Financials for Startups - Massachusetts Institute of ...cyprus.alumclub.mit.edu/.../financialsforstartups.pdf · Financials for Startups MIT CLUB OF CYPRUS ENTREPRENEURSHIP COMPETITION

Financials for Startups

MIT CLUB OF CYPRUS

ENTREPRENEURSHIP COMPETITION 2016

Nicosia

27 February, 2016

http://www.cyec.org.cy/


The Financial Model

Basic Accounting Principles

The Profit & Loss

The Balance Sheet

The Cash Flow Statement

Financial Modeling and Forecasting

Forecasting

The Break Even Analysis

Financial Planning and Implementation

Financial Planning

Cash Flow Management

Implementation through a Case Study

CONTENTS



The Business Model in numbers

Done last, after Business Model is finalized

tested & verified in the market (e.g. Lean Startup Methodology)

Financial projections are integral to the business planning

process

Need to be reviewed and revised regularly

Credible Financial Projections serve to:

Set goals for founders and employees

Monitor/control expenses and “burn rate”

Reflect the commitment of founders

Attract investors

“He who fails to plan, is planning to fail”

Winston Churchill

The Financial Model




THE CORE FINANCIAL STATEMENTS

Three, related, statements:

I. The Profit & Loss (or Income Statement)

II. The Balance Sheet (or Statement of Financial Position)

III. The Cash Flow Statement




It summarises a company’s earnings, costs and

expenses and measures Profitability over a

period of time (month, quarter, year).

It provides information on a company’s ability to

generate revenues and run its operations

efficiently.

I. The Profit & Loss




Definitions:

1. Sales: The sales figure represents the amount of revenue

generated by the business.

2. Cost of goods sold (COGS): This number represents the costs

directly associated with making or acquiring your products.

3. Gross profit: Derived by subtracting COGS from net sales. It does

not include any operating expenses or income taxes.

4. Operating expenses: These are the daily expenses incurred in the

operation of your business. In this sample, they are divided into

three categories: A) Sales & Marketing (S&M), b) Research &

Development (R&D) and B) General and Administrative

Expenses(G&A)





Definitions:

A) S&M Sales salaries, bonuses and commissions paid to your sales staff.

Collateral fees and promotions.

Advertising costs.

Other sales costs include travel, trade shows, client entertainment, sales

meetings, equipment rental for presentations, printing costs etc.

B) R&D Payroll and benefits to employees involved in R&D activities;

Outside consulting services related to R&D activities;

Testing equipment related to R&D activities.

C) G&A Payroll and benefit costs for employees not included in S&M or R&D.

Rent or lease office or industrial space.

Utility costs for heating, air conditioning, electricity, water, phone/internet etc. in

connection with your business.

Other overhead costs that do not fall into other general categories e.g. insurance,

office supplies, or cleaning services.





Definitions:

5. Total Expenses: This is a tabulation of all expenses incurred in

running the business, exclusive of taxes, depreciation & amortization,

interest expense (or interest income).

6. Operating Profit/Loss (EBITDA): This number represents the

amount of income earned by a business prior to paying income

taxes. This figure is arrived at by subtracting total operating expenses

from gross profit.

7. Depreciation & Amortization: This is an annual non-cash expense

that takes into account the loss in value of tangible & intangible

assets used in your business.

8. Taxes: This is the amount of income taxes you owe to the

government and, if applicable, state and local government taxes.

9. Net income: This is the amount of money the business has earned

after paying income taxes.




Profit & Loss (P&L) Statement

Also called Income Statement

• Revenue (after discounts)

• Cost of Goods Sold (COGS)

• Direct product cost

• Mfg but NOT R&D

• Gross Margin or Gross Profit

• Departmental Expenses

• Operating Profit / Loss

• Profit before taxes (PBT)

• EBITDA (Earnings before interest, taxes, depreciation, amortization)

Revenue 50.0$ 100%

Cost of Goods Sold 20.0$ 40%

Gross Margin 30.0$ 60%

Sales & Marketing 15.0$ 30%

R&D 5.0$ 10%

G&A 2.5$ 5%

Total Expenses 22.5$ 45%

Operating Profit 7.5$ 15%

Sample

It measures a company’s Financial Health at a

point in time (i.e. as at 31.12.XXXX)

Basic Accounting Equation:

Assets = Liabilities + Shareholders' Equity

Shareholders’ Equity = Assets – Liabilities

Basic Accounting PrinciplesII. The Balance Sheet



1. Assets are subdivided into current and long-term (fixed) assets to reflect the

ease of liquidating each asset category.

a. Current assets are any assets that can be easily converted into cash

within one calendar year.

