Financial Planning/Budgeting - Entrepreneurship 101

For the startup CEO!

Presented by: Andrew GrahamMarch 2015!

Memory at Work

Pg 2!

Better borrowing for responsible Canadians

Memory at Work

Pg 3!

Memory at Work

Pg 4!

Memory at Work

Pg 5!

Why  money  ma*ers  in  a  startup  

Have  to  pay  the  bills  

Sign  of  a  sustainable  business  model  

Desirable  outcome!!  

Memory at Work

¨  Income Statement!

¨ Cash Flow Forecast!

¨ Balance Sheet!

Pg 6!

Memory at Work

¨ Financial performance over a period of time!

¨ Usually for a year, quarter or month!

Pg 7!

Memory at Work

Pg 8!

Amazon.com!Income Statement!

For the year ended Dec 31, 2014!

millions of USD!

Revenue! $ 88,988!Cost of sales! 62,752 !Gross margin! 26,236!

Operating expenses!Selling, general & admin.! 16,650 !Technology & Content! 4,529!Depreciation & Amortization! 4,746! Total operating expenses! 25,925!

Income from operations! 311 !Interest & Other income and expenses! (385)!Taxes! 167 !

Net income! (241) !

Source: Company filings.!Simplified for teaching purposes; not all lines match actual results!

Memory at Work

Pg 8!

Revenue!!

Money brought into a company by its business

activities!

Revenue Forecasting!!

Top-down!vs!

Bottom-up!

Amazon.com!Income Statement!

For the year ended Dec 31, 2014!

millions of USD!

Revenue! $ 88,988!Cost of sales! 62,752 !Gross margin! 26,236!

Operating expenses!Selling, general & admin.! 16,650 !Technology & Content! 4,529!Depreciation & Amortization! 4,746! Total operating expenses! 25,925!

Income from operations! 311 !Interest & Other income and expenses! (385)!Taxes! 167 !

Net income! (241) !

Source: Company filings.!Simplified for teaching purposes; not all lines match actual results!

Memory at Work

Pg 8!

Cost of Sales!!

Costs that go into creating the products and services

that a company sells!

Amazon.com!Income Statement!

For the year ended Dec 31, 2014!

millions of USD!

Revenue! $ 88,988!Cost of sales! 62,752 !Gross margin! 26,236!

Operating expenses!Selling, general & admin.! 16,650 !Technology & Content! 4,529!Depreciation & Amortization! 4,746! Total operating expenses! 25,925!

Income from operations! 311 !Interest & Other income and expenses! (385)!Taxes! 167 !

Net income! (241) !

Source: Company filings.!Simplified for teaching purposes; not all lines match actual results!

Memory at Work

Pg 8!

Gross Margin!!

Revenue minus cost of sales!

Amazon!Linkedin!Toyota!

!29%!!81%!!13%!

Amazon.com!Income Statement!

For the year ended Dec 31, 2014!

millions of USD!

Revenue! $ 88,988!Cost of sales! 62,752 !Gross margin! 26,236!

Operating expenses!Selling, general & admin.! 16,650 !Technology & Content! 4,529!Depreciation & Amortization! 4,746! Total operating expenses! 25,925!

Income from operations! 311 !Interest & Other income and expenses! (385)!Taxes! 167 !

Net income! (241) !

Source: Company filings.!Simplified for teaching purposes; not all lines match actual results!

Memory at Work

Pg 8!

Operating Expenses!!

Business costs NOT related to producing goods &

services for sale!

Amazon.com!Income Statement!

For the year ended Dec 31, 2014!

millions of USD!

Revenue! $ 88,988!Cost of sales! 62,752 !Gross margin! 26,236!

Operating expenses!Selling, general & admin.! 16,650 !Technology & Content! 4,529!Depreciation & Amortization! 4,746! Total operating expenses! 25,925!

Income from operations! 311 !Interest & Other income and expenses! (385)!Taxes! 167 !

Net income! (241) !

Source: Company filings.!Simplified for teaching purposes; not all lines match actual results!

Memory at Work

Pg 8!

Selling, General and Administrative Expenses

(SG&A)!

Amazon.com!Income Statement!

For the year ended Dec 31, 2014!

millions of USD!

