Seminar 8: Making Sense of the Numbers

1. Academic excellence for business and the professions
BOOTSTRAP SEMINARS 2014
Making sense of the numbers

2. Introduction
• Why Financial planning is important
• Building Forecasts
• Gross Profit & Breakeven
• Managing cash in a start up
• Financial Control
• How much funding should you raise and when should
you raise it
• Making best use of a £3K investment/competition prize
• R&D Tax Credits
• How to set up a company

3. Why it’s important
• Ensure the business is likely to be viable
• Support your investment case.
• Most important ensure Cash managed – Cash is king.
• By planning know in advance if cash flow problem – its
too late when bank account empty. Must be able to pay
bills as they fall due. Raising finance takes 3-6 months
minimum.
• Usually have a limited amount of cash to spend – ensure
allocated to desired activities eg marketing, development
etc
• Growing business can very often have cash flow
problems

4. BUILDING A BUDGET
FORECAST

5. Some terminology
• Profit/Loss = Sales less costs of producing those sales.
Sales £1,000 Goods/services sold to
customer
Cost of Sales £200 Direct costs of producing
those sales – materials,
factory labour.
Gross Profit £800 Gross profit = 80%
Other Costs £300 Marketing, admin, sales,
depreciation, travel,
office, R&D etc.
Profit/Loss £500

6. Cash and Profit
• Cash Flow and Profit are usually different, eg £100K
profit doesn’t always = £100K of increased cash balance.
• This is caused by
– Payments from customer usually on credit
– Payments to suppliers usually on credit
– Items of capital expenditure eg computers charged to
P&L over a long period (Depreciation)
• However suggest that for initial forecasts you assume
cash and profit are the same.

7. How to build a forecast
• Investors typically want a 3-5 yr forecast but
concentrate on year 1
• Start with setting up template (See Spreadsheet)
• What are the projected sales (Revenue Model) – number
of units, price, when etc – is the business seasonal?
• When will the cash be received – cash sales , credit
sales typically paid 30-60 days after supply
• Set up costs – hardware/software development, factory
fit out , website development etc.

8. How to build a forecast
• Cost of sales – what does it cost to make/buy in the
units.
• What are the overheads – staff, rent, marketing etc
• Having identified Income + expenditure set out in a
spreadsheet by month
• Show net cash flow for mth + cash flow at month end
• Remember a forecast is a best estimate!

9. Where does the info come from?
• Personal knowledge
• Competitors eg what do competitors charge
• Competitor accounts
• Industry statistics
• Suppliers ask them what they will charge to supply when do
volume discounts kick in.
• Property – ask an estate agent
• Work with someone who has industry knowledge
• How are going to acquire customers – salesman ,advertising,
what is the cost of acquiring customers likely to be. Resulting
forecast is a best estimate
• State assumptions - particularly Sales, cost of sales,
marketing plan

10. Building a sales forecast
• Forecast unit sales and average selling price per month
• Use results of your market research
• Use past data if you have it – either for your business or
similar business
• Is business seasonal? A lot of internet businesses are
seasonal. Eg Christmas, games see drop-off in August
• If you have a new technology it can be very difficult to
predict sales levels and timing of take-up.

11. What costs do we typically incur?
Most companies
• Office costs - rent, rates Electricity, gas, cleaning,
security, coffee, postage etc (Consider serviced office
when starting up eg The Hangout)
• Marketing
• Professional Fees eg Accountancy, Tax, Payroll, Legal
• Insurance - Employers Liability legally required
Employee salaries
• Capital Expenditure - computers , office furniture

12. What costs do we typically incur?
Manufacturing business
• Capital Expenditure - Plant and machinery
• Production salaries
• Raw Materials including packaging
• Distribution
• Factory building - Lease or Buy - keep it flexible, may not
be possible if high set up costs

13. What costs do we typically incur?
Web Business
• Web site design and maintenance - in house or
outsource
• Hosting
• Domain registration
• Office Space
• Employees
• Fulfilment costs – postage, storage

14. What costs do we typically incur?
Software/ other intellectual Property
• Development Staff - Biggest cost
• Patent fees/Royalties and legal costs
• Computer hardware/software

15. GROSS PROFIT &
BREAK-EVEN

16. Gross Profit and Break Even
• Gross Profit = Selling price – Cost Price
• Gross Profit % - above expressed as a %
Bar sells drink for £10
Cost of drink £4
Gross Profit £6
Gross Profit % 60%
• Break Even - How many £/units to sell each day/week/
month to cover your costs

17. Why is this important?
• Gross Profit drives the amount you need to sell to
breakeven – increased margin means you need to sell
less to breakeven – e.g. a bar
• Changing gross profit may indicate problems
Selling Price £10 £10
Cost Price £6 £5
Gross Profit £4 £5
Gross Profit % 40% 50%
Daily Costs £500 £500
No of drinks to sell to
break even each day
125 drinks 100 drinks

18. Summary slide for presentations
Year 1 Year 2 Year 3
Sales £1,000 £1,500 £3,000
Cost of Sales £200 £300 £500
Gross Profit £800 £1,200 £2,500
Other Costs £700 £1,000 £1,500
Net Profit £100 £200 £1,000
Cash Balance £50 £100 £1,050
Gross Profit % 80% 80% 83.33%
Breakeven Units 100 120 140

19. MANAGING CASH FLOW
IN A START-UP

20. Managing the cash in a start-up
• Cash is always tight in the start-up phase
– Initial start up capital is expensive so rarely have lots of
surplus cash
– Launch delayed
– Unexpected costs
– Customers pay late
– Suppliers won’t give credit

21. Managing the cash in a start-up
• How can the cash be stretched out
– Defer salaries – founders work for free
– Try and get things for free – use your network
– Credit from suppliers
– Find a way of generating revenue quickly – proof of
concept, test customers, discounts for early adoption or
early payment.

