Financial Projections for
  Start-Up Businesses

                     Mark Leslie
            mleslie@leslieventures.com
 ...
Financial Projections
► Why do Financial Plan?
► Basic Building Blocks
► Key Variables
► Bottoms up / Tops Down
► Model Co...
Why do a financial Plan
► Can’t raise money without one?
► Feasibility of business model
► Understand the key variables fo...
Basic Building Blocks –
      Department Budget
Eng Budget     q1   q2   q3   q4   y1   y2

   head 1

   head 2

Salary t...
Key Variables
       Department Budget
              ► Headcount
Dept Budget      Salary / overhead /
                  r...
Key Variables
       Department Budget
              ►   G&A
Dept Budget        Headcount
                       ► Exec  ...
Key Variables
       Department Budget
              ► Engineering
Dept Budget      Headcount
                 NRE
     ...
Key Variables
       Department Budget
              ► Marketing
Dept Budget      Headcount
                 product lau...
Key Variables
       Department Budget
              ► Sales
Dept Budget      Headcount
                  ► Mgrs,   SE’s
...
Key Variables
       Department Budget

Dept Budget
              ►Headcount
              ►Headcount
              ►Headc...
Key Variables –
            Capital Equipment
► Cost   per head
► NRE
► Technology   Buyout
► Tooling
► ITinfrastructure
►...
Basic Building Blocks
Corp Rollup and Cap Schedule

                  Corp Exp Budget
Dept Budget

 Dept Budget

  Dept Bu...
Key Variables
      Revenue Model (cross checked)
►   Market
      Available / Served                      Revenue Model
...
Key Variables
                     Cost Model
►   Product
     Estimated BOM
       ► Rush charges
       ► Design change...
Basic Building Blocks – Income
           Statement
                    Revenue Model

Dept Budget


 Dept Budget
        ...
Key Variables
        Capitalization (Funding) Plan
►   Equity Financing – amount and timing
       Seed
       Startup ...
Key Variables –
            Capital Equipment
► Cost   per head
► NRE
► Technology   Buyout
► Tooling
► ITinfrastructure
►...
Basic Building Blocks – Balance
     Sheet and Cash Flow
                  Rev enue M odel




 Dept Budget
              ...
Bottoms-up / Tops-down
►   Bottom-up
       Built from details
       Variable assumptions
       Start up and growth s...
The Model Company
►   Income Statement
       Revenue
       Gross Margin
       Departmental expenses as percentage of...
Basic Building Blocks –
                 Department Budget
     Startup                                          Model
  ...
Intergalactic Optical Nanotubes, Inc.
         Income Statement

               Y1      Y2      Y3    Y4    Y5
Revenue    ...
Model Companies – Operating Stacks ($M)
               Cisco      Dell   Microsoft   Yahoo   Rambus
Revenue        18,878 ...
Model Companies – Common Sizing (%)
                   Cisco   Dell   Microsoft   Yahoo   Rambus
Revenue             100  ...
Model Companies – Market Value
                    Cisco   Dell   Microsoft   Yahoo   Rambus
Market Cap ($B)      146     ...
Planning Issues
►   Revenues (always) take longer
       Sales forecasts are optimistic
       Un-tested “sales model”
 ...
Sanity Testing
► Rate  of Sales Growth
► Staffing
   Growth
   Non-growth
     ► (engineer   one product, sell it foreve...
Financial Models --
       The crucible to test your ideas!
► Ifyou understand the model, feasibility of
  ideas are more ...
Modeling –
          “What-if” Scenarios
► Document    assumptions
   Facilitates changes in future
   Operational (e.g....
Lest we forget…


Cash…
    …is King.
           Again!
Financial Projections for
  Start-Up Businesses

                     Mark Leslie
            mleslie@leslieventures.com
 ...
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Financial Projections for Financial Projections for Start-Up ...

