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Seminar 8: Making Sense of the Numbers
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Academic excellence for business and the professions
BOOTSTRAP SEMINARS 2014 Making sense of the numbers
Introduction • Why Financial planning is important • Building Forecasts • Gross Profit & Breakeven • Managing cash in a start up • Financial Control • How much funding should you raise and when should
you raise it • Making best use of a £3K investment/competition prize • R&D Tax Credits • How to set up a company
Why it’s important • Ensure the business is likely to be viable • Support your investment case. • Most important ensure Cash managed – Cash is king. • By planning know in advance if cash flow problem – its
too late when bank account empty. Must be able to pay bills as they fall due. Raising finance takes 3-6 months minimum.
• Usually have a limited amount of cash to spend – ensure allocated to desired activities eg marketing, development etc
• Growing business can very often have cash flow problems
BUILDING A BUDGET FORECAST
Some terminology • Profit/Loss = Sales less costs of producing those sales. Sales £1,000 Goods/services sold to
customer Cost of Sales £200 Direct costs of producing
those sales – materials, factory labour.
Gross Profit £800 Gross profit = 80% Other Costs £300 Marketing, admin, sales,
depreciation, travel, office, R&D etc.
Profit/Loss £500
Cash and Profit • Cash Flow and Profit are usually different, eg £100K
profit doesn’t always = £100K of increased cash balance. • This is caused by
– Payments from customer usually on credit – Payments to suppliers usually on credit – Items of capital expenditure eg computers charged to
P&L over a long period (Depreciation) • However suggest that for initial forecasts you assume
cash and profit are the same.
How to build a forecast • Investors typically want a 3-5 yr forecast but
concentrate on year 1 • Start with setting up template (See Spreadsheet) • What are the projected sales (Revenue Model) – number
of units, price, when etc – is the business seasonal? • When will the cash be received – cash sales , credit
sales typically paid 30-60 days after supply • Set up costs – hardware/software development, factory
fit out , website development etc.
How to build a forecast • Cost of sales – what does it cost to make/buy in the
units. • What are the overheads – staff, rent, marketing etc • Having identified Income + expenditure set out in a
spreadsheet by month • Show net cash flow for mth + cash flow at month end • Remember a forecast is a best estimate!
Where does the info come from? • Personal knowledge • Competitors eg what do competitors charge • Competitor accounts • Industry statistics • Suppliers ask them what they will charge to supply when do
volume discounts kick in. • Property – ask an estate agent • Work with someone who has industry knowledge • How are going to acquire customers – salesman ,advertising,
what is the cost of acquiring customers likely to be. Resulting forecast is a best estimate
• State assumptions - particularly Sales, cost of sales, marketing plan
Building a sales forecast • Forecast unit sales and average selling price per month • Use results of your market research • Use past data if you have it – either for your business or
similar business • Is business seasonal? A lot of internet businesses are
seasonal. Eg Christmas, games see drop-off in August • If you have a new technology it can be very difficult to
predict sales levels and timing of take-up.
What costs do we typically incur? Most companies • Office costs - rent, rates Electricity, gas, cleaning,
security, coffee, postage etc (Consider serviced office when starting up eg The Hangout)
• Marketing • Professional Fees eg Accountancy, Tax, Payroll, Legal • Insurance - Employers Liability legally required
Employee salaries • Capital Expenditure - computers , office furniture
Manufacturing business • Capital Expenditure - Plant and machinery • Production salaries • Raw Materials including packaging • Distribution • Factory building - Lease or Buy - keep it flexible, may not
be possible if high set up costs
What costs do we typically incur?
Web Business • Web site design and maintenance - in house or
outsource • Hosting • Domain registration • Office Space • Employees • Fulfilment costs – postage, storage
What costs do we typically incur?
Software/ other intellectual Property • Development Staff - Biggest cost • Patent fees/Royalties and legal costs • Computer hardware/software
What costs do we typically incur?
GROSS PROFIT & BREAK-EVEN
Gross Profit and Break Even • Gross Profit = Selling price – Cost Price • Gross Profit % - above expressed as a %
Bar sells drink for £10 Cost of drink £4 Gross Profit £6 Gross Profit % 60%
• Break Even - How many £/units to sell each day/week/month to cover your costs
Why is this important? • Gross Profit drives the amount you need to sell to
breakeven – increased margin means you need to sell less to breakeven – e.g. a bar
• Changing gross profit may indicate problems
Selling Price £10 £10 Cost Price £6 £5
Gross Profit £4 £5
Gross Profit % 40% 50%
Daily Costs £500 £500
No of drinks to sell to break even each day
125 drinks 100 drinks
Summary slide for presentations Year 1 Year 2 Year 3
Sales £1,000 £1,500 £3,000
Cost of Sales £200 £300 £500
Gross Profit £800 £1,200 £2,500
Other Costs £700 £1,000 £1,500
Net Profit £100 £200 £1,000
Cash Balance £50 £100 £1,050
Gross Profit % 80% 80% 83.33%
Breakeven Units 100 120 140
MANAGING CASH FLOW IN A START-UP
Managing the cash in a start-up
• Cash is always tight in the start-up phase – Initial start up capital is expensive so rarely have lots of
surplus cash – Launch delayed – Unexpected costs – Customers pay late – Suppliers won’t give credit
Managing the cash in a start-up
• How can the cash be stretched out – Defer salaries – founders work for free – Try and get things for free – use your network – Credit from suppliers – Find a way of generating revenue quickly – proof of
concept, test customers, discounts for early adoption or early payment.