1. Cash

2. Accounts receivable

3. Prepaid Expenses

4. Inventory

b. Fixed assets (tangible and intangible assets used for the business).

1. Land 6. Goodwill

2. Buildings 7. Trademarks

3. Furniture & Fittings

4. Machinery and equipment

5. Vehicles

Total fixed assets: Total fixed assets less accumulated depreciation.

Total assets represent the total value (€) of both the short-term and long-term

assets of your business




2. Liabilities are also divided into current and long-term liabilities.

a. Current Liabilities include all debts and obligations owed by the business

to outside creditors, vendors, or banks that are payable within one year.

1. Accounts payable 4. Lines of Credit

2. Accrued Expenses 5. Current Portion of Long-term Debt

3. Unearned Revenue

b. Long-term Liabilities:

1. Mortgage Payable 4. Deferred Tax

2. Notes Payable

3. Loans Payable

3. Owners’ (or Shareholders’) Equity

1. Share Capital

2. Retained earnings

Owner’s Equity is also known as the company’s “net worth” or “book value”

Total Liabilities and Owners’ equity: This represents all monies owed to outside

creditors, vendors, or banks and all remaining monies (including retained earnings

reinvested in the business) owed to the shareholders.






It reports the amount of cash generated and used

by the company during a period of time (month,

quarter, year).

It is used to assess the quality of a company's

income and its potential to remain solvent (key

survival parameter)

“Cash is King!”

Basic Accounting PrinciplesIII. The Cash Flow Statement



It reports the cash generated and used in 3 categories:

1. Operating activities:

Direct Method: Receipts received from Customers

Payments paid to Suppliers

Payments paid to Employees

Interest Payments

Income Tax Payments, etc.

Indirect Method

net income (from Income Statement), adjusted (add back or subtract) for

non-cash expenses/gains/losses: Depreciation expense

Amortization expense

Gains or losses from the sale of a non-current assets

Losses from accounts receivable

• Plus, adjust for changes in current assets and liabilities affecting cash: Changes in Assets (accounts receivable, Inventory, prepaid expenses)

Changes in Liabilities (Accounts payable, Accrued expenses)




It reports the cash generated and used in 3 categories:

2. Investing activities:

Purchase of sale of long-term assets (e.g. land, building, equipment,

marketable securities, etc.)

3. Financing activities:

Proceeds from issuing short-term or long-term debt

Proceeds from issuing new share capital

Repayment of debt principal, including capital leases

Payments for repurchase of company shares

Payments of dividends







Focus on Profit & Loss and Cash Flow Projections covering:

Sales forecast

Operational Expenses (fixed and variable)

Capital Expenditure (CAPEX)

Forecast for at least 3 years (investors want upto 5 years);

monthly for year 1, quarterly for years 2-3, annually for years 4-5

A. Sales forecast How many customers can you expect?

How many units will be sold?

How will you price your products?

What is the cost of goods sold?

I. Forecasting



Financial Modeling and Forecasting I. Forecasting – Sales Plan




B. Operational Expenses

1. Staffing Plan

I. Forecasting

Staffing Plan Staffing Staffing Staffing Staffing Staffing Staffing Staffing Staffing Staffing Staffing Staffing Staffing

