financial projections for investor presentations - sept 18 2013

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Thank you Ben Hron!

ABC Company, Inc.

Estimated Statement of Operations

For The Years Ended December 31, 2010. 2011, 2012, and 2013

2010 2011 2012 2013 2010 2011 2012 2013

Revenue:

Installation Revenue 450$ 3,825$ 21,038$ 73,633$ 77.1% 84.3% 82.3% 80.6%

Non-Installation Revenue

Service Fees 89$ 623$ 4,361$ 17,444$ 15.2% 13.7% 17.1% 19.1%

Other Non-Installation Revenue 45$ 90$ 158$ 237$ 7.7% 2.0% 0.6% 0.3%

Total Revenue: 584$ 4,538$ 25,557$ 91,314$ 100.0% 100.0% 100.0% 100.0%

Direct Costs:

Installation Costs 338$ 2,678$ 12,623$ 36,817$ 57.9% 59.0% 49.4% 40.3%

Non-Installation Costs 38$ 193$ 1,175$ 4,420$ 6.5% 4.3% 4.6% 4.8%

Direct Costs: 376$ 2,871$ 13,798$ 41,237$ 64.4% 63.3% 54.0% 45.2%

Other Cost of Services 88$ 567$ 2,556$ 6,849$ 15.1% 12.5% 10.0% 7.5%

Gross Margin ($) 120$ 1,100$ 9,203$ 43,228$ 20.5% 24.2% 36.0% 47.3%

Gross Margin (%) 20.5% 24.2% 36.0% 47.3%

Operating Expenses:

Sales 292$ 1,588$ 6,389$ 18,263$ 50.0% 35.0% 25.0% 20.0%

Marketing 263$ 1,361$ 5,111$ 13,697$ 45.0% 30.0% 20.0% 15.0%

Research & Development 175$ 998$ 2,811$ 8,218$ 30.0% 22.0% 11.0% 9.0%

General & Administration 44$ 295$ 1,533$ 4,566$ 7.5% 6.5% 6.0% 5.0%

Total Operating Expenses: 774$ 4,242$ 15,844$ 44,744$ 132.5% 93.5% 62.0% 49.0%

EBITDA (654)$ (3,142)$ (6,641)$ (1,516)$ -112.0% -69.2% -26.0% -1.7%

Other (Revenue) & Expenses:

Interest 80$ 156$ 32$ 80$ 13.7% 3.4% 0.1% 0.1%

Taxes 8$ 9$ 11$ 15$ 1.4% 0.2% 0.0% 0.0%

Depreciation & Amortization 13$ 67$ 268$ 874$ 2.2% 1.5% 1.0% 1.0%

Total Other (Revenue) & Expenses 101$ 232$ 311$ 969$ 17.3% 5.1% 1.2% 1.1%

Net Income (Loss) (755)$ (3,374)$ (6,952)$ (2,485)$ -129.3% -74.3% -27.2% -2.7%

Statement Notes:

Revenue

Market 1 43$ 2,320$ 12,205$ 46,232$ 7.4% 51.1% 47.8% 50.6%

Market 2 230$ 1,201$ 7,652$ 26,450$ 39.4% 26.5% 29.9% 29.0%

Market 3 256$ 932$ 3,250$ 12,658$ 43.8% 20.5% 12.7% 13.9%

Market 4 55$ 85$ 2,450$ 5,974$ 9.4% 1.9% 9.6% 6.5%

Total Revenue 584$ 4,538$ 25,557$ 91,314$

Headcount

Existing 13.00$ 18.00$ 61.00$ 298.00$

New Hires 5.00$ 43.00$ 237.00$ 830.00$

Total Headcount 18.00$ 61.00$ 298.00$ 1,128.00$

Capital Expenditures 126.00$ 424.00$ 1,584.00$ 4,474.00$

Dollars (000's omitted) Percent (%) of Revenue

COPYRIGHT © 2010 COPYRIGHT © 2012

Rule #1:

If you cannot read the

financial statement from two

feet away the font is too small

(i.e. there are too many details)

COPYRIGHT © 2012

ABC Company, Inc.