  1. 1. Financial Projections for Start-Up Businesses Mark Leslie mleslie@leslieventures.com 650.561.1228
  2. 2. Financial Projections ► Why do Financial Plan? ► Basic Building Blocks ► Key Variables ► Bottoms up / Tops Down ► Model Companies ► Planning Issues ► Financial Models – the crucible to test ideas ► “What-if” Scenarios ► Lest we forget…
  3. 3. Why do a financial Plan ► Can’t raise money without one? ► Feasibility of business model ► Understand the key variables for your business ► Understand the cash requirements ► Sharpens focus on key planning areas ► Focus on key operating metrics ► Oh, yeah…  Can’t raise money without one!!!
  4. 4. Basic Building Blocks – Department Budget Eng Budget q1 q2 q3 q4 y1 y2 head 1 head 2 Salary total Salary ovhd Depreciation expenses capital
  5. 5. Key Variables Department Budget ► Headcount Dept Budget  Salary / overhead / recruiting  Facilities / communications / IT  T& E / other ► Capital Equipment
  6. 6. Key Variables Department Budget ► G&A Dept Budget  Headcount ► Exec office / CFO  legal  Accounting  Corporate allocatable expenses ► IT and communications infrastructure ► Real estate
  7. 7. Key Variables Department Budget ► Engineering Dept Budget  Headcount  NRE  consulting (e.g. FCC approval)  prototypes, expensed materials  product enhancements and sustaining engineering
  8. 8. Key Variables Department Budget ► Marketing Dept Budget  Headcount  product launch  Advertising / PR  seminars, trade shows, web site  brochures, literature
  9. 9. Key Variables Department Budget ► Sales Dept Budget  Headcount ► Mgrs, SE’s  Productivity model  partnerships, coop. Advertising  remote offices
  10. 10. Key Variables Department Budget Dept Budget ►Headcount ►Headcount ►Headcount
  11. 11. Key Variables – Capital Equipment ► Cost per head ► NRE ► Technology Buyout ► Tooling ► ITinfrastructure ► Purchased Bldgs Corp Cap Budget
  12. 12. Basic Building Blocks Corp Rollup and Cap Schedule Corp Exp Budget Dept Budget Dept Budget Dept Budget Dept Budget Corp Cap Budget
  13. 13. Key Variables Revenue Model (cross checked) ► Market  Available / Served Revenue Model ► Price  List / discount / Avg selling price ► Forecast – by Product  Product mix  Trajectory of Ramp ► Forecast – by Channel  Net cost by channel ► Forecast – by Sales Capacity  Sales Yield (sum of quota less safety margin)  Productivity ramp  Attrition calculation  Staffing plan ► Cost for customer acquisition
  14. 14. Key Variables Cost Model ► Product  Estimated BOM ► Rush charges ► Design changes ► Warranty ► Obsolescence / write–offs  Labor  Volume ► Services  Labor Cost Model  Training  Efficiency
  15. 15. Basic Building Blocks – Income Statement Revenue Model Dept Budget Dept Budget Income Statement Revenue Dept Budget COGS Expenses Profit Dept Budget Product Cost Model
  16. 16. Key Variables Capitalization (Funding) Plan ► Equity Financing – amount and timing  Seed  Startup A  Development B  Mezzanine C  IPO  Post IPO ► Debt Financing  Capital equipment Leasing  Working capital bank Line  Convertible debt securities Capitalization Plan
  17. 17. Key Variables – Capital Equipment ► Cost per head ► NRE ► Technology Buyout ► Tooling ► ITinfrastructure ► Purchased Bldgs Corp Cap Budget
  18. 18. Basic Building Blocks – Balance Sheet and Cash Flow Rev enue M odel Dept Budget Balance Sheet Dept Budget Dept Budget Income S tatement Rev enue Cash Flow C O GS Dept Budget Expenses P rofit Product Cost Model Corp Cap Budget Capitalization Plan