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

Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1

Engineering

CTO Input 1 1 1 1 1 1 1 1 1 1 1 1

Programmer Input 2 2 2 3 4 5 6 7 8 9 10 11

Tech Writer Input - - - 1 1 1 2 2 2 2 2 2

Other Input - - - - - - - - - - - -

Total Eng 3 3 3 5 6 7 9 10 11 12 13 14

Marketing

VP Marketing Input 1 1 1 1 1 1 1 1 1 1 1 1

Product Manager Input 1 1 1 1 1 1 2 2 2 2 2 2

Other Input 1 1 1 2 2 2 3 3 3 4 4 4

Total Mktg 3 3 3 4 4 4 6 6 6 7 7 7

Sales

VP Sales Input 1 1 1 1 1 1 1 1 1 1 1 1

Regional Sales Input 1 1 1 2 2 2 2 2 2 3 3 3

Support Input - - - 1 1 1 1 1 1 2 2 2

Other Input 1 1 1 2 2 2 2 2 2 3 3 3

Total Sales 3 3 3 6 6 6 6 6 6 9 9 9

General & Admin

CEO Input 1 1 1 1 1 1 1 1 1 1 1 1

VP Finance Input 1 1 1 1 1 1 1 1 1 1 1 1

Accounting Input 1 1 1 2 2 2 2 2 2 3 3 3

Other Input 1 1 1 1 1 1 2 2 2 2 2 2

Total G&A 4 4 4 5 5 5 6 6 6 7 7 7

TOTAL EMP. 13 13 13 20 21 22 27 28 29 35 36 37




B. Operational Expenses

2. Departmental expenses(fixed & variable)

I. Forecasting

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


Engineering

Salaries & Benefits Staff ing Plan 28,750$ 28,750$ 28,750$ 41,688$ 48,875$ 56,063$ 69,000$ 76,188$ 83,375$ 90,563$ 97,750$ 104,938$

Tech Supplies input/formula 1,500$ 1,500$ 1,500$ 2,500$ 3,000$ 3,500$ 4,500$ 5,000$ 5,500$ 6,000$ 6,500$ 7,000$

Misc / Other input 14,000$ 14,000$ 14,000$ 20,000$ 20,000$ 20,000$ 30,000$ 30,000$ 30,000$ 40,000$ 40,000$ 40,000$

Total Engineering To P&L 44,250$ 44,250$ 44,250$ 64,188$ 71,875$ 79,563$ 103,500$ 111,188$ 118,875$ 136,563$ 144,250$ 151,938$

Marketing


Literature / PR input 2,000$ 2,000$ 2,000$ 2,000$ 2,000$ 2,000$ 4,000$ 4,000$ 4,000$ 4,000$ 4,000$ 4,000$

Trade Show s input -$ -$ -$ -$ -$ -$ -$ -$ 25,000$ -$ -$ -$

Misc / Other input 15,000$ 15,000$ 15,000$ 20,000$ 20,000$ 20,000$ 30,000$ 30,000$ 30,000$ 35,000$ 35,000$ 35,000$

Total Marketing To P&L 45,750$ 45,750$ 45,750$ 58,417$ 58,417$ 58,417$ 87,188$ 87,188$ 112,188$ 99,854$ 99,854$ 99,854$

Sales


Travel ($3k per rep) input/formula 3,000$ 3,000$ 3,000$ 6,000$ 6,000$ 6,000$ 6,000$ 6,000$ 6,000$ 9,000$ 9,000$ 9,000$

Commission (3% Rev) input/formula -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Misc / Other input 14,000$ 14,000$ 14,000$ 20,000$ 20,000$ 20,000$ 20,000$ 20,000$ 20,000$ 25,000$ 25,000$ 25,000$

Total Sales To P&L 53,417$ 53,417$ 53,417$ 89,250$ 89,250$ 89,250$ 89,250$ 89,250$ 89,250$ 124,083$ 124,083$ 124,083$

General & Admin


Rent input 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$

Telephone & Postage input/formula 2,600$ 2,600$ 2,600$ 4,000$ 4,200$ 4,400$ 5,400$ 5,600$ 5,800$ 7,000$ 7,200$ 7,400$

Misc / Other input 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 20,000$ 20,000$ 20,000$ 20,000$ 20,000$ 20,000$

Total G&A To P&L 70,933$ 70,933$ 70,933$ 77,125$ 77,325$ 77,525$ 91,192$ 91,392$ 91,592$ 97,583$ 97,783$ 97,983$

Total Operating Expense 214,350$ 214,350$ 214,350$ 288,979$ 296,867$ 304,754$ 371,129$ 379,017$ 411,904$ 458,083$ 465,971$ 473,858$



Financial Modeling and Forecasting I. Forecasting – Profit & Loss

P & L by Month Source Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec


Sales

Model 1 Sales Plan -$ -$ -$ 30,000$ 30,000$ 30,000$ 60,000$ 90,000$ 120,000$ 150,000$ 180,000$ 225,000$

