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Financial Projections for Investor Presentations - Sept 18 2013

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David Fogel of Swifton CFOs presents at McCarter English's series for entrepreneurial ventures

David Fogel of Swifton CFOs presents at McCarter English's series for entrepreneurial ventures

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  • 1. COPYRIGHT © 2013 Thank you Ben Hron!
  • 2. ABC Company, Inc. Estimated Statement of Operations For The Years Ended December 31, 2010. 2011, 2012, and 2013 2010 2011 2012 2013 2010 2011 2012 2013 Reve nue: Installation Revenue 450$ 3,825$ 21,038$ 73,633$ 77.1% 84.3% 82.3% 80.6% Non-Installation Revenue Service Fees 89$ 623$ 4,361$ 17,444$ 15.2% 13.7% 17.1% 19.1% Other Non-Installation Revenue 45$ 90$ 158$ 237$ 7.7% 2.0% 0.6% 0.3% Total Revenue: 584$ 4,538$ 25,557$ 91,314$ 100.0% 100.0% 100.0% 100.0% Direct Costs: Installation Costs 338$ 2,678$ 12,623$ 36,817$ 57.9% 59.0% 49.4% 40.3% Non-Installation Costs 38$ 193$ 1,175$ 4,420$ 6.5% 4.3% 4.6% 4.8% Direct Costs: 376$ 2,871$ 13,798$ 41,237$ 64.4% 63.3% 54.0% 45.2% Other Cost of Service s 88$ 567$ 2,556$ 6,849$ 15.1% 12.5% 10.0% 7.5% Gross Margin ($) 120$ 1,100$ 9,203$ 43,228$ 20.5% 24.2% 36.0% 47.3% Gross Margin (%) 20.5% 24.2% 36.0% 47.3% Operating Expenses: Sales 292$ 1,588$ 6,389$ 18,263$ 50.0% 35.0% 25.0% 20.0% Marketing 263$ 1,361$ 5,111$ 13,697$ 45.0% 30.0% 20.0% 15.0% Research & Development 175$ 998$ 2,811$ 8,218$ 30.0% 22.0% 11.0% 9.0% General & Administration 44$ 295$ 1,533$ 4,566$ 7.5% 6.5% 6.0% 5.0% Total Operating Expenses: 774$ 4,242$ 15,844$ 44,744$ 132.5% 93.5% 62.0% 49.0% EBITDA (654)$ (3,142)$ (6,641)$ (1,516)$ -112.0% -69.2% -26.0% -1.7% Other (Revenue ) & Expenses: Interest 80$ 156$ 32$ 80$ 13.7% 3.4% 0.1% 0.1% Taxes 8$ 9$ 11$ 15$ 1.4% 0.2% 0.0% 0.0% Depreciation & Amortization 13$ 67$ 268$ 874$ 2.2% 1.5% 1.0% 1.0% Total Other (Revenue) & Expenses 101$ 232$ 311$ 969$ 17.3% 5.1% 1.2% 1.1% Net Income (Loss) (755)$ (3,374)$ (6,952)$ (2,485)$ -129.3% -74.3% -27.2% -2.7% Stateme nt Note s: Reve nue Market 1 43$ 2,320$ 12,205$ 46,232$ 7.4% 51.1% 47.8% 50.6% Market 2 230$ 1,201$ 7,652$ 26,450$ 39.4% 26.5% 29.9% 29.0% Market 3 256$ 932$ 3,250$ 12,658$ 43.8% 20.5% 12.7% 13.9% Market 4 55$ 85$ 2,450$ 5,974$ 9.4% 1.9% 9.6% 6.5% Total Re venue 584$ 4,538$ 25,557$ 91,314$ Headcount Existing 13.00$ 18.00$ 61.00$ 298.00$ New Hires 5.00$ 43.00$ 237.00$ 830.00$ Total Headcount 18.00$ 61.00$ 298.00$ 1,128.00$ Capital Expe nditures 126.00$ 424.00$ 1,584.00$ 4,474.00$ Dollars (000's omitte d) Percent (%) of Revenue COPYRIGHT © 2010 COPYRIGHT © 2012
  • 3. Rule #1: If you cannot read the financial statement from two feet away the font is too small (i.e. there are too many details) COPYRIGHT © 2012
  • 4. ABC Company, Inc. Projected Statement of Operations For The Years Ended December 31, 2010. 2011, 2012, and 2013 2010 2011 2012 2013 Revenue: Market 1 43.00$ 2,320.00$ 12,205.00$ 46,232.00$ Market 2 230.00$ 1,201.00$ 7,652.00$ 26,450.00$ Market 3 256.00$ 932.00$ 3,250.00$ 12,658.00$ Market 4 55.00$ 85.00$ 2,450.00$ 5,974.00$ Total Revenue 584.00$ 4,538.00$ 25,557.00$ 91,314.00$ Gross Margin ($) 120.00$ 1,100.00$ 9,203.00$ 43,228.00$ Gross Margin (%) 20.5% 24.2% 36.0% 47.3% Operating Expenses: Sales & Marketing 555.00$ 2,949.00$ 11,500.00$ 31,960.00$ Research & Development 175.00$ 998.00$ 2,811.00$ 8,218.00$ General & Administration 44.00$ 295.00$ 1,533.00$ 4,566.00$ Total Operating Expenses: 774.00$ 4,242.00$ 15,844.00$ 44,744.00$ Other Expense/(Income) 101.00$ 232.00$ 311.00$ 969.00$ Net Income (Loss) (755.00)$ (3,374.00)$ (6,952.00)$ (2,485.00)$ Statement Notes: Headcount Existing 13.00$ 18.00$ 61.00$ 298.00$ New Hires 5.00$ 43.00$ 237.00$ 830.00$ Total Headcount 18.00$ 61.00$ 298.00$ 1,128.00$ Capital Expenditures 126.00$ 424.00$ 1,584.00$ 4,474.00$ Dollars (000's omitted) COPYRIGHT © 2012
  • 5. Rule #2: Pennies are only for accounting auditors COPYRIGHT © 2012