22. FINANCIAL CONTROL

23. What is Financial Control
• Measurement of actual v plan P+L and cash, balance sheet, KPIs,
keeping track of product costs.
• Ratio analysis
• How are doing against our plan
• Thinking ahead revising our budgets

24. Importance of Financial Control
• Allows us to indentify how we are doing – good and bad from a
financial point of view and it may point to problems in specific areas
of the business – eg lack of sales, poor margins may mean
problems in purchasing, marketing dept spending in excess of
budget
• Allows you to take corrective action in plenty of time – its too late to
worry about a lack of cash when the bank account empty – avoid
surprises.
• Plan for growth ahead of time if sales are growing quicker than
anticipated
• Board should review mgt accounts at regular board meetings.

25. What do we do
• Mthly mgt accounts – compare actual v budget analyse the
variances
• Mgt a/c may be as simple as a review of bank statement
• Understand product costs
• Reforecast – budget typically fixed for 12 mths but each mth/qtr
reforecast
• Calculation of ratios/key performance indicators – benchmark

26. HOW TO MAKE BEST
USE OF A £3K
INVESTMENT

27. How much cash to raise?
• Your forecast will indicate how much cash you estimate
you will need to reach profitability.
• Raising finance is expensive – how much of the
company do you have to sell to raise the money ?
• If your forecast indicates that you need £2M to reach
profitability it is very unlikely that you will be able to raise
this in one financing round
• Company Valuations and attractiveness to potential
investors are related to the risk of the investment.

28. How much cash to raise?
• In early stage companies some of the key risks are
- Will the technology/product/service work
- How much will the product cost to develop/service launch
- Can the business overcome some regulatory issues eg planning
permission
- Will anyone buy the product/service
- What will the sales price be
Aim to raise sufficient funds (plus a contingency) at
each round to eliminate risks with the result you
achieve a better valuation and a greater chance of
raising the next round. Ensure this is reflected in your
forecast.

29. How to make best use of £3K
• Use it to mitigate some of the risks
– Build a proof of concept
– Find early customer(s)
– Carry out detailed market research
– Sort out regulatory issues eg get necessary licences
– If specific risks with the technology attempt to resolve
them

30. R&D TAX CREDITS

31. R&D Tax Credits
• Tax refund from HMRC for R&D Costs
• You do not need to have previously paid tax
• Get refund of approx 24% of Salary, Employers national
insurance and consumables used in the R&D process eg cost
of building a prototype.
• Contractor cost refund is approx 16%
• Claimed when you file your annual tax return. Supporting
narrative is required
• Refund is usually paid within 4-10 weeks of submitting the
claim
• Suggest you use a firm of accountants that understands R&D
tax credits – not of all of them do.

32. SETTING UP A LIMITED
COMPANY

33. Company
• Key Advantages
– Shareholders and directors have limited liability - (worst
is loose investment)
– Separate legal entity from directors/ shareholders so
directors not personally liable for debts – (except in
cases of negligence/fraud/Wrongful trading)
– Raise finance by issuing shares
• (Wrongful trading – if directors knowingly make a
financial commitment that they know the company cant
pay for they can be personally liable)

34. Types of Company
• XYZ Limited (Private Limited Company)
– Most common for small/medium business not listed on
stock exchange.
– This is what you will use
• XYZ PLC (Public Limited Company)
– Companies listed on a stock exchange
– More onerous reporting/shareholder protection than
Limited Company

35. How to incorporate a Company
• Companies House
– Cardiff based government agency that is the Registrar of
Companies.
– Companies file specific details that are available on the
public record.
– www.companieshouse.gov.uk

36. How to incorporate a Company
• To incorporate a company
– Use a lawyer or Company formation agent
– Or do it yourself on Companies House Website – cost
£15
– It is a straight forward process
– Directors/shareholders/Articles can all be changed later
by filing appropriate forms so don't worry if you get initial
details wrong

37. DIY Incorporation
Website Address
http://www.companieshouse.gov.uk/infoAndGuide/
companyRegistration.shtml
You will need
– Company name and registered office address ( Company name
must be unique check first not used at Co House Webcheck
– NB worth checking if web domain for proposed name is available
– Director and Secretary – name, address, date of birth (need at least
1 director, no longer requirement for secretary)
– Shareholder name, address, no of shares, amount paying per share
– £15 Payment

38. Articles of Association
• Company rule book
• must be filed at Companies House
• Standard Articles are available – suggest you use these
for initial incorporation
• It is likely that investors will require special terms
• Approved by shareholders

39. Articles usually contain
• The issuing of shares – what authority board has
• Different rights attached to different classes of shares
• The appointments of directors - which shows whether a shareholder
dominates or shares equality with all contributors
• Directors meetings – the quorum and percentage of vote
• Management decisions – Investor, Board or Management (reserved
matters)
• Transferability of shares – Permitted transfers
• Special voting rights of a Chairman, and his/her mode of election
• The dividend policy - a percentage of profits to be declared when
there is profit or otherwise
• Winding up - the conditions, notice to members
• Founders e.g. Founders share buy back provisions
• First right of refusal on issue of new shares (Pre-emption rights)

40. Academic excellence for business and the professions
THANK YOU
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