  19. 19. Bottoms-up / Tops-down ► Bottom-up  Built from details  Variable assumptions  Start up and growth stage ► Top-down  “model” of the mature company  Similar to other companies / products / markets ► The Five-Year Plan  Year 5 = model company (or close to it)  Year 1 = raw start up  Year 2  5 development stage to mature company
  20. 20. The Model Company ► Income Statement  Revenue  Gross Margin  Departmental expenses as percentage of revenue  Operating Income ► Balance sheet items  DSO (A/R days sales outstanding)  Inventory turns ► Employee Metrics  Revenue / employee  Expense / employee  Expenses as a percent of revenue
  21. 21. Basic Building Blocks – Department Budget Startup  Model Y1 Y2 Y4 Y5 Income Income Income Income Statement Statement Statement Statement Balance Balance Balance Balance Sheet Sheet Sheet Sheet Cash Flow Cash Flow Cash Flow Cash Flow
  22. 22. Intergalactic Optical Nanotubes, Inc. Income Statement Y1 Y2 Y3 Y4 Y5 Revenue 0 2.0 20.0 160.0 350.0 Gross Mrgn 0 1.6 16.0 128.0 280.0 Engineering 2.0 2.5 2.5 2.5 2.5 SG&A 0.5 1.5 1.5 1.5 1.5 Total Op Ex 2.5 4.0 4.0 4.0 4.0 Op Profit (2.5) (2.0) 12.0 124.0 176.0
  23. 23. Model Companies – Operating Stacks ($M) Cisco Dell Microsoft Yahoo Rambus Revenue 18,878 35,404 32,187 953 97 Cogs 5,645 29,055 5,686 163 8 Gross Margin 13,233 6,349 26,501 790 89 Eng 3,135 455 4,659 143 22 SG&A 4,818 3,050 8,625 537 35 Total Op Exp 8,351 3,505 13,284 702 57 Operating 4,882 2,844 13,217 88 31 Income Net Income 3,578 2,122 9,993 43 25 EPS .50 .91 .19 .20 .20
  24. 24. Model Companies – Common Sizing (%) Cisco Dell Microsoft Yahoo Rambus Revenue 100 100 100 100 100 Cogs 30 82 18 17 8 Gross Margin 70 18 82 83 92 Eng 17 1 15 15 23 SG&A 25 9 26 56 36 Total Op Exp 44 10 42 74 59 Operating Income 26 8 41 9 32 Net Income 19 6 31 4.5 26
  25. 25. Model Companies – Market Value Cisco Dell Microsoft Yahoo Rambus Market Cap ($B) 146 95 317 3 2 Revenue ($B) 19 35 32 1 .1 Multiple of 8 3 10 3 20 Revenue Earnings ($B) 3.6 2.1 10 .04 .02 Multiple of 41 38 31 75 100 Earnings
  26. 26. Planning Issues ► Revenues (always) take longer  Sales forecasts are optimistic  Un-tested “sales model”  Unrealistic productivity assumptions ► Margins aren’t as great as planned  Design creep  Hidden costs like yield, scrap, obsolescence, warranty ► Operating expenses higher than plan ► Capital needs are high . . . and not free  Cost of capital is inversely proportional to the execution of the plan
  27. 27. Sanity Testing ► Rate of Sales Growth ► Staffing  Growth  Non-growth ► (engineer one product, sell it forever) ► Profits ► Proxy – compare your plan to the experience of existing companies
  28. 28. Financial Models -- The crucible to test your ideas! ► Ifyou understand the model, feasibility of ideas are more self-evident ► Make Key Assumptions into variables  Investigate alternatives  Sensitivity Analysis ► Determine CASH consumption ► Understand the path to profitability
  29. 29. Modeling – “What-if” Scenarios ► Document assumptions  Facilitates changes in future  Operational (e.g.,product engineering plan/milestones) ► Develop a feel for the dynamics  E.g., Reduced investment in engineering = product schedule slip of X months = revenue delay
  30. 30. Lest we forget… Cash… …is King. Again!
  31. 31. Financial Projections for Start-Up Businesses Mark Leslie mleslie@leslieventures.com 650.561.1228
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