Revenue! $ 88,988!Cost of sales! 62,752 !Gross margin! 26,236!

Operating expenses!Selling, general & admin.! 16,650 !Technology & Content! 4,529!Depreciation & Amortization! 4,746! Total operating expenses! 25,925!

Income from operations! 311 !Interest & Other income and expenses! (385)!Taxes! 167 !

Net income! (241) !

Source: Company filings.!Simplified for teaching purposes; not all lines match actual results!

Memory at Work

Pg 8!

Research & Development!(“Technology & Content”)!

!Activities with the intention of making a discovery that can

lead to new or improved products!

Amazon.com!Income Statement!

For the year ended Dec 31, 2014!

millions of USD!

Revenue! $ 88,988!Cost of sales! 62,752 !Gross margin! 26,236!

Operating expenses!Selling, general & admin.! 16,650 !Technology & Content! 4,529!Depreciation & Amortization! 4,746! Total operating expenses! 25,925!

Income from operations! 311 !Interest & Other income and expenses! (385)!Taxes! 167 !

Net income! (241) !

Source: Company filings.!Simplified for teaching purposes; not all lines match actual results!

Memory at Work

Pg 8!

Depreciation & Amortization!

!Reduction in the capital

value of an asset over time to account for wear & tear!

Amazon.com!Income Statement!

For the year ended Dec 31, 2014!

millions of USD!

Revenue! $ 88,988!Cost of sales! 62,752 !Gross margin! 26,236!

Operating expenses!Selling, general & admin.! 16,650 !Technology & Content! 4,529!Depreciation & Amortization! 4,746! Total operating expenses! 25,925!

Income from operations! 311 !Interest & Other income and expenses! (385)!Taxes! 167 !

Net income! (241) !

Source: Company filings.!Simplified for teaching purposes; not all lines match actual results!

Memory at Work

Pg 8!

Interest & Other income and expenses!

!Income from interest

payments, dividends, etc!

Amazon.com!Income Statement!

For the year ended Dec 31, 2014!

millions of USD!

Revenue! $ 88,988!Cost of sales! 62,752 !Gross margin! 26,236!

Operating expenses!Selling, general & admin.! 16,650 !Technology & Content! 4,529!Depreciation & Amortization! 4,746! Total operating expenses! 25,925!

Income from operations! 311 !Interest & Other income and expenses! (385)!Taxes! 167 !

Net income! (241) !

Source: Company filings.!Simplified for teaching purposes; not all lines match actual results!

Memory at Work

Pg 8!

Taxes!

Amazon.com!Income Statement!

For the year ended Dec 31, 2014!

millions of USD!

Revenue! $ 88,988!Cost of sales! 62,752 !Gross margin! 26,236!

Operating expenses!Selling, general & admin.! 16,650 !Technology & Content! 4,529!Depreciation & Amortization! 4,746! Total operating expenses! 25,925!

Income from operations! 311 !Interest & Other income and expenses! (385)!Taxes! 167 !

Net income! (241) !

Source: Company filings.!Simplified for teaching purposes; not all lines match actual results!

Memory at Work

Pg 8!

Net income!!

Profit!!!

Amazon.com!Income Statement!

For the year ended Dec 31, 2014!

millions of USD!

Revenue! $ 88,988!Cost of sales! 62,752 !Gross margin! 26,236!

Operating expenses!Selling, general & admin.! 16,650 !Technology & Content! 4,529!Depreciation & Amortization! 4,746! Total operating expenses! 25,925!

Income from operations! 311 !Interest & Other income and expenses! (385)!Taxes! 167 !

Net income! (241) !

Source: Company filings.!Simplified for teaching purposes; not all lines match actual results!

Memory at Work

Pg 9!

Example: Tom’s Solar Power Company, Inc.!

Input Cost: !$50! Sell for: !$100!

Memory at Work

Pg 10!

Units Sold! - !

50 !

150 !

250 !

400 !

550 !

750 !

1,050 !

1,400 !

1,900 !

2,500 !

3,500 !

Unit Price! $100/unit!

Revenue! $ - !

5,000 !

15,000 !

25,000 !

40,000 !

55,000 !

75,000 !

