Financial Fundamentals Every Entrepreneur Should Know!

1. Financial Fundamentals

2. Workshop Objectives

3. Simplify your life. Amplify your business.

4. Meet the Team
Dave Leanne Kyle Katie

5. Agenda
Common Mistakes Entrepreneurs Make
Financial Terms & Advanced Metrics
Access to Financing

6. Common Mistakes
Entrepreneurs Make

7. Errors Managing Money
• Separate business and personal bank accounts
 Accurate records
 Support receipt organization
 Avoid surprises

8. Lack of Proper Documentation
• Document ALL loans
Non shareholder = Bare interest
Informal loans = Unfavorable tax results

9. Lack of Proper Documentation
• Shareholder agreements
• Paid subscription for shares
• Employment contracts

10. Inappropriate Draws
• Drawing without understanding the source
Salary = withholding tax & T4
Dividends = a resolution & T5
Management fees may require HST to be paid

11. Wrong Structure
• How do I choose?
Sole proprietorship
Corporation
Holding company
Family trust

12. Questions to Ask
• Are there profits to be retained in the company?
• Are there others to participate in profits?
• Is there a liability risk in the company?
• Is there potential to sell the business?
• Is the benefit worth the cost?

13. Not Filing or Missed Deadlines
• Failure to remit payroll taxes
• Failure to file T4 or T5
• Failure to file T2
• Installment payments
• GST/ HST

14. Access to Funds and Tax Credits
• Don’t Miss out
SRED = Tax credit on eligible expenses for R&D
Co-op/ Apprentice = Tax credits on eligible programs
Grants = Training & equipment
HST = Income tax credits & rebates

15. Practice Recordkeeping
• Pick Supporting Tools
• Standardize categories
• Utilize technology
• Work inside your comfort zone

16. Why we like QBO
• Easy data entry and document management tools (Receipt
Bank, Hubdoc)
• Business planning tools (Liveplan, Spotlight Forecasting)
• Enhanced reporting tools (Spotlight Reporting)
• Industry specific tools (time tracking for service businesses,
inventory)
• Non financial SaaS (project management)

17. So What? Who Cares?
Financial Terms

18. Income Statement (Profit & Loss)
Revenue – Variable costs = Gross Margin
Gross Margin - Fixed costs= Net income or Loss
So What? Building Blocks of cash flow
Who Cares? You! Indication is you made of loss money in given period of time

19. Revenue
Sales of company representing goods delivered or
services completed
Top Line Gross Income Run Rate (extrapolated) Sales
Tech firms; quote bookings vs. actual revenue

20. Variable Costs
Costs that vary in relation to changes in revenue
Cost of Sales Cost of Goods Sold Direct Costs
• Landed product cost for companies that sell goods
• Cost of staffing in companies that sell services
• Hosting costs for SaaS companies

21. Gross Margin (Gross Profit)
Revenue minus variable costs
Gross margin % = Gross margin
Revenue
30% gross margin = $1 revenue yields $0.30 to cover fixed costs

22. Contribution Margin
Revenue - Variable costs for 1 unit of sales
So What?
Who Cares?

23. Fixed Costs (overhead/ indirect)
Don’t have a direct correlation to sales volume
Examples
Occupancy Costs Administrative Costs
Sales and Marketing Costs Management Costs

24. Net Income or Loss
The profitability or loss of the company for a specific
time period
Bottom Line Net Earnings Net Profit Burn Rate
Net Income = Revenue – Variable Costs- Fixed Costs

25. Breakeven Point
$ of revenue required to breakeven (no net income or
loss) for a specific time period based on assumptions for
gross margin % and fixed costs
Calculated by Fixed Costs/ Gross Margin %
Example: if we had projected fixed costs of $400,000 and a projected gross margin
percent of 20%, our breakeven point would be $2 million in revenue

26. Company MarsFit
Our company started
selling a fitness tracker in
2015
2015: shipped 10,000
units at $55/each
through online channel &
5,000 units at $40 each
to distributors
2015: further confirmed
orders from distributors
of an additional 2,000
units at $40 each that
shipped Jan 2016
The trackers were
manufactured in China at
a total cost of $23/unit
Freight, duty and
brokerage costs were $2/
unit
We bought 20,000 units
during the year
Rent & occupancy costs: $80,000
Sales & marketing: $200,000
Admin costs: $75,000
Personnel costs: $260,000

27. 1. What was our topline in 2015?
2. What was our cost of goods sold?
3. What is our gross margin?
4. What is our gross margin %?
5. What is our net profit or loss?
6. What is our burn rate per month?
7. What would our breakeven point be in 2016 if our gross margin % and
fixed costs didn't change?
Questions

28. • $550,000 ($55 x 10,000 units) online channel
$200,000 ($40 x 5,000 units) distribution channel
• The 2,000 units not shipped until 2016 won’t be revenue until
2016
Total revenue is $750,000 ($550,000 + $200,000)
1) Topline (Revenue)
2015: shipped 10,000
units at $55/each
through online channel &
5,000 units at $40 each
to distributors
2015: further confirmed
orders from distributors
of an additional 2,000
units at $40 each that
shipped Jan 2016