Model 2 Sales Plan -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Model 3 Sales Plan -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

Total Sales -$ -$ -$ 30,000$ 30,000$ 30,000$ 60,000$ 90,000$ 120,000$ 150,000$ 180,000$ 225,000$

COGS Sales Plan -$ -$ -$ 6,000$ 6,000$ 6,000$ 12,000$ 18,000$ 24,000$ 30,000$ 36,000$ 45,000$

Gross Margin -$ -$ -$ 24,000$ 24,000$ 24,000$ 48,000$ 72,000$ 96,000$ 120,000$ 144,000$ 180,000$

Expenses

Engineering Expenses 44,250$ 44,250$ 44,250$ 64,188$ 71,875$ 79,563$ 103,500$ 111,188$ 118,875$ 136,563$ 144,250$ 151,938$

Marketing Expenses 45,750$ 45,750$ 45,750$ 58,417$ 58,417$ 58,417$ 87,188$ 87,188$ 112,188$ 99,854$ 99,854$ 99,854$

Sales Expenses 53,417$ 53,417$ 53,417$ 89,250$ 89,250$ 89,250$ 89,250$ 89,250$ 89,250$ 124,083$ 124,083$ 124,083$

G&A Expenses 70,933$ 70,933$ 70,933$ 77,125$ 77,325$ 77,525$ 91,192$ 91,392$ 91,592$ 97,583$ 97,783$ 97,983$

Operating Exp. 214,350$ 214,350$ 214,350$ 288,979$ 296,867$ 304,754$ 371,129$ 379,017$ 411,904$ 458,083$ 465,971$ 473,858$

Operating Profit (214,350)$ (214,350)$ (214,350)$ (264,979)$ (272,867)$ (280,754)$ (323,129)$ (307,017)$ (315,904)$ (338,083)$ (321,971)$ (293,858)$




P & L by Quarter Source Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4


Sales

Model 1 P&L By Month -$ 90,000$ 270,000$ 555,000$ 750,000$ 937,500$ 1,125,000$ 1,500,000$ 1,912,500$ 2,700,000$ 2,025,000$ 2,025,000$

Model 2 P&L By Month -$ -$ -$ -$ 225,000$ 375,000$ 450,000$ 600,000$ 855,000$ 1,140,000$ 1,350,000$ 1,950,000$

Model 3 P&L By Month -$ -$ -$ -$ -$ -$ -$ -$ 525,000$ 1,125,000$ 2,025,000$ 2,437,500$

Total Sales -$ 90,000$ 270,000$ 555,000$ 975,000$ 1,312,500$ 1,575,000$ 2,100,000$ 3,292,500$ 4,965,000$ 5,400,000$ 6,412,500$

COGS P&L By Month -$ 18,000$ 54,000$ 111,000$ 210,000$ 281,250$ 337,500$ 450,000$ 715,250$ 1,068,000$ 1,177,500$ 1,425,000$

Gross Margin -$ 72,000$ 216,000$ 444,000$ 765,000$ 1,031,250$ 1,237,500$ 1,650,000$ 2,577,250$ 3,897,000$ 4,222,500$ 4,987,500$

Expenses

Engineering P&L By Month 132,750$ 215,625$ 333,563$ 432,750$ 549,150$ 652,275$ 775,200$ 853,950$ 994,500$ 1,076,250$ 1,188,000$ 1,239,750$

Marketing P&L By Month 137,250$ 175,250$ 286,563$ 299,563$ 391,050$ 465,450$ 514,225$ 614,225$ 642,500$ 767,500$ 785,375$ 880,375$

Sales P&L By Month 160,250$ 267,750$ 267,750$ 372,250$ 489,850$ 580,875$ 606,000$ 734,900$ 953,775$ 1,343,575$ 1,474,250$ 1,742,875$

G&A P&L By Month 212,800$ 231,975$ 274,175$ 293,350$ 394,150$ 405,250$ 458,400$ 461,400$ 595,750$ 602,950$ 642,450$ 646,650$

Operating Exp. 643,050$ 890,600$ 1,162,050$ 1,397,913$ 1,824,200$ 2,103,850$ 2,353,825$ 2,664,475$ 3,186,525$ 3,790,275$ 4,090,075$ 4,509,650$