Projected Statement of Operations


2010 2011 2012 2013

Revenue:

Market 1 43.00$ 2,320.00$ 12,205.00$ 46,232.00$

Market 2 230.00$ 1,201.00$ 7,652.00$ 26,450.00$

Market 3 256.00$ 932.00$ 3,250.00$ 12,658.00$

Market 4 55.00$ 85.00$ 2,450.00$ 5,974.00$

Total Revenue 584.00$ 4,538.00$ 25,557.00$ 91,314.00$

Gross Margin ($) 120.00$ 1,100.00$ 9,203.00$ 43,228.00$

Gross Margin (%) 20.5% 24.2% 36.0% 47.3%

Operating Expenses:

Sales & Marketing 555.00$ 2,949.00$ 11,500.00$ 31,960.00$

Research & Development 175.00$ 998.00$ 2,811.00$ 8,218.00$

General & Administration 44.00$ 295.00$ 1,533.00$ 4,566.00$

Total Operating Expenses: 774.00$ 4,242.00$ 15,844.00$ 44,744.00$

Other Expense/(Income) 101.00$ 232.00$ 311.00$ 969.00$

Net Income (Loss) (755.00)$ (3,374.00)$ (6,952.00)$ (2,485.00)$

Statement Notes:

Headcount

Existing 13.00$ 18.00$ 61.00$ 298.00$

New Hires 5.00$ 43.00$ 237.00$ 830.00$

Total Headcount 18.00$ 61.00$ 298.00$ 1,128.00$

Capital Expenditures 126.00$ 424.00$ 1,584.00$ 4,474.00$

Dollars (000's omitted)

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Rule #2:

Pennies are only for

accounting auditors

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ABC Company, Inc.

Estimated Statement of Operations


2010 2011 2012 2013

Revenue:

Market 1 43$ 2,320$ 12,205$ 46,232$

Market 2 230$ 1,201$ 7,652$ 26,450$

Market 3 256$ 932$ 3,250$ 12,658$

Market 4 55$ 85$ 2,450$ 5,974$

Total Revenue 584$ 4,538$ 25,557$ 91,314$

Gross Margin ($) 120$ 1,100$ 9,203$ 43,228$

Gross Margin (%) 20.5% 24.2% 36.0% 47.3%

Operating Expenses:

Sales & Marketing 555$ 2,949$ 11,500$ 31,960$

Research & Development 175$ 998$ 2,811$ 8,218$

General & Administration 44$ 295$ 1,533$ 4,566$

Total Operating Expenses: 774$ 4,242$ 15,844$ 44,744$

Other Expense/(Income) 101$ 232$ 311$ 969$

Net Income (Loss) (755)$ (3,374)$ (6,952)$ (2,485)$

Statement Notes:

Headcount

Existing 13$ 18$ 61$ 298$

New Hires 5$ 43$ 237$ 830$

Total Headcount 18$ 61$ 298$ 1,128$

Capital Expenditures 126$ 424$ 1,584$ 4,474$

Dollars (000's omitted)

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Rule #3:

Use $ (dollar signs) on the

first and last row only.

Unless, of course, you are

mixing rows of $ and %, etc.

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FORMAT CREDIBILITY

The presentation format does

not interfere with (or create

noise for) the reader

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ABC Company, Inc.

Projected Statement of Operations

For The Years Ended December 31, 2010 through 2013

Revenue:

Market 1 43$ 2,320$ 12,205$ 46,232$

Market 2 230 1201 7652 26450

Market 3 256 932 3250 12658

Market 4 55 85 2450 5974

Total Revenue 584 4538 25557 91314

Gross Margin ($) 120 1100 9203 43228

Gross Margin (%) 20.5% 24.2% 36.0% 47.3%

Operating Expenses:

Sales & Marketing 555 2949 11500 31960

Research & Development 175 998 2811 8218

General & Administration 44 295 1533 4566

Total Operating Expenses: 774 4242 15844 44744

Other Expense/(Income) 101 232 311 969

Net Income (Loss) (755)$ (3,374)$ (6,952)$ (2,485)$

Statement Notes:

Headcount

Existing 13 18 61 298

New Hires 5 43 237 830

Total Headcount 18 61 298 1,128

Capital Expenditures 126$ 424$ 1,584$ 4,474$

Dollars

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Rule #4:

Use column headings that

make sense

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Rule #5:

Numbers with thousands or

millions must have commas

This: 54,556

Not this: 54556

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Rule #6:

Don’t mix fonts

Or font size……

And do not use a silly font

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Rule #7

Spelle Check

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And do not tell me you relied

on Microsoft…….

Rule #8:

Text is left justified

Numbers are right justified

Violators confuse the reader

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Rule #9:

Do not overdo color

and

Do not highlight in

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Use Spot color!

Rule #11:

Round your numbers to the

nearest thousand for

presentations

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Financials in your Slide deck

are a Marketing Effort!

Really?

