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Developing a Financial Plan for your Business. Speaker: Kerri Golden, CA, Primaxis Technology Ventures
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Kerri Golden, CAPartner – Primaxis Technology Ventures
CFO – Infobright Inc.
February 13, 2008
If you fail to Plan: will your Plan fail?
Developing a Financial Planfor your Business
3 Financial Planning – February 2008
Presentation OverviewPresentation 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 andDebt/Equity Financing
Cash Flow – Entrepreneur’s most important tool
Closing Remarks
4 Financial Planning – February 2008
The Business Plan ~ 30 pagesThe 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
5 Financial Planning – February 2008
Before you start your Financial PlanBefore 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…
6 Financial Planning – February 2008
Income Statement Income Statement –– the Top Lines the Top Lines
($4.0M)($4.9M)($3.0M)Net (Loss) Income
$400K$300K$200KITDA*
($3.6M)($4.6M)($2.8M)EBITDA
$1.5M$1.2M$0.6MAdmin Expenses
$3.7M$2.2M$0.7MSelling Expenses
$3.0M$2.3M$1.5MR&D Expenses
$4.6M$1.1M$0Gross Margin
$1.1M$0.3M$0Cost of Sales
$5.7M$1.4M$0Sales
Year ThreeYear TwoYear One
*ITDA = Interest, Taxes, Depreciation and Amortization
7 Financial Planning – February 2008
Translating Market Share to Sales?Translating Market Share to Sales?
All Competitors
My Company
Target 1% of the projected $3 billion market by year five, work backward to earlier year sales projections
Year five projected sales = $30 million
Tip:
It can be better to segment themarket and show your marketshare in relation to segment –investors like to back companieswho will be significant players intheir market segment
8 Financial Planning – February 2008
Sales Forecast Sales Forecast –– bottom up more credible! 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 tosupport Doctor Network
9 Financial Planning – February 2008
Other Sales Forecast ConsiderationsOther Sales Forecast Considerations
Mixed Distribution Model may result in multiple sellingprices 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 stateassumptions in your plan
Service Revenues Dependent on salary/consulting rates which generally increase over
time
10 Financial Planning – February 2008
Always ask: Is Your Plan Realistic?Always ask: Is Your Plan Realistic?
11 Financial Planning – February 2008
Cost of Sales and Gross MarginCost 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 understandmargin targets for your industry/sector (Software – 80-90%, ProductCompanies – 45-60%)
12 Financial Planning – February 2008
Expense Projections - Income StatementExpense Projections - Income Statement
($4.0M)($4.9M)($3.0M)Net (Loss) Income
$400K$300K$200KITDA*
($3.6M)($4.6M)($2.8M)EBITDA
$1.5M$1.2M$0.6MAdmin Expenses
$3.7M$2.2M$0.7MSelling Expenses
$3.0M$2.3M$1.5MR&D Expenses
$4.6M$1.1M$0Gross Margin
$1.1M$0.3M$0Cost of Sales
$5.7M$1.4M$0Sales
Year ThreeYear TwoYear One
*ITDA = Interest, Taxes, Depreciation and Amortization
13 Financial Planning – February 2008
R&D expenses may be your comfort zoneR&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 toproduct design/development, testing and QA
Must address sustaining work on product line, fieldsupport 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)
14 Financial Planning – February 2008
But selling expenses often drive growth!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 - $307.6MNewbridge spent 50%+ on selling and only 33% onR&D to generate spectacular sales growth
15 Financial Planning – February 2008
WhatWhat’’s in Selling Expenses?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 withindustry to enable recruiting top resources?
Marketing Costs – Public Relations, Advertising, TradeShows, Website, Lead Generation, Case Studies,Customer Documentation, Partner recruiting costs
Travel, Living and Entertainment – strategy to ensurecustomer coverage and policy to control costs
Performance measures to ensure the costs of pursuingcustomers are matched with margin on sales
16 Financial Planning – February 2008
WhatWhat’’s in Admin Expenses?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 asteam 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
17 Financial Planning – February 2008
The Business Case ToolThe Business Case Tool
$1,300$0($1,250K)Total Margin
$1,700$1,000K$1,250KTotal Costs
$300K$200K$100KG&A Costs
$1,200K$500K$150KSelling Costs
$200K$300K$1,000KR&D Costs
$3,000K$1,000K$0Incr. Margin
$6,000K$2,000K$0IncrementalRevenue
Year ThreeYear TwoYear One
Business case discipline should be added to ensure that futuredevelopment projects contribute to financial success.
18 Financial Planning – February 2008
The Balance Sheet The Balance Sheet –– an example an example
$343K$304K$203KFixed Assets
$2,939K$6,101K$619KTotal Liab/Equity
($12,170K)($8,006K)($3,037K)Ret. (Loss) Income
$13,324K$13,008K$3,227KFinancing*
$1,786K$1,020K$429KAP & Liabilities
$2,939K$6,101K$619KTotal Assets
$328K$190K$223KInventory/Prepaid
$1,371K$929K$176KAccounts Rec.
$898K$4,738K$17KCash
Year ThreeYear TwoYear One
*Financing could be Debt, Equity or combination thereof
19 Financial Planning – February 2008
Asset increase = use of cashAsset 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
20 Financial Planning – February 2008
Liability/Equity increase = source of cashLiability/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
21 Financial Planning – February 2008
Cash Flow Statement Cash Flow Statement –– key tool key tool
Often regarded as something accountant prepares formonthly/quarterly/annual financial statements
Should be used as a weekly or daily planning tool tomanage 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
22 Financial Planning – February 2008
Some Final ThoughtsSome 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 financialplan is as important as developing the plan
“Cash is king” in start-ups and the balance should bemonitored on a regular basis (daily or weekly)