financial projections presentation (venture fast track)
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Financial Projections for Presentations October 24, 2013
Heather Onsto,
Today’s Speakers
• Managing Director, Scalar Analy<cs (Business Valua<ons)
• CPA, CVA
• TuDs Univ & Clark Univ Professor (Accoun<ng and Business Valua<on)
• Prior CFO • BA, Furman, MSA,
Bentley
• Venture Partner, former Director of Small Business with LaunchCapital
• Interim CEO of the Nanny Caddy, a LaunchCapital porPolio company
• Over 20 years experience in small business finance
• BA, Wofford College; MBA, Dartmouth
Alicia Amaral
Financial Projec<ons: WIFM?
Today’s presenta<on will focus on the how and why of building and pitching financial projec<ons
• How: Crea<ng financial projec<ons using a spreadsheet and some common accoun<ng knowledge shows you where to focus your resources
• Why: Crea<ng financial projec<ons shows investors that you have carefully considered all financial implica<ons
Financial Projec<ons: 3 Objec<ves
1. Force discipline and objec<vity through crea<ng a methodical approach
2. Demonstrate thorough understanding of your company’s business model
3. Provide answers to “what if?”
Building Projec<ons: Yeah, but… I’ve heard that I don’t really have to build a business plan with financial projec8ons because no one actually reads it…
• Business plans with financial projec<ons are necessary…
– Bo,oms-‐up vs. Top-‐down
– HINT: You're trying to talk yourself out of this! • Financial projec<ons are a key por<on of the due diligence
most investors perform
FOR YOU
Investors are more interested in the assump1ons made when building financial projec1ons, not the exact bo;om line
Building Projec<ons: Pulp fic<on? Projec8ons are just imaginary anyway, so what does it maCer what I put in?
A common mistake is to have illogical numbers in the projec<ons – All numbers should be <ed to your growth assump<ons
• Ex 1: If sales cycle is 6 weeks, should there be sales in month 1?
• Ex 2: If business is seasonal, should growth be smooth in every month?
– All numbers should <e with a rough cash flow statement • Either a separate tab or at the bo,om of the P&L
Projec1ons that have not been planned properly make investors ques1on your understanding of your business model
Building Projec<ons: What if…
Scenario planning is just worst-‐case (out of business), expected (what I really think will happen), and best-‐case (Google buys us for a bazillion dollars), right?
Focus on YOUR key success metrics to drive scenario planning – Sales trac<on – Gross margins – Incremental headcount
Fundraise amount range should encompass most likely scenarios to avoid expensive “Bridge” or “A-‐1” rounds
More on Scenario Planning…
Worst-‐case scenarios should answer “What happens if there is no outside capital?” – if the answer isn't 'grow slower', is this a pipe dream?
Best-‐case scenarios should answer “What does this business look like if everything goes right?” – if the answer isn’t a huge financial win for your investor, is this a pipe
dream?
Most-‐likely scenarios should answer “What does this business look like following comparable companies’ growth paths?” – if the answer isn’t able to be funded with the current “ask”, is this a
pipe dream?
Goldilocks got it right: examine all op1ons!
Building Projec<ons: Common terms • P&L • Retained earnings (best source of funding!) • EBITDA • Gross profit margin (GP or GPM)
• Working capital • CapEx • Burn rate • Accrual vs. cash basis • Cash flow breakeven (CFBE) • Capital structure
Building Projec<ons: How it works
• Have an assump8ons page and reference cells (don’t hard code anything) – A separate assump<ons page allows flexibility – change them for different growth scenarios
– Assump<ons are the backbone of your projec<ons, so you should know them COLD
Excel is your friend, but be careful with cell references – it’s easy to make a mistake!
Building Projec<ons: Proper start…?
Es<mate 1% of $100 million market share
Building Projec<ons: Proper start…?
Es<mate 1% of $100 million market share
JUST KIDDING!
Projec<ons: Start with Revenue
Take a “Bo,om Up” approach
• Ex: We have tracked X unique visitors to our website and with an industry averages 2% conversion rate, sales will be Y.
• Ex: Survey revealed customers are willing to pay $X for a product with Y features.
• Ex: Q4 sales were $X. With a customer acquisi<on cost of $Y, we expect a 20% growth rate as a result of marke<ng efforts
Econ 101: revenue = price * volume. Knowing which element is driving your company’s revenue is a key metric.
Projec<ons: Add in expenses This also has a “Bo,om-‐up” approach
• Include details of all categories – Ex. Inventory = raw materials, WIP, and finished goods – Ex. Headcount is a step-‐func<on (hard to find .25 person) – Ex. Income taxes, no; Sales tax, use tax, payroll tax… yes!
• COGS (gross profit margin) – Inventory, shipping, packaging, direct labor
• SG&A – Business Development/Sales – Marke<ng
– Overhead
Projec<ons: Understand EBITDA piPalls
• EBITDA excludes expenses that are not core to a company’s opera<ons; allows for comparisons without regard to capital structure
• Be careful about using EBITDA as proxy for cash flow even though most investors expect it
• EBITDA excludes deprecia<on because it’s noncash but CapEx requires cash
“References to EBITDA make us shudder – does management think the tooth fairy pays for capital expenditures?” – Warren Buffet
Projec<ons: final checks
• Map out cash inflows and ouPlows to determine funding needs – do this by month!
