Speaker: Kerri Golden, CA and VC
Building a successful business is about more than simply running a research project. Ms. Kerri Golden (a chartered accountant and centure capitalist) will talk about building realistic financial plans for running a start-up company - plans that help you not only identify where you will spend money, but where you will make money!
Part of MaRS' CIBC Presents Entrepreneurship 101 lecture series: http://www.marsdd.com/events/details.html?uuid=9f5986be-713f-4180-aefc-7c1aac04abb1
2. If you fail to Plan: will your Plan fail?
Developing a Financial Plan for your Business
Kerri Golden, CA
February 10, 2010
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
3 Financial Planning – February 2010
4. You need an outline of your Business Plan including:
Product/Technology or Service
• R&D budget for tech development of initial product or set-up of service
• Specs for product/service - bill of material, labor costs to build/deliver
• Product/Service 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…
4 Financial Planning – February 2010
5. 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!
5 Financial Planning – February 2010
6. 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 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
6 Financial Planning – February 2010
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/investors determine the level of sales needed to generate
profit in the business and timing of profitability/self-sufficiency
Need to consider what changes/factors will have greatest impact on
profitability, break-even and timing?
7 Financial Planning – February 2010
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
8 Financial Planning – February 2010
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
9 Financial Planning – February 2010
10. Reduce technology risk, earn revenues earlier
Q1 ’09 Q2 09 Q3 ‘09 Q4 ‘09 Q1 ‘10 Q2 ‘10
v0.1 Proof of Concept
v0.2 Early feature set
v0.3
Live processing
v0.4 Platform, Management Lab Trial
v0.5 Advanced Features Lab Trial
v0.6 Trials
Features Complete
v1.0 First Commercial
Shipments
10 Financial Planning – February 2010
10
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
For social entrepreneurs, consider “sponsorship contributions”
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
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
12 Financial Planning – February 2010
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
13 Financial Planning – February 2010
14. 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
Your Company
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 All Competitors
significant players in their
market segment (15-25%) and
are focused in their approach.
14 Financial Planning – February 2010
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 – 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
Require 6 regional sales and support reps to support
the Doctor Network
15 Financial Planning – February 2010
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
16 Financial Planning – February 2010
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%, Service companies – 35-50%)
18 Financial Planning – February 2010
19. 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
19 Financial Planning – February 2010
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)
20 Financial Planning – February 2010
21. 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!
21 Financial Planning – February 2010
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
23 Financial Planning – February 2010
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
24 Financial Planning – February 2010
25. 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.
25 Financial Planning – February 2010
26. Completes the financial statements along with Cash Flow and Income Statement
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
26 Financial Planning – February 2010
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
27 Financial Planning – February 2010
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
28 Financial Planning – February 2010
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
29 Financial Planning – February 2010
30. Developing a Financing Roadmap
What is an execution plan?
Determining size and timing of investment rounds
The Tools you need to Raise Money
The Business Plan
Business Plans for Social Enterprises (SEs) and Social
Purpose Businesses (SPBs)
30 Financial Planning – February 2010