Entrepreneurship 101: Financial Planning with Kerri Golden

Financial Planning – January 2011

Developing a Financial Plan for your Business

Alex Osterwalder Business Model Canvas

Presented by: Kerri Golden
January 19, 2011

 You need the following:
 A business model, an understanding of elements of financial
model and benchmarks from others using similar business model
 Assumptions for Your Revenue Streams (Cash Inflows)
•  Market information including overview of competitive offerings
•  Revenue unit targets and pricing by customer segment and channels

 Assumptions for Your Cost Structure (Cash Outflows)
•  Key resources and how they are compensated/used
•  Key activities and what they cost
•  Key partnerships, their compensation based on contribution and other
costs to support partnerships

3 Financial Planning – January 2011

  www.trizle.com/topics/985-how-to-budget-your-startup
has this little story:
1. Sally gets a 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!


  She spent all/ most of her funding on the development of the
technology, product or service and almost no time and money selling
and marketing her product to customers
  Like many entrepreneurs, she assumed that marketing/sales was
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
  Finally, she missed the opportunity to lower her start-up’s
dependence on outside financing by securing early sales dollars


  Income Statement
 Revenue forecast, fixed and variable expenses (Cost of Revenue, Development,
Sales & Marketing, General & Administrative costs, etc) and Net Profit/Loss
 Should consider 3 scenarios: optimistic, pessimistic and probable
 Should help you/investors determine the level of revenue needed to generate a profit
in the business and timing of break-even and profitability
 What changes/factors will have greatest impact on profitability, break-even & timing?

  Balance Sheet
 Important if seeking outside investment or loans – measures Key Assets/Liabilities

  Cash Flow Forecast based on Business Model/Execution Plan
 How much funding do you need over forecast period, where will it come from and
what milestones will you accomplish with the funding?


  Revenues should be derived from:
  Bottom up view of customer relationships correlated with market data
  Pricing and cost assumptions for your product or servicel
  Social entrepreneurs: consider “sponsorship contributions” or donations
  Need to consider the pros and cons of the “hockey stick”
  Expenses:
  Develop bottom-up forecast based on your expectations
  Review benchmark targets for your industry (later years in your plan)
  Identify fixed versus variable items in your plan – i.e. those costs that
may vary with your top-line performance or activity volume
  Identify unique costs of delivering social impact for investors
  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


•  On-line company data gathered from Yahoo Finance (http://finance.yahoo.com/)
•  Analyst Research reports may provide additional detail on a sector
•  Public data is for larger companies, need to consider start-up differences
•  Wide range of gross margin results – 34-100% (allocation of costs)
•  May want to adjust averages for outlier data points (High/Low, Negative EBITDA)


Entrepreneur says: 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
Your Company
Tip:
•  Better to segment the market
and calculate your market share
on smaller target segment.
• You’ll create a more realistic
plan for your business.
• Investors like to back focused All Competitors
companies who will be
significant players in their
market segment (15-25%).


  Distribution Channel = Doctors
  Recruit Doctors as follows:
  150 in year one at trade shows/cold calling (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 – resulting in $30M of
revenue in year 5 of plan
  Pricing starts at $1,200 per year, competition drives average price
down 20% over period of the plan
  Resources required:
  6 regional sales/support representatives to call on the Doctor Network
across North America


•  Sample company is an on-line business with paid subscriptions from customers


  Businesses with several distribution channels may have
multiple selling prices for products
  End User Selling Price for product sold directly to customers
  Wholesale Price for sales to distribution partners
  Consider discount practices in industry (list price no one pays)
  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
  Volatility can be challenging – err on side of conservatism in your plan
  Professional Service Revenues
  Dependent on salary/consulting rates which generally increase over time


  The direct costs of delivering your product or service
  Products: Material, Labor, Warehousing, Shipping and Warranty
  On-line businesses: hosting/connectivity, content, software licenses
  Services: Headcount and costs related directly to service delivery
  Costs will evolve over time
  Volume will often impact unit cost on variable cost items
  Product companies often plan for engineered cost reductions in plan
  Labor costs increase over time, but productivity gains may offset
  Gross Margin
  Expressed in dollars and benchmarked as a percentage
  Need to understand margin targets for your industry/sector
  Rules of thumb – Software: 80-90%, Product Companies: 45-60%, Service
companies: 35-50%, On-line businesses: 34-100% (allocation of costs)