Operating Profit (643,050)$ (818,600)$ (946,050)$ (953,913)$ (1,059,200)$ (1,072,600)$ (1,116,325)$ (1,014,475)$ (609,275)$ 106,725$ 132,425$ 477,850$




P & L by Year

Source Year 1 Year 2 Year 3 Year 4 Year 5

Sales

Model 1 P&L By Month 915,000$ 100% 4,312,500$ 72% 8,662,500$ 43% 7,650,000$ 22% 5,250,000$ 10%

Model 2 P&L By Month -$ 0% 1,650,000$ 28% 5,295,000$ 26% 12,900,000$ 37% 11,812,500$ 23%

Model 3 P&L By Month -$ 0% -$ 0% 6,112,500$ 30% 14,662,500$ 42% 34,050,000$ 67%

Total Sales 915,000$ 100% 5,962,500$ 100% 20,070,000$ 100% 35,212,500$ 100% 51,112,500$ 100%

COGS P&L By Month 183,000$ 20% 1,278,750$ 21% 4,385,750$ 22% 8,227,500$ 23% 12,667,500$ 25%

Gross Margin 732,000$ 80% 4,683,750$ 79% 15,684,250$ 78% 26,985,000$ 77% 38,445,000$ 75%

Expenses

Engineering P&L By Month 1,114,688$ 122% 2,830,575$ 47% 4,498,500$ 22% 6,225,675$ 18% 7,663,950$ 15%

Marketing P&L By Month 898,625$ 98% 1,984,950$ 33% 3,075,750$ 15% 4,206,750$ 12% 5,847,400$ 11%

Sales P&L By Month 1,068,000$ 117% 2,411,625$ 40% 5,514,475$ 27% 9,364,575$ 27% 11,938,250$ 23%

G&A P&L By Month 1,012,300$ 111% 1,719,200$ 29% 2,487,800$ 12% 3,147,150$ 9% 4,258,500$ 8%

Operating Exp. 4,093,613$ 447% 8,946,350$ 150% 15,576,525$ 78% 22,944,150$ 65% 29,708,100$ 58%

Operating Profit (3,361,613)$ -367% (4,262,600)$ -71% 107,725$ 1% 4,040,850$ 11% 8,736,900$ 17%




Cash Flow Projection

Cash flows from Operations: Operating profit (losses) from P&L

PLUS Investment activities: Capital expenditure (CAPEX)

PLUS Financing activities: Investment required

To determine the total investment required

Cumulative operating losses PLUS

Cumulative capital expenses

On the month that you turn cash positive

Burn Rate: Monthly operating loss plus capital expenditures

I. Forecasting – Cash Flows

“Happiness is

a positive cash flow”



Financial Modeling and Forecasting I. Forecasting – Cash Flows

Cash Flow Source Q1 Q2 Q3 Q4

Year 1 Year 1 Year 1 Year 1

Beginning Cash Input (Beginning only) -$ 4,281,488$ 3,273,300$ 1,849,038$

Gross Margin From P&L Quarterly -$ -$ 100,000$ 250,000$

Expenses From P&L Quarterly (600,513)$ (876,188)$ (1,226,263)$ (1,513,238)$

Investment Input 5,000,000$ -$ -$ -$

Capital Expense From P&L CAPEX (118,000)$ (132,000)$ (298,000)$ (274,000)$

Change in Cash 4,281,488$ (1,008,188)$ (1,424,263)$ (1,537,238)$

Ending Balance 4,281,488$ 3,273,300$ 1,849,038$ 311,800$

Capital Expenses Q1 Q2 Q3 Q4

Year 1 Year 1 Year 1 Year 1

Employee Workstations (PP) 4,000$ 68,000$ 32,000$ 48,000$ 24,000$

Prototype Expenses Input 50,000$ 100,000$ 250,000$ 250,000$

118,000$ 132,000$ 298,000$ 274,000$

Cumulative CAPEX 118,000$ 250,000$ 548,000$ 822,000$

Depreciation

Depreciation Charge 9,833$ 20,833$ 45,667$ 68,500$




Total operating costs (variable and fixed) are compared with sales revenue in order to determine the level of sales volume at which the business makes neither a profit or a loss “the break-even point”

Line OA = Variation of income at varying levels of production activity

Line OB = Total Fixed Costs of the business

Point P = Costs are exactly equal to income,

and hence no profit or loss is made.

