Kerri Golden, CA February 4, 2009
If you fail to plan, will your plan fail?
Developing a financial plan for your business
Financial Planning – February 2009 3
Executive Summary
Company and Opportunity Summary
Product and Technology
Market Size and Growth
Sales and Marketing Plan
Competitive Overview
Operations/Execution Plan
Management Team
Financials and Investment Requirements – focus for today
Financial Planning – February 2009 4
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/Execution Plan • Details of support program, team, equipment required…
Financial Planning – February 2009 5
www.trizle.com/topics/985-how-to-budget-your-startup has this little story: 1. Sally gets 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!
Financial Planning – February 2009 6
She spent all/ most of her funding on the development of the technology or product and almost no time and money selling and marketing her product to customers
Like most technology entrepreneurs, she assumed that marketing/sales were 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
She also missed the opportunity to lower her start-up’s dependence on outside financing by securing early sales dollars
Financial Planning – February 2009 7
Cash Flow Forecast based on Business/ Execution Plan
How much money do you need for the business now and over forecast period and what milestones will you accomplish with the funding?
Business Income Statement
Sales forecasts, margin, fixed and variable expenses (R&D, Sales & Marketing & Administrative costs, interest, etc) and net profit/loss
Should consider 3 scenarios: optimistic, pessimistic and probable
Should help you and prospective investors determine the level of sales needed to generate profit in the business and timing of profitability
Need to consider what changes/factors will have greatest impact on profitability and timing?
Financial Planning – February 2009 8
“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 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 term of first round, may be quarterly thereafter
Financial Planning – February 2009 9
Round One Round Two Round Three
Opening Cash $- $15K $40K
+Equity/Debt $250K $500K $500K
+Customer receipts - $200K $1,350K
-Payroll expenses ($200K) ($500K) ($800K)
-Supplier expenses ($50K) ($125K) ($200K)
- Product exp (40%) - ($100K) ($600K)
+Grants/other funds $15K - -
+ITC credit (prior yr) - $50K $115K
-Debt incl. interest - - -
Closing Cash $15K $40K $405K
Sales are $250K before Round Two and $1.5M before Round Three
Financial Planning – February 2009 10
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Q1 ’09 Q2 09 Q3 ‘09 Q4 ‘09 Q1 ‘10 Q2 ‘10
v0.1
v0.2
v0.3
v0.4
v0.5
v0.6
v1.0
Lab Trial
Trials
Proof of Concept
Early feature set
Live processing
Platform, Management
Advanced Features
Features Complete
First Commercial Shipments
Lab Trial
Reduce technology risk, earn revenues earlier
Financial Planning – February 2009 11
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Q1 ’09 Q2 09 Q3 ‘09 Q4 ‘09 Q1 ‘10 Q2 ‘10
v0.1
v0.2
v0.3
v0.4
v0.5
v0.6
v1.0
Lab Trial
Trials
Business Plan/Customer Requirements
Go-To-Market Plan/Customer Business Case (ROI)
Customer/Partner Meetings
Customer Demos
Customer Trial Management/Feedback
Customer Testing, Finalize Pricing, Initial Contracts
PR & Launch Plan
Lab Trial
Financial Planning – February 2009 12
Top-line revenues should be derived from: Market forecasts for your business and bottom up view of customers Pricing and cost assumptions for your product and your business model Need to consider the pros and cons of the “hockey stick”
Expenses: Develop bottom-up forecast based on your expectations Review benchmark targets for other companies in your industry and
compare with later years in your plan Identify fixed versus variable components of your plan – i.e. those costs
that may vary with your top-line performance
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
Financial Planning – February 2009 13
Year One Year Two Year Three
Sales $0 $250K $1,500K
Cost of Sales $0 $100K $600K
Gross Margin $0 $150K $900K
R&D Expenses $150K $275K $300K
ITC Credits ($50K) ($115K) ($125K)
Selling Expenses $75K $275K $600K
Admin Expenses $10K $75K $100K
EBITDA $185K ($360K) $25K
ITDA* - - -
Net (Loss) Income ($185K) ($360K) $25K
*ITDA = Interest, Taxes, Depreciation and Amortization
Financial Planning – February 2009 14
All Competitors
Your Company
Entrepreneur states: 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:
It is better to segment the market and show your market share in relation to a specific smaller segment. Investors like to back companies who will be significant players in their market segment (15-25%) and are focused in their approach.
