Budgeting: If you fail to plan, will your plan fail?
1.
2. If you fail to Plan: will your Plan fail?
Developing a Financial Plan
for your Business
Kerri Golden, CA
Partner – Primaxis Technology Ventures
CFO – Infobright Inc.
February 13, 2008
3. Presentation Overview
Financial Plan: part of your Business Plan
The Top Line – Sales, Cost of Sales and Margin
Operating Expenses – R&D, Selling and Admin.
Business Case Tool
Balance Sheet - Working Capital, Equipment and
Debt/Equity Financing
Cash Flow – Entrepreneur’s most important tool
Closing Remarks
3 Financial Planning – February 2008
4. The Business Plan ~ 30 pages
Executive Summary
Company and Opportunity Summary
Product and Technology
Market Size and Growth
Sales and Marketing Plan
Competitive Overview
Operations Plan
Management Team
Financials and Investment Requirements – focus for today
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5. Before you start your Financial Plan…
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 Plan
• Details of support program, team, equipment required…
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6. Income Statement – the Top Lines
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
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7. Translating Market Share to Sales?
Target 1% of the projected $3 billion market by year five, work
backward to earlier year sales projections
Year five projected sales = $30 million
My Company
Tip:
It can be better to segment the
market and show your market
share in relation to segment –
investors like to back companies All Competitors
who will be significant players in
their market segment
7 Financial Planning – February 2008
8. Sales Forecast – bottom up more credible!
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 Doctor Network
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9. Other Sales Forecast Considerations
Mixed Distribution Model may result in multiple selling
prices for products
End User Selling Price for product sold directly to customers
Wholesale Price for sales distribution partners
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
Service Revenues
Dependent on salary/consulting rates which generally increase over
time
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10. Always ask: Is Your Plan Realistic?
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11. Cost of Sales and Gross Margin
The direct costs of producing your product
Bill of Material, Labor, Warehousing, Shipping…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%)
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12. Expense Projections - Income Statement
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
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13. R&D expenses may be your comfort zone
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)
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14. But selling expenses often drive growth!
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
Newbridge spent 50%+ on selling and only 33% on
R&D to generate spectacular sales growth
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15. What’s in Selling Expenses?
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
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16. What’s in Admin Expenses?
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
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17. The Business Case Tool
Year One Year Two Year Three
Incremental $0 $2,000K $6,000K
Revenue
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.
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18. The Balance Sheet – an example
Year One Year Two Year Three
Cash $17K $4,738K $898K
Accounts Rec. $176K $929K $1,371K
Inventory/Prepaid $223K $190K $328K
Fixed Assets $203K $304K $343K
Total Assets $619K $6,101K $2,939K
AP & Liabilities $429K $1,020K $1,786K
Financing* $3,227K $13,008K $13,324K
Ret. (Loss) Income ($3,037K) ($8,006K) ($12,170K)
Total Liab/Equity $619K $6,101K $2,939K
*Financing could be Debt, Equity or combination thereof
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19. Asset increase = use of cash
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
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20. Liability/Equity increase = source of cash
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
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
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21. Cash Flow Statement – key tool
Often regarded as something accountant prepares for
monthly/quarterly/annual financial statements
Should be used as a weekly or daily planning tool to
manage your business
Opening Cash Balance
+ Cash Receipts from customers/other Receivable
- Payroll Costs
- Cash Payments to suppliers for Expenses/Inventory/Fixed Assets
+ Cash received from lenders or equity financing
- Cash Payments, including interest for repayment of debt
= Closing Cash Balance
Understanding & managing cash flow is key to success
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22. Some Final Thoughts
Your business plan is quantified in your financial plan
The assumptions/content must be consistent between the two plans
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
“Cash is king” in start-ups and the balance should be
monitored on a regular basis (daily or weekly)
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