• Revenue collec<on – <ming impacts cash projec<ons. 30 or 60 days? 2/10, n30?
• Inventory turn – becomes COGS when you sell it but need cash up front
• Deprecia<on = noncash expense (include?) • Don’t forget to include CapEx in cash flow (tooth fairy doesn’t visit adults)
"The GOAL” is to make money – Social jus<ce, triple net bo,om line, etc, come AFTER
profitability • "You can't give away what you don't have"
– You'll need space one day that isn't free – It is illegal to hire someone and not pay them
– Equity + cash = total compensa<on • As equity values increase, cash compensa<on should increase as the less expensive long-‐run pay op<on (this means you are WINNING!)
– Research financial statements to get an idea of expenses you may have missed
– Research how much things cost – don’t guess! • Call your iden<fied suppliers for costs, terms of materials and development costs
Projec<ons: MORE final checks
Pitching projec<ons: What’s the “ask”?
Fin projec<ons need to <e to the amount of the raise – Fundraising takes <me, so 12-‐18 months of cash per raise – Iden<fy milestones to be hit and cost of each one
– The sum of those milestone costs is the raise amount – The "cushion" in the raise is not X%, it's the cost difference in the most likely scenarios
The secret to life is “t” – “t” is the variable for “<me” in mathema<cal equa<ons… and <me in projec<ons is everything
Pitching Projec<ons: Rookie moves
– CTRL+C+P en<re excel model into a slide
– Using anything less than 18-‐point font – Li,ering clipart from 1995… or 2013
– Sta<ng projec<ons to the $.01 – Failing to summarize projec<ons
– Using ANY of the following phrases: • “conserva<vely es<mated…” • “at only X% of the market…”
• “with no compe<<on…”
– Forgeyng to explain what the amount you raise achieves
– Expec<ng a short-‐term exit at a high mul<ple
BAD EXAMPLE Revenue
Custom runners 120000.00 360000.00 1080000.00 2160000.00 4320000.00 Standard runners 52500.00 157500.00 472500.00 945000.00 1890000.00
Total Revenue 172500.00 517500.00 1552500.00 3105000.00 6210000.00
COGS Custom runners 30000.00 90000.00 270000.00 540000.00 1080000.00 Standard runners 23625.00 70875.00 212625.00 425250.00 850500.00
Total COGS 53625.00 160875.00 482625.00 965250.00 1930500.00
GROSS PROFIT 118875.00 356625.00 1069875.00 2139750.00 4279500.00 Expenses
Selling Expenses Commission 10500.00 31500.00 94500.00 189000.00 378000.00 Marketing/Advertising 50000.00 50000.00 100000.00 150000.00 200000.00
Research and Development 40000.00 50000.00 62500.00 78125.00 97656.25 General and Administrative Expenses
Office Rent 30000.00 30000.00 30000.00 30000.00 30000.00 Insurance 9600.00 9600.00 9600.00 9600.00 9600.00 Office Utilities 4800.00 4800.00 4800.00 4800.00 4800.00 Supplies 18000.00 18000.00 18000.00 18000.00 18000.00 Salaries 120000.00 120000.00 120000.00 120000.00 120000.00 Benefits 30000.00 30000.00 30000.00 30000.00 30000.00 Miscellaneous 21600.00 21600.00 21600.00 21600.00 21600.00
Total Expenses 334500.00 365500.00 491000.00 651125.00 909656.25
EBITDA -215625.00 -8875.00 578875.00 1488625.00 3369843.75
Interest Expense -4500.00 -3600.00 -2700.00 -1800.00 -900.00 Depreciation Expense -24761.90 -31904.76 -31904.76 -28571.43 -28571.43
Pretax Income -244886.90 -44379.76 544270.24 1458253.57 3340372.32
Income Tax Expense 0.00 0.00 217708.10 583301.43 1336148.93
NET INCOME -244886.90 -44379.76 326562.14 874952.14 2004223.39
Pitching Projec<ons: Expert moves
• Know your audience – The earlier you are, the more interested in your assump<ons the investors are – so know you’ll be discussing them in detail. Painstaking detail.
• Be rich, not king – Does a new hire cut costs or increase revenue? This will drive the <ming of a new hire.
• Don’t forget that headcount is a step-‐func<on • What is B/E expecta<on for a new hire?
– Good metric for HC is sales/employee – these numbers are benchmarked and available with some research.
Good Example -‐ Financial Projec<ons
INCOME STATEMENT 2013 2014 2015 2016 2017
Sales
Net Sales $110 $220 $330 $440 $550
COGS $75 $120 $175 $220 $275
Gross Margin $35 $100 $155 $220 $275
Gross margin % 32% 45% 47% 50% 50%
Expenses
Sales $80 $70 $70 $80 $100
Marketing $50 $75 $50 $75 $100
R&D Product Development $25 $35 $25 $15 $15
General & Administrative $20 $30 $40 $45 $50
Total Expenses $175 $210 $185 $215 $265
Net Income (Loss) ($140) ($110) ($30) $5 $10
Outside Capital $300 $0 $0 $0 $0
Annual Cash Balance $160 $50 $20 $25 $35
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