  Teams tend to be comfortable forecasting these costs
  Typically - largest component is labor costs for the team
- should consider evolution of team over time from
research to product design/development, testing and QA
  Should address future sustaining work on product line
  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 & Experimental Dev (SRED) - http://www.cra-arc.gc.ca/sred/
  Ontario Innovation Tax Credit (OITC) http://www.rev.gov.on.ca/en/credit/oitc/index.html
  Ontario Interactive Digital Media Tax Credit - http://www.omdc.on.ca/Page3400.aspx
  NRC-IRAP programs – advisory services and R&D funding (matching) - http://
www.nrc-cnrc.gc.ca/eng/ibp/irap.html


 Newbridge early sales – a nice “hockey stick” result
 If Sally had been Terry Matthews, she might have
spent 50% of expenses on sales/marketing and only
33% on R&D to generate spectacular sales growth!


% of Operating Cisco Adobe F5 Networks
Expense 2009 $36B $2.9B $650M

R&D Expenses 35% 31% 26%

Sales & 55% 53% 60%
Marketing Exp.

General & 10% 16% 14%
Admin. Exp.


  Labor costs for sales, marketing and customer service team
members – some may be 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, Channel recruiting/support costs
  Travel, Living and Entertainment – strategy to ensure
customer coverage and policy to control costs
  Over time, performance metrics to ensure the costs of
pursuing customers are matched with margin on sales
  Some grants/tax credits include marketing costs


  Labor costs for operations, customer support, finance,
HR, IT and admin teams, including CEO
  Billing costs – credit card fees (Paypal, Moneris)
  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
  Misc. Costs – bank charges, courier, postage


•  Data from Yahoo Finance, highlighted items are basics for start-up
•  Less relevant for benchmarking – Days in A/R and Days In A/P may be useful

  Accounts Receivable (A/R)
  Amounts owing from customers, partners, tax credit, grant program, HST
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 30-60 days from billing)
  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
  Capital Assets
  Equipment to be used in the business, expensed over longer-term
  Some businesses can be very capital-intensive


  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
  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 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 or
revenue 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 first year, quarterly thereafter usually works


•  Calculations come from cash inflow and cash outflow estimates
•  Manager’s tool generally built to look at daily, weekly and monthly cash


•  More common format used by professional accountants and public companies
•  Early-stage investors indifferent on form but will ensure reporting tool is in place


  How do you count for sweat equity and how much equity
or stock options should I give?
  Generally recommend keeping it simple and only recording the number
of shares in your share register and nothing in the financial statements
  At early-stage – difficult to equate dollar for dollar without giving away
100% of business, need to consider upside potential
  Article on MaRS website -
http://www.marsdd.com/entrepreneurs-toolkit/articles/Company-101-
Allocating-stock-options.html
  How is sweat equity different than stock options?
  Equity represents shares issued today for ownership in the business
whereby options are future right to own shares and can vest
  Shouldn’t the value of developing my product or service
be an asset my company’s balance sheet?
  Either approach is acceptable under GAAP; however, most start-ups
expense the costs as they go for simplicity – investors are indifferent


  Your business model is quantified in your financial model
  The assumptions/content must be consistent
  The key aspects of the business model need to be researched and
thought through before starting the financial model
  Your financial model 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 revenue & cash flow


Workbooks:
  Developing a Financing Strategy for your Company
  The Business Plan and Executive Summary
Articles:
  Basics of Raising Money
  Developing a financing roadmap
  What is an execution plan?
  How much money should I raise?
  Investor Engagement: The Tools you need to Raise Money
  Planning and Modeling your Social Business
  Business Plans for Social Enterprises (non-profit) and Social Purpose
Businesses (for-profits)


Entrepreneurship 101: Financial Planning with Kerri Golden

Recomendados

Recomendados

Mais conteúdo relacionado

Destaque

Destaque (6)

Mais de MaRS Discovery District

Mais de MaRS Discovery District (20)

Último

Último (20)

Entrepreneurship 101: Financial Planning with Kerri Golden