II. Break Even Analysis

The break-even analysis lets you determine what you need to

sell, monthly or annually, to cover your costs of doing business




So why is it so important to know your break-even point?

If you don’t know your break-even point you may be working below it

each month without even realizing it.

Example: A cooling company had 2 technicians that did billable work and 2

office staff.

So that left only $240 per day for all other expenses including rent, utilities, vehicle

payments, fuel, supplies, etc, which was not enough.

The real problem here was that the company should have had 2 or 3 techs per 1

office staff in order to make the maths work.

II. Break Even Analysis

Staff costs:Cost of technicians = $30 x 8 h per day x 2 = $480

Cost of office staff = $15 x 8 h per day x 2 = $240

Total staff costs per day = $720

RevenueThe technicians could bill a max. of 6 hours

per day (2 h for prep., traveling etc.) at a rate

of $80 per hour

Max. Revenue per day = 6 h x 2 x $80

= $960 per day.




a) Breakeven Calculation for a Product Business

1. Price of product per unit = €100

2. Cost of Goods sold per unit (including labor and material cost) = €30

3. Gross Profit per unit = €70

4. Other monthly operational costs = €10,000

5. Number of units per month you need to sell to breakeven = €10,000 divided

by €70 = 143 units

b) Breakeven Calculation for a Service Business

1. Rate per Hour charged for your service = €50

2. Cost per hour of Staff providing the service = €25

3. Gross Profit per Billable Hour = €50 – €25 = €25

4. Other monthly operational costs= €5,000

5. Number of billable hours needed per month to breakeven =

€5,000 divided by € 25 = 200 hours

6. Minimum number of persons providing the service = 200 divided by billable

hours per person per month

II. Break Even Analysis - Examples



Financial Modeling and Forecasting II. Break Even Analysis

The Break-even point is Not a Static Number

Along the way, expenses tend to creep up in both the direct and indirect

categories, and you may fall below the break-even volume without

realizing it.

Take your profit and loss statement every six months or so and refigure

your break-even target number.

Ways to Lower Break-even volume

There are three ways, two of them involving cost controls (an ongoing

goal!).

1.Lower direct costs, which will raise the gross margin.

2.Exercise strict cost controls on your fixed expenses and total costs.

3.Raise prices!



Financial Planning and Implementation I. Financial Planning

Business planning should not be confused with the preparation of financial

projections.

Business planning must provide the foundation for the financial projections

which can be derived arithmetically by a model.

The accuracy and usefulness of these projections will be completely

determined by the quality and reliability of the underlying assumptions.

An impressive set of financial projections is of little benefit if unsupported by

research or only based on speculation or wishful thinking.

Perform ‘reality checks’ on key ratios of your financial projections to make

sure they are sound.

Beware of unrealistic increases in ratios such as Gross margin, Operating

profit margin, Revenue per employee etc.

Compare with other similar companies



Financial Planning and Implementation

“You can’t manage what you can’t measure”

By comparing your actual financial performance to your projections, you’ll be able

to see if your business is consistently falling short of your projections or

surpassing them.

If your performance is falling behind projections, then you’ll need to make some

changes by raising prices, cutting costs or rethinking your business model.

Conversely, if your income surpasses your projections, then you may need

to hire employees, expand your facility or seek financing sooner than you

expected

I. Financial Planning – A Process

Plan

Measure Forecast

Execute



Financial Planning and Implementation II. Cash Flow Management

Cash flow, not profits, is the lifeblood of your business.

Forecast it, monitor it, and manage it well before serious trouble starts to brew.

Fat profits Vs. Positive cash flow.

Crucial in controlling cash is having a detailed cash-flow projections, updated at

least every month. But don't just add up the numbers - manage the

numbers.

The following are candidates for cash savings:

Inventory

Payables (extended terms, financing or on consignment)

Product Mix

Manage your Receivables (turn your sales into cash fast!)

Focus on the Growing Your Business!



Financial Planning and Implementation III. Implementation through a Case Study

Facts:

SmartTech is a technology start-up which aims to sell gadgets it designs

and manufactures through retail stores in Cyprus and Greece with future

growth aimed for Romania and Bulgaria.