Financial Planning – February 2009 15
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 to support the Doctor Network
Financial Planning – February 2009 16
Mixed Distribution Model may result in multiple selling prices for products End User Selling Price for product sold directly to customers Need to consider discount practices in the industry Wholesale Price for sales to distribution partners and OEMs
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 Current volatilty is challenging – err on side of conservatism in your plan
Service Revenues Dependent on salary/consulting rates which generally increase over time
Financial Planning – February 2009 17
Financial Planning – February 2009 18
The direct costs of producing your product Bill of Material, Labor, Warehousing, Shipping, Warranty…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 understand
margin targets for your industry/sector (Software – 80-90%, Product Companies – 45-60%)
Financial Planning – February 2009 19
Year One Year Two Year Three
Sales $0 $1.4M $5.7M
Cost of Sales $0 $0.3M $1.1M
Gross Margin $0 $1.1M $4.6M
R&D Expenses $1.5M $2.3M $3.0M
Selling Expenses $0.7M $2.2M $3.7M
Admin Expenses $0.6M $1.2M $1.5M
EBITDA ($2.8M) ($4.6M) ($3.6M)
ITDA* $200K $300K $400K
Net (Loss) Income ($3.0M) ($4.9M) ($4.0M)
*ITDA = Interest, Taxes, Depreciation and Amortization
Financial Planning – February 2009 20
Teams generally comfortable forecasting these costs Largest component is labor costs for the team - should
consider evolution of team over time from research to product design/development, testing and QA
Must address sustaining work on product line, field support 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)
Financial Planning – February 2009 21
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 If Sally had been Terry Matthews, she might have
spent 50%+ on selling and only 33% on R&D to generate spectacular sales growth!
Financial Planning – February 2009 22
% of Revenue Cisco
$40B
Adobe
$3.6B
F5 Networks
$662M
R&D Expenses 16% 17% 23%
Sales & Marketing Exp.
25% 30% 52%
General & Admin. Exp.
6% 9% 12%
Financial Planning – February 2009 23
Labor costs for sales and marketing team members – usually a team that is 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, Partner recruiting costs
Travel, Living and Entertainment – strategy to ensure customer coverage and policy to control costs
Performance measures to ensure the costs of pursuing customers are matched with margin on sales
Financial Planning – February 2009 24
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 as team 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
Financial Planning – February 2009 25
Year One Year Two Year Three
Incremental Revenue
$0 $2,000K $6,000K
Incr. Margin $0 $1,000K $3,000K
R&D Costs $1,000K $300K $200K
Selling Costs $150K $500K $1,200K
G&A Costs $100K $200K $300K
Total Costs $1,250K $1,000K $1,700
Total Margin ($1,250K) $0 $1,300
Business case discipline should be added to ensure that future development projects contribute to financial success.
Financial Planning – February 2009 26
Year One Year Two Year Three
Cash $15K $40K $405K
A/R and ITC Rec $50K $165K $325K
Inventory/Prepaid - - -
Fixed Assets - - -
Total Assets $65K $205K $730K
AP & Liabilities - - -
Financing* $250K $750K $1,250K
Ret. (Loss) Income ($185K) ($545K) ($520K)
Total Liab/Equity $65K $205K $730K
*Financing could be Debt, Equity or combination thereof
Completes the financial statements along with Cash Flow and Income Statement
Financial Planning – February 2009 27
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
Financial Planning – February 2009 28
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 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
Financial Planning – February 2009 29
Your business/execution plan is quantified in your financial plan The assumptions/content must be consistent 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 financial plan is as important as developing the plan
In today’s economic times, it is important to develop plans that generate early sales & cash flow