FINANCIAL CONTROL
What is Financial Control • Measurement of actual v plan P+L and cash, balance sheet, KPIs,
keeping track of product costs. • Ratio analysis • How are doing against our plan • Thinking ahead revising our budgets
Importance of Financial Control • Allows us to indentify how we are doing – good and bad from a
financial point of view and it may point to problems in specific areas of the business – eg lack of sales, poor margins may mean problems in purchasing, marketing dept spending in excess of budget
• Allows you to take corrective action in plenty of time – its too late to worry about a lack of cash when the bank account empty – avoid surprises.
• Plan for growth ahead of time if sales are growing quicker than anticipated
• Board should review mgt accounts at regular board meetings.
What do we do • Mthly mgt accounts – compare actual v budget analyse the
variances • Mgt a/c may be as simple as a review of bank statement • Understand product costs • Reforecast – budget typically fixed for 12 mths but each mth/qtr
reforecast • Calculation of ratios/key performance indicators – benchmark
HOW TO MAKE BEST USE OF A £3K INVESTMENT
How much cash to raise? • Your forecast will indicate how much cash you estimate
you will need to reach profitability. • Raising finance is expensive – how much of the
company do you have to sell to raise the money ? • If your forecast indicates that you need £2M to reach
profitability it is very unlikely that you will be able to raise this in one financing round
• Company Valuations and attractiveness to potential investors are related to the risk of the investment.
How much cash to raise? • In early stage companies some of the key risks are - Will the technology/product/service work - How much will the product cost to develop/service launch - Can the business overcome some regulatory issues eg planning
permission - Will anyone buy the product/service - What will the sales price be Aim to raise sufficient funds (plus a contingency) at each round to eliminate risks with the result you achieve a better valuation and a greater chance of raising the next round. Ensure this is reflected in your forecast.
How to make best use of £3K • Use it to mitigate some of the risks – Build a proof of concept – Find early customer(s) – Carry out detailed market research – Sort out regulatory issues eg get necessary licences – If specific risks with the technology attempt to resolve
them
R&D TAX CREDITS
R&D Tax Credits • Tax refund from HMRC for R&D Costs • You do not need to have previously paid tax • Get refund of approx 24% of Salary, Employers national
insurance and consumables used in the R&D process eg cost of building a prototype.
• Contractor cost refund is approx 16% • Claimed when you file your annual tax return. Supporting
narrative is required • Refund is usually paid within 4-10 weeks of submitting the
claim • Suggest you use a firm of accountants that understands R&D
tax credits – not of all of them do.
SETTING UP A LIMITED COMPANY
Company • Key Advantages – Shareholders and directors have limited liability - (worst
is loose investment) – Separate legal entity from directors/ shareholders so
directors not personally liable for debts – (except in cases of negligence/fraud/Wrongful trading)
– Raise finance by issuing shares • (Wrongful trading – if directors knowingly make a
financial commitment that they know the company cant pay for they can be personally liable)
Types of Company • XYZ Limited (Private Limited Company) – Most common for small/medium business not listed on
stock exchange. – This is what you will use • XYZ PLC (Public Limited Company) – Companies listed on a stock exchange – More onerous reporting/shareholder protection than
Limited Company
How to incorporate a Company
• Companies House – Cardiff based government agency that is the Registrar of
Companies. – Companies file specific details that are available on the
public record. – www.companieshouse.gov.uk
How to incorporate a Company
• To incorporate a company – Use a lawyer or Company formation agent – Or do it yourself on Companies House Website – cost
£15 – It is a straight forward process – Directors/shareholders/Articles can all be changed later
by filing appropriate forms so don't worry if you get initial details wrong
DIY Incorporation Website Address http://www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml You will need – Company name and registered office address ( Company name
must be unique check first not used at Co House Webcheck – NB worth checking if web domain for proposed name is available – Director and Secretary – name, address, date of birth (need at least
1 director, no longer requirement for secretary) – Shareholder name, address, no of shares, amount paying per share – £15 Payment
Articles of Association • Company rule book • must be filed at Companies House • Standard Articles are available – suggest you use these
for initial incorporation • It is likely that investors will require special terms • Approved by shareholders
Articles usually contain
• The issuing of shares – what authority board has • Different rights attached to different classes of shares • The appointments of directors - which shows whether a shareholder
dominates or shares equality with all contributors • Directors meetings – the quorum and percentage of vote • Management decisions – Investor, Board or Management (reserved
matters) • Transferability of shares – Permitted transfers • Special voting rights of a Chairman, and his/her mode of election • The dividend policy - a percentage of profits to be declared when
there is profit or otherwise • Winding up - the conditions, notice to members • Founders e.g. Founders share buy back provisions • First right of refusal on issue of new shares (Pre-emption rights)
Academic excellence for business and the professions
THANK YOU Q&A