SmartTech designs the gadgets with its own Engineers in Cyprus but has

outsourced the manufacturing to a factory in China specialized in high-

tech gadgets.

SmartTech has projected Sales Revenue per store through focus groups,

market research and market studies of the target group.

The Company will be in Cyprus for tax reasons, and for potential shops

outside Cyprus they will be opened as branches.

The founders are willing to invest EUR 250k of their own equity to start

the business.




Assumptions on One Page – Basic Rule of Modeling Assumptions 2010

Per Store Breakdown

Net Sales Per Store Excluding VAT € 250,000.00

COGS Per Store € 112,500.00

Rent Per Store € 24,000.00

Fit Out cost Per Store € 30,000.00

Life Cycle of Fit Out cost 10

Utilities Per Store € 3,000.00

POS and computer h/w s/w maintenance fee Per Store € 1,000.00

Advertising Per Store € 10,000.00

General Admin Per Store € 6,000.00

Sales people (2 per store) € 24,000.00

Branch store supervisor € 20,000.00

Employee Benefits Per Store € 3,000.00

General Assumptions

CEO € 60,000.00

COO/CFO € 45,000.00

Employee Corp Tax, Social Security etc 11.7%

Investment from Owners € 250,000.00

Sales Growth Rate Years 2010-2015 13.0%

Inflation 3.0%

Tax Rate 10.0%

Receivables Days 0

Payables Days (Average Trade Creditors/COGS)*365 45

Inventory Turns (COGS/ Average Inventory) 12

Bank Interest Annual 5.0%

Bank Interest Monthly 0.4%

Days paying Bank interest 360

COGS Breakdown

Chief Engineer € 40,000.00

Assistant Engineers (4 of them) € 80,000.00

Delivery 4.0%

Manufacturing 40.0%

Insurance 1.0%

Total COGS as % of Sales (excluding Design Costs) 45.0%

On Sales Price

On Sales Price and includes Engineering Salaries

Responsible for oversight, pipeline and leading projects

Out of Engineering school

Includes all other payments for employees

Gadget Stores have no receivables

Marketing Budget based on Marketing Plan

Comments

See COGS breakdown




Link Assumptions to Income Statement Income Projections (EUR) 2010 2011 2012 2013 2014

Sales retail 500,000 847,500 1,596,125 2,885,794 4,076,184

Cost of Goods Sold 359,040 519,436 856,317 1,436,669 1,972,344

Gross Profit 140,960 328,064 739,808 1,449,126 2,103,840

Operating Expenses

Salary & Wages 215,581 272,671 385,133 557,803 685,170

Employee Benefits 6,000 9,270 15,914 26,225 33,765

Rent and PPE 48,000 74,160 127,308 209,804 270,122

General and Administrative 20,000 30,900 53,045 87,418 112,551

Marketing 20,000 30,900 53,045 87,418 112,551

EBITDA (168,621) (89,837) 105,363 480,457 889,681

Depreciation 6,000 9,000 15,000 24,000 30,000

EBIT (174,621) (98,837) 90,363 456,457 859,681

Interest 2,946 4,363 7,337 11,908 14,802

Pretax Income (177,567) (103,200) 83,026 444,549 844,879

Tax Loss Carryforward

Less Taxes 0 0 8,303 44,455 84,488

Net Income (177,567) (103,200) 74,724 400,094 760,391

Sales per day 1,389 2,354 4,434 8,016 11,323

Sales per month 41,667 141,250 133,010 240,483 339,682

Sales per store 250,000 282,500 319,225 360,724 407,618

# Stores as at 2 3 5 8 10




Link your Assumptions page & Income Statement to your Cash Flow

Statement of Cash Flows (EUR) 2010 2011 2012 2013 2014

Cash Flow from Operating Activities:

Net Income/(Loss) (177,567) (103,200) 74,724 400,094 760,391

Adjustment for Depretiation 6,000 9,000 15,000 24,000 30,000

Changes in Operating Assets & Liabilities

Receivables - - - - -

Inventories (29,920) (13,366) (28,073) (48,363) (44,640)

Accounts Payable 44,265 19,775 41,533 71,550 66,042

Net Cash from Operating Activities (157,222) (87,791) 103,183 447,282 811,794

Net Cash from Investing Activities - - - - -

Capex (60,000) (30,900) (63,654) (98,345) (67,531)