29. 2) Cost of Goods Sold (COGS)
• Variable costs equal our landed cost in this case
• Landed cost per unit $25 ($23 product cost + $2 freight)
• Sold 15,000 units (10,000 online + 5,000 distributors)
Our COGS is $375,000
($25 cost per unit X 15,000 units sold)
Annual purchases don't matter, how many sold determines variable cost
The trackers were
manufactured in China at
a total cost of $23/unit
Freight, duty and
brokerage costs were $2/
unit

30. 3) Gross Margin
Gross margin is $375,000
• Revenue of $750,000 – COGS of $375,000
= Gross margin of $375,000

31. 4) Gross Margin Percent
Gross Margin Percent is 50%
• Gross margin of $375,000
Revenue of $750,000

32. 5) Profit or Loss
Fixed Costs are $615,000
• $80K + $200K + $75K +260K
Loss for 2015 $240,000
• $375,000 gross margin - $615,000 in fixed costs

33. 6) Burn Rate
Monthly burn rate is $20,000
• $240,000 loss divided by 12 months
So What?
Who Cares?

34. 7) Break Even Point
2016 break event point:
• Expected gross margin percent of 50%
• Expected fixed costs of $615,000
($615,000 divided by 50%) = $1,230,000 revenue

35. A snapshot at a point in time of a company’s assets,
liabilities and shareholder’s equity
Assets = Liabilities + Equity
Balance Sheet

36. Assets
• What a company owns
Cash
Account receivable
Inventory
Equipment (capital assets)

37. Liabilities
• What a company owes
Accounts payable
HST payable
Debt financing

38. Equity
• What shareholders have left of their investment if the
company were to sell after all debts are paid
Equity =
Share investments
+ Plus accumulated profits or –minus accumulated losses
- Less dividends paid to shareholders

39. MarsFit Example
• Shareholders had initially invested $500,000 in
common shares
• Customers are fully paid up
• $40,000 still owed to suppliers

40. • Assets
Cash $175,000
(investment- losses- inventory + not yet paid for that inventory)
Inventory $125,000
(5,000 units unsold at $25 landed cost)
• Total Assets $300,000
• Liabilities
Accounts Payable $40,000
(still owing to suppliers)
• Shareholders’ Equity
Share Investment $500,000
Accumulated Losses (Deficit) ($240,000)
Total Shareholders’ Equity $260,000
• Total liabilities plus equity $300,000
Balance Sheet

41. • All businesses are different
• Key to understanding what levers to push to
improve your results and meet your milestones
• Dashboard
So What?
Who Cares?
Understanding Your Key Metrics

42. Customer Acquisition Costs
The cost of acquiring each customer
Total marketing costs + marketing personnel costs + onboarding
#new customers generated for a period of time
• Compared with Customer Lifetime Value (CLV) to assess viability of
business (CLV divided by CAC)
• CAC payback period
– The time period when our gross margin we get from customers will their
customer acquisition cost

43. Customer Lifetime Value
Simple calculation
• (g) Gross margin % per customer
• (r) Average monthly or annual revenue per customer
• (l) Average customer lifespan in months or years
Calculation CLV = g X r X l

44. MarsFit Subscription
• We spend $100,000 on marketing and $100,000 on marketing
personnel
• We get 2,000 new customers
• We have a
– 30% gross margin %
– Average monthly revenue per customer of $40
– And an average customer lifespan of 16 months

45. Questions
1.What is our CAC?
2.What is our CAC payback period?
3.What is our simple CLV?
4.What is our ratio of CLV to CAC?

46. Calculations
1. Our CAC is $100 ($200,000 in marketing and sales costs
divided by 2,000 new customers)
2. Our CAC payback period is 8 1/3 months ($100 CAC divided by
$12 (30% of $40) margin per customer per month)
3. Our simple CLV is $192 (30% X $40 X 16 months)
4. Our CLV to CAC ratio is 1.92 to 1 ($192 divided by $100)
Best practices for SaaS businesses seems to be 3 to 1

47. Access to Financing

48. Projecting Cash Flow
• Basis for cash flow projection =Income statement
projection
• Timing funds received and paying government
remittances and suppliers
• Inventory timing if you sell goods
• Capital asset needs (equipment, leaseholds)

49. Consistent Soft Factors
• Team
• Product
• Market
• Fit
Evaluated by traditional debt and VC investors
Evaluating Your Business

50. Why?
• Bootstrapped the company, want to retain equity ownership,
time to market not as important
Security Concern
• Loan recovery if business fails
(assets of the corporation, guarantees by shareholders,
guarantees by friends and family of shareholders)
Traditional Debt Financing

51. • Debt to equity ratio
• Total amounts owed divided by total shareholders’
equity
• Debt service coverage ratio- does the company have
enough cash flow to repay the annual loan payments
and the interest
Traditional Debt- Lending Ratios

52. Venture Capital Financing
Why?
• Unable to bootstrap the company, importance of time to
market, quick growth translating to quick increase in value
• Convertible debt
• Financing round (Seed, Series A, etc) – trade equity (shares-
participation in decision making and future value) for funding,
meet milestones to get to the next round of financing

53. Questions …