making a profit)

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Variable costs

Tend to be linked to type and level of business activity and can be controlled on a day-to-day basis

• Travel

• Telecoms costs

• Stationery

• Etc

History is often a good guide to the future expense pattern

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Annual costs

• Usually quite predicable when they occur and often how much they will be – Insurance– Preparation of the annual accounts– Audit if turnover greater than £1M– The Christmas staff party!

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Sales estimation

Making an offer, getting a sale and getting paid…• Using probabilities (e.g. verbal agreement to

purchase might be 50%, a written contract might be 75%) – only money in the bank is 100%!

• Timing issues – payment terms (‘30 days’), & customer’s payment systems

• Getting heavy – interest for late payment, threatening legal action etc.

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Cash flow and Financing

You fill in the spreadsheet, including the sales forecast, and though you expect the business to be profitable you don’t have enough cash…

• Getting paid early– Part or all prepayment

• Negotiating payment terms with suppliers based on when you get paid

• Factoring– Bank pays you 80% of invoice value in exchange for fee

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Estimation in Practice

• Fair amount of systematic work, but do-able a piece at a time– One limitation is the emergence of unexpected

items: can use contingency budgets – Possible to be too pessimistic on the cost side –

recheck it is realistic• Be prepared to update it at regular intervals –

spreadsheets were designed for this work!• Very good focus for the management team to check

assumptions are shared

A cash flow forecast based on clear assumptions is a valuable tool for management and investors

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