Cash Flow from Financing Activities

Investment from Owners 250,000 - - - -

Loan Borrowing 60,000 30,900 63,654 98,345 67,531

Loan Repayment 919 1,493 2,619 4,384 5,840

Net Cash from Financing Activities 249,081 (1,493) (2,619) (4,384) (5,840)

Increase/(Decrease) in Cash 91,859 (89,284) 100,564 442,898 805,954

Cash - Beginning of Period - 91,859 2,575 103,139 546,037

Cash - End of Period 91,859 2,575 103,139 546,037 1,351,990




Financials & Ratios

Profitable from third year – 2012, usual for start-ups

Increasing stores on a yearly basis to enable economies of scale

Note how salaries are higher in the early years due to fixed costs being split over less stores…

Select Financial Ratios 2010 2011 2012 2013 2014

% of Revenue

Salaries 43.12% 32.17% 24.13% 19.33% 16.81%

Employee Benefits 1.20% 1.09% 1.00% 0.91% 0.83%

Rent and PPE 9.60% 8.75% 7.98% 7.27% 6.63%

General and Administrative 4.00% 3.65% 3.32% 3.03% 2.76%

Operating Margins

Gross Margin 28.19% 38.71% 46.35% 50.22% 51.61%

Net Margin -35.51% -12.18% 4.68% 13.86% 18.65%

Select Financial Projections (EUR) 2010 2011 2012 2013 2014

Sales retail 500,000 847,500 1,596,125 2,885,794 4,076,184

Gross Profit 140,960 328,064 739,808 1,449,126 2,103,840

EBITDA (168,621) (89,837) 105,363 480,457 889,681

EBIT (174,621) (98,837) 90,363 456,457 859,681

Net Income (177,567) (103,200) 74,724 400,094 760,391

# Stores 2 3 5 8 10



Final Tips for Credible Startup Financials1. Project the financials as the last step of your business plan preparation.

2. Set the projections as goals for yourselves first and then to show commitment

to investors.

3. Give particular attention to your Gross Margin. Gross Margin is everything. Use

at least 50% mark up to your manufacturing costs.

4. Estimate sales volume by channel using a “bottoms-up” approach.

5. Don’t forget your overhead costs. Check industry average statistics to make

sure you are in the right range.

6. Cash flow is king.

Your “burn rate” is usually your single most important survival parameter.

The ‘holy grail” is break-even, when revenues first catch up with the outflow.

Projecting, tracking, and controlling cash flow is the single most important job of the CEO

7. Add a buffer to your required investment. Calculate your need from projected

cash flows and add a 25% buffer.

8. Plan to re-forecast every quarter. Cost projections should never be missed.

9. Target aggressive but rational projections.



Sources

1. “Building Financial Projections”, Charlie Tillett, MIT Sloan Management,

2004

2. “Mastering Financial Planning”, Demetris Tsingis, CyEC2014

3. “Budgeting for startups”, Akira Hirai, Cayenne Consulting

4. http://www.myaccountingcourse.com/financial-statements/

5. http://www.virginstartup.org/news/create-realistic-financial-projections-first-

year-business/

6. http://earlygrowthfinancialservices.com/key-building-startup-revenue-

model-forecasting/

7. http://blog.projectionhub.com/are-you-sure-your-business-is-breaking-

even/

8. http://blog.projectionhub.com/are-you-sure-your-business-is-breaking-

even/



http://www.myaccountingcourse.com/financial-statements/

http://www.virginstartup.org/news/create-realistic-financial-projections-first-year-business/

http://earlygrowthfinancialservices.com/key-building-startup-revenue-model-forecasting/

http://blog.projectionhub.com/are-you-sure-your-business-is-breaking-even/

http://blog.projectionhub.com/are-you-sure-your-business-is-breaking-even/

Dr. Lida Mardapitta-Hadjipandeli

email: [email protected]

Cyprus Entrepreneurship Competition

http://www.cyec.org.cy



mailto:[email protected]


Documents

Financials for Startups - Massachusetts Institute of ...cyprus.alumclub.mit.edu/.../financialsforstartups.pdf · Financials for Startups MIT CLUB OF CYPRUS ENTREPRENEURSHIP COMPETITION