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Provide cost-effective outsourced CFO support

Clients range from pre-revenue startups to later stage

privately held companies

Goals

(1) educate entrepreneurs to understand and

consider financial opportunities and implications

(2) handle all accounting/ financial matters so the

entrepreneurs can focus on driving the business

COPYRIGHT © 2012

David A. Fogel, CPA� Serial entrepreneurial CFO

� Managing Director of Swifton CFOs LLC (since 2009)

� Experience with high tech companies ranging from biotech to

telecom to healthcare IT to social media to…

� Adjunct Instructor of Master’s Program:

� Presenter & Mentor:

� Member:

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Introducing the Financial Statements

• Balance Sheet

• Profit and Loss Statement

• Cash Flow Statement

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Balance Sheet

� What you own/owe – point in time

� Assets = Liabilities + Equity

� Assets are good?

� Capital expenditures (Fixed Asset) rule

� Amount => $5,000 AND useful life > one year

� Liabilities – Disclose, disclose, disclose

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Profit and Loss Statement(Statement of Operations)

• What you earned

• Could represent cash activities but usually much

more……

• Management accounting can be more

informative, but need to have GAAP

• Earnings can be managed, but cash is a reality…

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Cash Flow Statement

• Where your cash came and went: • Operations, Investing, or Financing

• Cash in the bank is a fact

• Investors are most interested in your use of $$

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Developing The Financial Forecast

1. Defined

2. What about the assumptions?

3. Creating the sales forecast

4. Spreading the numbers

5. Creating the statements

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Ty DancoMember, Mass Medical AngelsMember, North Country Angels

"I'll never believe your revenue numbers

anyway, but I sure want to scrutinize your

assumptions and expenses!"

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1.What are financial projections?

Collection of statements that present

your business in numbers (IS, BS, CF, Cap)

“Does the story make sense?”

“Does the story add up?”

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Set your goals from top down

but…..

Prepare the model from the bottom up

then….start over

with your top down goals

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2. What about the assumptions?

Document the source of each number you produce - Why?

- Knowledge of the assumptions proves that the

entrepreneur understands the business

- Prove it to yourself

Sources of assumptions

- Desired goal to be obtained

- Primary market research – surveys, vendor quotes

- Second market research – purchased or gov’t information

- Estimated or best guess (really try not to SWAG)

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2. What about the assumptions? (part 2)

Start-up costs (uses of $)

Financing (sources of $)

Capital expenditures (costs with >1 yr life)

Fixed expense (cost of being in business)

Variable expense (cost of doing business)

Projected sales (anticipated revenue earned)

Cash flow (anticipated $ received and spent)

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• Expenses up to the point when you are open

for business…….which is when?

• List uses of money – describe how spent

• Like: Fixed assets & Working Capital

• Examples?

� Fixed Assets = Equipment, Furniture

� Working Capital = Rental deposits, Insurance

Start-up cost assumptions

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• Sources where $ will come from

• Where?

� Entrepreneur and team

� F&F

� Bank loan (though not likely for start-ups)

� Debt from owner or outside creditor

� Non-dilutive financing (maybe )

� Equity capital

• For loan – know amount, terms of repayment (mos), and rate of interest or return

Financing assumptions

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• Costs that have a “lifetime” greater than one year

AND an individual or collective cost greater than $2k

• Predict some fixed assets by headcount, some by

significant changes in sales volume, some by

changes in product lines, etc.

• Examples: Leasehold improvements, Furniture &

fixtures, Machinery

• Note: Expense the PCs & Macs & iPads(but keep track of them anyway)

Capital Expenditures(aka Fixed Assets)

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• Costs of being in business

• Do not vary by sales volume (i.e. day-to-day)

• But DO increase as the business scales

• Create fixed cost projections on monthly basis

• Research through correspondence with outside vendors

• Record the source & amount from each vendor……..

• Examples: Rent, Utilities, Salaries, Benefits, Marketing expenses, Administrative expenses

Fixed cost assumptions

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• Costs of doing business

• May vary directly with sales volume

• DO increase as the business scales

• Expenses incurred with the next “unit” of product or service

• Research through correspondence with outside vendors

• Examples: Materials, direct/indirect labor, and shipping costs

Variable cost assumptions

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� What product(s) and/or service(s)

� Quantities

� Price

� When (seasonality/cyclicality)?

� T&C’s

Projected sales assumptions

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• Convert your business activity to cash activity

• When will cash be collected from customers?

� May vary by product line and by customer

� Generally assume 45 days---though currently customers are extending to 60 days

• When do you pay your vendor’s invoices?

� May vary by product line and by vendor

� Generally assume 30-45 days

� Need to create “referenceable” vendors

Cash flow assumptions

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Ben LittauerMember, Boston Harbor Angels

"I like to see a business model spreadsheet with

the assumptions clearly called out as variables.

Then I can twiddle the knobs and see how

sensitive profits are to the assumptions."

