1Financial Plan

Business Plan PreparationBusiness Plan Preparation

Financial PlanFinancial Plan

Business Plan PreparationBusiness Plan Preparation

Financial PlanFinancial Plan

Frank MoyesFrank MoyesLeeds School of Business Leeds School of Business University of ColoradoUniversity of ColoradoBoulder, ColoradoBoulder, Colorado

2Financial Plan

TonightTonight

Plan presentation examplesPlan presentation examples Financial PlanFinancial Plan In the Fire – Customer SurveysIn the Fire – Customer Surveys Hand-in: prelim customer surveysHand-in: prelim customer surveys Team meetingsTeam meetings

3Financial Plan

Next WeekNext Week Management PlanManagement Plan In the Fire - Marketing planIn the Fire - Marketing plan

Prepare 6 slidesPrepare 6 slides 10 minutes10 minutes 4 entrepreneurs4 entrepreneurs

Amber Hickory, Greenhouse PartnersAmber Hickory, Greenhouse Partners Katarina Brown, Brand JuiceKatarina Brown, Brand Juice Scott Heinemann, AweidaScott Heinemann, Aweida David Parkhurst, Alpine AccessDavid Parkhurst, Alpine Access

Hand-in: Hand-in: Marketing Plan - draftMarketing Plan - draft Customer surveys & summary of resultsCustomer surveys & summary of results

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Marketing Plan OutlineMarketing Plan Outline Customer ResearchCustomer Research Target Market StrategyTarget Market Strategy Channel StrategyChannel Strategy PositioningPositioning Product/Service StrategyProduct/Service Strategy Pricing StrategyPricing Strategy E-commerceE-commerce Communications StrategyCommunications Strategy Sales StrategySales Strategy Revenue ModelRevenue Model

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Financial PlanFinancial Plan

Financial ProjectionsFinancial Projections Key AssumptionsKey Assumptions Business RisksBusiness Risks

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Business Plan PerspectiveBusiness Plan Perspective

“People write-up their business plan with a top-down mentality. They invariably talk about a particular vertical market that has X billions of dollars in sales each year. They’ll tell us that they can get 10% of that market. But when we ask them for the average sale or the cost of customer acquisition, the answer almost always is “I’ll get back to you.”

Dan Beldy, Hummer Winblad Venture Partners

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ApproachApproach

Download v6.8.6Download v6.8.6 Learn color codesLearn color codes NotesNotes Play with examplePlay with example Before start, erase all green dataBefore start, erase all green data Don’t mess with the PurpleDon’t mess with the Purple

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Financial ProjectionsFinancial Projections

Income StatementIncome Statement By years for 5 years By years for 5 years By months for years 1-2 & by quarters for years 3-5By months for years 1-2 & by quarters for years 3-5

Balance Sheet by years for 5 yearsBalance Sheet by years for 5 years Cash Flow Cash Flow

By years for 5 yearsBy years for 5 years By months for years 1-2 and by quarters for years 3-5By months for years 1-2 and by quarters for years 3-5

Break-even AnalysisBreak-even Analysis Financial CompsFinancial Comps

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ArchitectureArchitecture

OutputsOutputs InputsInputs Funding & ValuationFunding & Valuation

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Architecture - OutputsArchitecture - Outputs

5-year Income Statement5-year Income Statement 5-year Balance Sheet5-year Balance Sheet 5 year Cash Flow5 year Cash Flow Break-even AnalysisBreak-even Analysis Income Statement by months & quartersIncome Statement by months & quarters Cash Flow by months & quartersCash Flow by months & quarters SummarySummary ValuationValuation

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Architecture - Inputs Architecture - Inputs

Revenue ModelRevenue Model Cost of RevenueCost of Revenue Operating ExpensesOperating Expenses PersonnelPersonnel ExtraordinaryExtraordinary TaxesTaxes Property & EquipmentProperty & Equipment Working CapitalWorking Capital FundingFunding

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Architecture – Funding & ValuationArchitecture – Funding & Valuation

Look at Cash Flow to determine funding requirementsLook at Cash Flow to determine funding requirements Decide how you will fundDecide how you will fund

EquityEquity What % of company will you offer? What % of company will you offer? Valuation approaches – will cover week 13Valuation approaches – will cover week 13

Debt – what are the repayment terms & interestDebt – what are the repayment terms & interest

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Financial AssumptionsFinancial Assumptions

Describe assumptions critical to success of Describe assumptions critical to success of youryour business business DriversDrivers

Revenue model, e.g. prices, market share, new productsRevenue model, e.g. prices, market share, new products Cost projections, e.g. sourcing agreement, process developmentCost projections, e.g. sourcing agreement, process development

Capital ExpendituresCapital Expenditures Working CapitalWorking Capital Funding?Funding?

