if you fail to plan, will your plan fail? developing a financial plan for your business

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Financial Planning – February 2010 Follow or Tweet: #ent101

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Speaker: Kerri Golden, CA and VCBuilding 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

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Page 1: If you fail to plan, will your plan fail? Developing a financial plan for your business

Financial Planning – February 2010

Follow or Tweet: #ent101

Page 2: If you fail to plan, will your plan fail? Developing a financial plan for your business

Kerri Golden, CA February 10, 2010

If you fail to Plan: will your Plan fail?

Developing a Financial Plan for your Business

Page 3: If you fail to plan, will your plan fail? Developing a financial plan for your business

Financial Planning – February 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

Page 4: If you fail to plan, will your plan fail? Developing a financial plan for your business

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…

Page 5: If you fail to plan, will your plan fail? Developing a financial plan for your business

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!

Page 6: If you fail to plan, will your plan fail? Developing a financial plan for your business

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

Page 7: If you fail to plan, will your plan fail? Developing a financial plan for your business

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?

Page 8: If you fail to plan, will your plan fail? Developing a financial plan for your business

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

Page 9: If you fail to plan, will your plan fail? Developing a financial plan for your business

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

Page 10: If you fail to plan, will your plan fail? Developing a financial plan for your business

Financial Planning – February 2010 10

10

Q1 ’09 Q2 09 Q3 ‘09 Q4 ‘09 Q1 ‘10 Q2 ‘10

v0.1

v0.2

v0.3

v0.4

v0.5

v0.6

v1.0

Lab Trial

Trials

Proof of Concept

Early feature set

Live processing

Platform, Management

Advanced Features

Features Complete

First Commercial Shipments

Lab Trial

Reduce technology risk, earn revenues earlier

Page 11: If you fail to plan, will your plan fail? Developing a financial plan for your business

Financial Planning – February 2010 11

11

Q1 ’09 Q2 09 Q3 ‘09 Q4 ‘09 Q1 ‘10 Q2 ‘10

v0.1

v0.2

v0.3

v0.4

v0.5

v0.6

v1.0

Lab Trial

Trials

Business Plan/Customer Requirements

Go-To-Market Plan/Customer Business Case (ROI)

Customer/Partner Meetings

Customer Demos

Customer Trial Management/Feedback

Customer Testing, Finalize Pricing, Initial Contracts

PR & Launch Plan

Lab Trial

Page 12: If you fail to plan, will your plan fail? Developing a financial plan for your business

Financial Planning – February 2010 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

Page 13: If you fail to plan, will your plan fail? Developing a financial plan for your business

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

Page 14: If you fail to plan, will your plan fail? Developing a financial plan for your business

Financial Planning – February 2010 14

All Competitors

Your Company

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

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 significant players in their market segment (15-25%) and are focused in their approach.

Page 15: If you fail to plan, will your plan fail? Developing a financial plan for your business

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

Page 16: If you fail to plan, will your plan fail? Developing a financial plan for your business

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

Page 17: If you fail to plan, will your plan fail? Developing a financial plan for your business

Financial Planning – February 2010 17

Page 18: If you fail to plan, will your plan fail? Developing a financial plan for your business

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%)

Page 19: If you fail to plan, will your plan fail? Developing a financial plan for your business

Financial Planning – February 2010 19

*ITDA = Interest, Taxes, Depreciation and Amortization

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

Page 20: If you fail to plan, will your plan fail? Developing a financial plan for your business

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)

Page 21: If you fail to plan, will your plan fail? Developing a financial plan for your business

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!

Page 22: If you fail to plan, will your plan fail? Developing a financial plan for your business

Financial Planning – February 2010 22

% of Operating

Expense 2009

Cisco

$36B

Adobe

$2.9B

F5 Networks

$650M

R&D Expenses 35% 31% 26%

Sales & Marketing Exp.

55% 53% 60%

General & Admin. Exp.

10% 16% 14%

Page 23: If you fail to plan, will your plan fail? Developing a financial plan for your business

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

Page 24: If you fail to plan, will your plan fail? Developing a financial plan for your business

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

Page 25: If you fail to plan, will your plan fail? Developing a financial plan for your business

Financial Planning – February 2010 25

Year One Year Two Year Three

Incremental Revenue

$0 $2,000K $6,000K

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.

Page 26: If you fail to plan, will your plan fail? Developing a financial plan for your business

Financial Planning – February 2010 26

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

Completes the financial statements along with Cash Flow and Income Statement

Page 27: If you fail to plan, will your plan fail? Developing a financial plan for your business

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

Page 28: If you fail to plan, will your plan fail? Developing a financial plan for your business

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

Page 29: If you fail to plan, will your plan fail? Developing a financial plan for your business

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

Page 30: If you fail to plan, will your plan fail? Developing a financial plan for your business

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)