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3. Creating the sales forecast

BEST - Predict by customer as detailed as

possible

….but include customer turnover

BETTER – Predict by market

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3. Creating the sales forecast (part 2)

How do I start? Market research!

• Trade associations

• Primary & secondary research

• Gov’t resources

�US Census Bureau

�IRS Statistical Data

Select your geography

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Small

Client

Medium

Client

Large

Client

Average Hours Per

Week

4 Hours 8 Hours 16 Hours

Average Contract $

Per Week

$500 $1,250 $2,500

Predict by client (customer) types

• By market

• By size

Then ID certain characteristics

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Predict using Sales staff• Assume lag time (3-6 mos.)

• Estimate the pipeline

• # of calls / meetings per staff

• # of sales per staff

• Remember: Not all staff start same date

• Spread out the volume by month – with

realistic goals

• ….Consider turnover of sales staff

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Forecast Trap:

Why they call them “Gross Sales”

• Returns

• Discounts

• Coupons

• Rebates

• Chargebacks

• Markdowns

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4. Spreading the Numbers

• Yes, you need to do it monthly -- for the entire period

• Avoid flat numbers – consider the meaning – use %

increases or $ per some type of unit

• Think: As headcount increases rent increases

(just not variably)

• Start with revenue, then cost of services

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Tip:

Project payroll & benefits in detail

• Payroll & benefits are often the most costly

expense yet they are often neglected

• Project monthly to handle start dates

correctly (everyone cannot start in January)

• Match people adds with milestones

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Tip:

Don’t forget the…..

Sales commissions – Direct connect them to your

sales staff’s (or sales rep) sales

Bonuses – Include with payroll

Recruiting expenses – Peg them to change in new

employees

Debt - Many forget to include Interest Expense on

the income statement even though the Company

has incurred Debt

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Presentation Suggestions

Steady, consistent evolution of the model

� Revenue growth in $

� Expenses over time in %

Know the % change for major components

(and be able to explain them)

Do not allocate G&A/Facilities expenses

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Tip:

Reasonableness

1. Once you think you are done take the

smell test --- Do the numbers really make

sense (i.e. can you really increase revenue

w/o an increase in costs)?

2. Do the Like-Kind test. Compare your

“metrics” versus your competition

COPYRIGHT © 2012

ABC Co.($ 000's omitted)

2010 2011 2012 2013 2014

Pro Forma Financial StatementRevenue -$ 1,875$ 44,953$ 108,238$ 180,161$

Cost of Service - 1,162 12,739 5,369 -

Gross Margin - 712 32,214 102,868 180,161

38% 72% 95% 100%

Operating Expenses

Employee Costs 1,303 2,972 3,587 4,198 4,379

Professional Fees 253 637 1,780 1,230 1,135

Marketing & Travel 61 525 2,340 293 658

Administrative Expenses 60 55 232 41 47

Development & Pilot Manufacturing 409 819 262 965 1,733

Facility & Other 195 801 1,206 1,612 2,023

Total Expenses 2,282 5,807 9,407 8,340 9,976

Depreciation & Amortization 42 98 301 590 791

EBIT (2,324) (5,193) 22,507 93,939 169,394

Net Income (2,639) (5,411) 16,893 55,530 100,603

0% -289% 38% 51% 56%

Pro Forma Cash FlowCash from Operations (2,597) (5,313) 17,193 56,120 101,393

Cash from Working Capital (31) (936) (2,879) (2,754) (3,437)

Cash from Investments (57) (297) (1,052) (607) (600)

Cash from Financing 7,000 - 42,000 - -

Net Cash Flow 4,315 (6,545) 55,262 52,759 97,357

Ending Cash 6,644$ 99$ 55,360$ 108,119$ 205,476$

Income

Statement

Cash Flow

Statement

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ABC Company – Financials by Year

($000’s omitted)

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($25,000)

$25,000

$75,000

$125,000

$175,000

$225,000

2010 2011 2012 2013 2014

Revenue

Income

Cash

Milestone #1

Prototype

Milestone #2

Pilots

Milestone #3

Commercialization

Seeking $250k Investment

Universal Truths:

1. Project monthly, Present annually

2. Projections constantly change,

let them. Not an annual exercise.

Develop as a monthly exercise.

3. Financials must be consistent with rest

of presentation

4. P&L Income ≠ Cash Flow

(we know this right?)

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Even More Universal Truths:

• Be consistent – Don’t portray cost

categories (or individuals)

differently by year

• Have “Checks”

• Do not need to be hung up with

GAAP, but….don’t go rogue

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financial projections for investor presentations - sept 18 2013

Business