Do not be resource constrained at the beginningDo not be resource constrained at the beginning

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Suggested ApproachSuggested Approach

Top down vs. bottoms upTop down vs. bottoms up Keep record of key assumptionsKeep record of key assumptions COMP’s provide reality check COMP’s provide reality check Revenue projections by months & quarters is key. Revenue projections by months & quarters is key.

DETERMINES:DETERMINES: Cost of RevenueCost of Revenue Operating ExpensesOperating Expenses Working CapitalWorking Capital Monthly & Quarterly projectionsMonthly & Quarterly projections

XYZ CompanyPeer Company Comparisons

Select BestCompany A Company B Company C Comparison Projections

RatiosAccounts Receivable % of RevInventory % of RevAccounts Payable % of RevWorking Capital % of RevNet Fixed Assets % of Rev

Current Ratio Debt to Capital (LT Debt + Equity)

ProfitabilityGross Profit % of RevOperating Expenses % of RevEarnings from Operations % of RevEBIT % of RevDepreciation % of RevEBITDA % of RevNet Earnings % of Rev

ReturnsReturn on AssetsReturn on EquityReturn on Capital (LT Debt + Equity)

Growth Revenue Growth Rate - CAGR: Net Earnings Growth Rate - CAGR:

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IssuesIssues

ProfitabilityProfitability Gross marginsGross margins Operating expensesOperating expenses

Assets & LiabilitiesAssets & Liabilities Working CapitalWorking Capital Fixed Assets & Capital ExpendituresFixed Assets & Capital Expenditures

SeasonalitySeasonality GrowthGrowth

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Powerful ToolPowerful Tool

Upfront effortUpfront effort What if? questionsWhat if? questions Sensitivity analysisSensitivity analysis How tell if projections make sense?How tell if projections make sense?

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Risks IRisks I

What major risks does the venture face?What major risks does the venture face? What can go wrong?What can go wrong? What must go rightWhat must go right

How mitigate?How mitigate?

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Risks IIRisks II

MarketMarket Size of marketSize of market Competitor’s response Competitor’s response Sales cycleSales cycle Closing window (12 VC funded companies)Closing window (12 VC funded companies)

Strategic - establishing strategic partnershipsStrategic - establishing strategic partnerships Operational - large number of interrelated componentsOperational - large number of interrelated components

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Risks IIIRisks III

TechnologyTechnology Will it workWill it work Time and cost to developmentTime and cost to development ScalabilityScalability

FinancialFinancial Risk/returnRisk/return DilutionDilution

Macro-economicMacro-economic Volatile industryVolatile industry Government approvalGovernment approval Exchange ratesExchange rates

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Financial PlanFinancial Plan

Financial ProjectionsFinancial Projections Summary goes in PlanSummary goes in Plan All Financial Statements go in AppendixAll Financial Statements go in Appendix

AssumptionsAssumptions ~5 key assumptions go in Plan~5 key assumptions go in Plan Detailed assumptions go in AppendixDetailed assumptions go in Appendix

Business RisksBusiness Risks

Summary of Financial Projections

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Critical Mistakes ICritical Mistakes I ““Let’s go smoke something”Let’s go smoke something” ““These trees sure are pretty”These trees sure are pretty” ““We can get orders in a month”We can get orders in a month”

Sales cycleSales cycle No one knows youNo one knows you

““We can whip this puppy out in 6 months”We can whip this puppy out in 6 months” Development time-line longer Development time-line longer More expensiveMore expensive

““Look at how much they spend on marketing! We Look at how much they spend on marketing! We won’t have to spend that much”won’t have to spend that much”

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““Sure, operating expenses are high at the beginning, Sure, operating expenses are high at the beginning, but then they will go down.”but then they will go down.” Operating expenses don’t declineOperating expenses don’t decline Salaries must be realisticSalaries must be realistic Growth requires spending moneyGrowth requires spending money

““This equipment should last us for years.” This equipment should last us for years.” Assets must be replaced Assets must be replaced

““We’ll lean on our suppliers and not pay them for 90 We’ll lean on our suppliers and not pay them for 90 days.”days.”

““Our customer will pay us in 30 days.”Our customer will pay us in 30 days.”

Critical Mistakes IICritical Mistakes II

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Financial DynamicsFinancial Dynamics

Who does the financial projections?Who does the financial projections? Should my projections be optimistic or pessimistic?Should my projections be optimistic or pessimistic? Investor questionsInvestor questions

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Business Plan PerspectiveBusiness Plan Perspective

“Entrepreneurs have got to display a clearly articulated vision for what they want to do. And they must tell their story from the bottom up. A bottom-up approach means that they know with absolute certainty whom they’ll sell to, how much it will cost, and what the sales per week will be next March. Sure, a lot of assumptions are involved, but entrepreneurs need to break their business down to the molecular level. That information leads logically to the next step which is saying to an investor, ‘I am going to take this money and do X, Y, and Z with it and here’s what will happen in the end.’ Your survival depends on knowing that stuff cold.”

Dan Beldy, Hummer Winblad Venture Partners