105,000 !

140,000 !

190,000 !

250,000 !

350,000 !

 $-­‐    

 $100,000    

 $200,000    

 $300,000    

 $400,000    

Jan   Feb   Mar   Apr   May   Jun   Jul   Aug   Sep   Oct   Nov   Dec  

Revenue  

Memory at Work

Pg 11!

Tom's Solar Power Co, Inc!Monthly Income Statement!

January-June, 2012!$!

Jan! Feb! Mar! Apr! May! Jun!Revenue! $ - ! 5,000 ! 15,000 ! 25,000 ! 40,000 ! 55,000 !Cost of Sales! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !Gross Margin! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !

SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Net Income! (1,000)! 1,500 ! 6,500 ! 11,500 ! 19,000 ! 26,500 !

Cash Projection!

Starting Cash! $25,000 ! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)!Revenue (1 month delayed)! - ! 5,000 ! 15,000 ! 25,000 ! 40,000 !Cost of sales (1 month ahead)! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 ! 37,500 !SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Cash gain/(loss)! (3,500)! (8,500)! (8,500)! (6,000)! (3,500)! 1,500 !

Ending Cash! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)! (3,500)!

Tom's Solar Power Co, Inc!Monthly Income Statement!

January-June, 2012!$!

Jan! Feb! Mar! Apr! May! Jun!Revenue! $ - ! 5,000 ! 15,000 ! 25,000 ! 40,000 ! 55,000 !Cost of Sales! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !Gross Margin! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !

SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Net Income! (1,000)! 1,500 ! 6,500 ! 11,500 ! 19,000 ! 26,500 !

Cash Projection!

Starting Cash! $25,000 ! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)!Plus: Revenue (1 month delayed)! - ! 5,000 ! 15,000 ! 25,000 ! 40,000 !Minus: Cost of sales (1 month ahead)! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 ! 37,500 !Minus: SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Cash gain/(loss)! (3,500)! (8,500)! (8,500)! (6,000)! (3,500)! 1,500 !

Ending Cash! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)! (3,500)!

Memory at Work

Pg 11!

Tom's Solar Power Co, Inc!Monthly Income Statement!

January-June, 2012!$!

Jan! Feb! Mar! Apr! May! Jun!Revenue! $ - ! 5,000 ! 15,000 ! 25,000 ! 40,000 ! 55,000 !Cost of Sales! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !Gross Margin! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !

SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Net Income! (1,000)! 1,500 ! 6,500 ! 11,500 ! 19,000 ! 26,500 !

Cash Projection!

Starting Cash! $25,000 ! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)!Plus: Revenue (1 month delayed)! - ! 5,000 ! 15,000 ! 25,000 ! 40,000 !Minus: Cost of sales (1 month ahead)! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 ! 37,500 !Minus: SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Cash gain/(loss)! (3,500)! (8,500)! (8,500)! (6,000)! (3,500)! 1,500 !

Ending Cash! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)! (3,500)!

Memory at Work

Pg 11!

Tom's Solar Power Co, Inc!Monthly Income Statement!

January-June, 2012!$!

Jan! Feb! Mar! Apr! May! Jun!Revenue! $ - ! 5,000 ! 15,000 ! 25,000 ! 40,000 ! 55,000 !Cost of Sales! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !Gross Margin! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !

SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Net Income! (1,000)! 1,500 ! 6,500 ! 11,500 ! 19,000 ! 26,500 !

Cash Projection!

Starting Cash! $25,000 ! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)!Plus: Revenue (1 month delayed)! - ! 5,000 ! 15,000 ! 25,000 ! 40,000 !Minus: Cost of sales (1 month ahead)! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 ! 37,500 !Minus: SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Cash gain/(loss)! (3,500)! (8,500)! (8,500)! (6,000)! (3,500)! 1,500 !

Ending Cash! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)! (3,500)!

Memory at Work

Pg 11!

Tom's Solar Power Co, Inc!Monthly Income Statement!

January-June, 2012!$!

Jan! Feb! Mar! Apr! May! Jun!Revenue! $ - ! 5,000 ! 15,000 ! 25,000 ! 40,000 ! 55,000 !Cost of Sales! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !Gross Margin! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !

SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Net Income! (1,000)! 1,500 ! 6,500 ! 11,500 ! 19,000 ! 26,500 !

Cash Projection!

Starting Cash! $25,000 ! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)!Plus: Revenue (1 month delayed)! - ! 5,000 ! 15,000 ! 25,000 ! 40,000 !Minus: Cost of sales (1 month ahead)! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 ! 37,500 !Minus: SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Cash gain/(loss)! (3,500)! (8,500)! (8,500)! (6,000)! (3,500)! 1,500 !

Ending Cash! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)! (3,500)!

Memory at Work

Pg 11!

Tom's Solar Power Co, Inc!Monthly Income Statement!

January-June, 2012!$!

Jan! Feb! Mar! Apr! May! Jun!Revenue! $ - ! 5,000 ! 15,000 ! 25,000 ! 40,000 ! 55,000 !Cost of Sales! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !Gross Margin! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !

SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Net Income! (1,000)! 1,500 ! 6,500 ! 11,500 ! 19,000 ! 26,500 !

Cash Projection!

Starting Cash! $25,000 ! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)!Plus: Revenue (1 month delayed)! - ! 5,000 ! 15,000 ! 25,000 ! 40,000 !Minus: Cost of sales (1 month ahead)! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 ! 37,500 !Minus: SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Cash gain/(loss)! (3,500)! (8,500)! (8,500)! (6,000)! (3,500)! 1,500 !

Ending Cash! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)! (3,500)!

Memory at Work

Pg 11!

Memory at Work

Pg 11!

Tom's Solar Power Co, Inc!Monthly Income Statement!

January-June, 2012!$!

Jan! Feb! Mar! Apr! May! Jun!Revenue! $ - ! 5,000 ! 15,000 ! 25,000 ! 40,000 ! 55,000 !Cost of Sales! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !Gross Margin! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 !

SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Net Income! (1,000)! 1,500 ! 6,500 ! 11,500 ! 19,000 ! 26,500 !

Cash Projection!

Starting Cash! $25,000 ! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)!Plus: Revenue (1 month delayed)! - ! 5,000 ! 15,000 ! 25,000 ! 40,000 !Minus: Cost of sales (1 month ahead)! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 ! 37,500 !Minus: SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 !Cash gain/(loss)! (3,500)! (8,500)! (8,500)! (6,000)! (3,500)! 1,500 !

Ending Cash! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)! (3,500)!

Memory at Work

Pg 12!

Memory at Work

Pg 12!

If you don’t forecast cash flows, you’re flying blind!!

Memory at Work

¨ Earnings Before Interest, Taxes, Depreciation and Amortization!

¨ A measure of a company’s cash flow from operations!

Pg 13!

Memory at Work

¨ Snapshot of assets and liabilities at a point in time!

Pg 14!

Memory at Work

Pg 15!

Tom's Solar Power Co, Inc!Balance Sheet!

February 29, 2012!

$!Assets!Cash! $ 13,000 !Accounts Receivable! 5,000 !Inventory (prepaid)! 7,500 !Building and Equipment! 50,000 !Land!  ! 100,000 !Total Assets! 175,500 !

Liabilities!Accounts Payable! - !Loan!  ! 25,000 !Total Liabilities! 25,000 !

Owner's Equity!  ! 150,500 !Total Liabilities and Owner's Eq.!  ! 175,500 !

Tom's Solar Power Co, Inc!Monthly Income Statement!

February 2012!$!

Feb!Revenue! 5,000 !Cost of Sales! 2,500 !Gross Margin! 2,500 !

SG&A! 1,000 !Net Income! 1,500 !

Cash Projection!

Starting Cash! 21,500 !Plus: Revenue (1 month delayed)! - !Minus: Cost of sales (1 month ahead)! 7,500 !Minus: SG&A! 1,000 !Cash gain/(loss)! (8,500)!

Ending Cash! 13,000 !

Memory at Work

¨  It’s all about cash!!

¨ Forecast from the bottom!

¨ Create multiple scenarios: how sensitive is your business to changes:!–  In revenue!–  In expenses!

¨ Get expert advice when you need it!

Pg 16!

Andrew Grahamagraham@marsdd.com!