  • 6. ABC Company, Inc. Estimated Statement of Operations For The Years Ended December 31, 2010. 2011, 2012, and 2013 2010 2011 2012 2013 Revenue: Market 1 43$ 2,320$ 12,205$ 46,232$ Market 2 230$ 1,201$ 7,652$ 26,450$ Market 3 256$ 932$ 3,250$ 12,658$ Market 4 55$ 85$ 2,450$ 5,974$ Total Revenue 584$ 4,538$ 25,557$ 91,314$ Gross Margin ($) 120$ 1,100$ 9,203$ 43,228$ Gross Margin (%) 20.5% 24.2% 36.0% 47.3% Operating Expenses: Sales & Marketing 555$ 2,949$ 11,500$ 31,960$ Research & Development 175$ 998$ 2,811$ 8,218$ General & Administration 44$ 295$ 1,533$ 4,566$ Total Operating Expenses: 774$ 4,242$ 15,844$ 44,744$ Other Expense/(Income) 101$ 232$ 311$ 969$ Net Income (Loss) (755)$ (3,374)$ (6,952)$ (2,485)$ Statement Notes: Headcount Existing 13$ 18$ 61$ 298$ New Hires 5$ 43$ 237$ 830$ Total Headcount 18$ 61$ 298$ 1,128$ Capital Expenditures 126$ 424$ 1,584$ 4,474$ Dollars (000's omitted) COPYRIGHT © 2012
  • 7. Rule #3: Use $ (dollar signs) on the first and last row only. Unless, of course, you are mixing rows of $ and %, etc. COPYRIGHT © 2012
  • 8. FORMAT CREDIBILITY The presentation format does not interfere with (or create noise for) the reader COPYRIGHT © 2012
  • 9. ABC Company, Inc. Projected Statement of Operations For The Years Ended December 31, 2010 through 2013 Revenue: Market 1 43$ 2,320$ 12,205$ 46,232$ Market 2 230 1201 7652 26450 Market 3 256 932 3250 12658 Market 4 55 85 2450 5974 Total Revenue 584 4538 25557 91314 Gross Margin ($) 120 1100 9203 43228 Gross Margin (%) 20.5% 24.2% 36.0% 47.3% Operating Expenses: Sales & Marketing 555 2949 11500 31960 Research & Development 175 998 2811 8218 General & Administration 44 295 1533 4566 Total Operating Expenses: 774 4242 15844 44744 Other Expense/(Income) 101 232 311 969 Net Income (Loss) (755)$ (3,374)$ (6,952)$ (2,485)$ Statement Notes: Headcount Existing 13 18 61 298 New Hires 5 43 237 830 Total Headcount 18 61 298 1,128 Capital Expenditures 126$ 424$ 1,584$ 4,474$ Dollars COPYRIGHT © 2012
  • 10. Rule #4: Use column headings that make sense COPYRIGHT © 2012
  • 11. Rule #5: Numbers with thousands or millions must have commas This: 54,556 Not this: 54556 COPYRIGHT © 2012
  • 12. Rule #6: Don’t mix fonts Or font size…… And do not use a silly font COPYRIGHT © 2012
  • 13. Rule #7 Spelle Check COPYRIGHT © 2012 And do not tell me you relied on Microsoft…….
  • 14. Rule #8: Text is left justified Numbers are right justified Violators confuse the reader COPYRIGHT © 2012
  • 15. Rule #9: Do not overdo color and Do not highlight in COPYRIGHT © 2012 Use Spot color!
  • 16. Rule #11: Round your numbers to the nearest thousand for presentations COPYRIGHT © 2012
  • 17. Financials in your Slide deck are a Marketing Effort! Really? COPYRIGHT © 2012
  • 18. Provide cost-effective outsourced CFO support Clients range from pre-revenue startups to later stage privately held companies Goals (1) educate entrepreneurs to understand and consider financial opportunities and implications (2) handle all accounting/ financial matters so the entrepreneurs can focus on driving the business COPYRIGHT © 2012
  • 19. David A. Fogel, CPA Serial entrepreneurial CFO Managing Director of Swifton CFOs LLC (since 2009) Experience with high tech companies ranging from biotech to telecom to healthcare IT to social media to… Adjunct Instructor of Master’s Program: Presenter & Mentor: Member: COPYRIGHT © 2013
  • 20. Introducing the Financial Statements • Balance Sheet • Profit and Loss Statement • Cash Flow Statement COPYRIGHT © 2012
  • 21. Balance Sheet What you own/owe – point in time Assets = Liabilities + Equity Assets are good? Capital expenditures (Fixed Asset) rule Amount => $5,000 AND useful life > one year Liabilities – Disclose, disclose, disclose COPYRIGHT © 2012
  • 22. Profit and Loss Statement (Statement of Operations) • What you earned • Could represent cash activities but usually much more…… • Management accounting can be more informative, but need to have GAAP • Earnings can be managed, but cash is a reality… COPYRIGHT © 2012
  • 23. Cash Flow Statement • Where your cash came and went: • Operations, Investing, or Financing • Cash in the bank is a fact • Investors are most interested in your use of $$ COPYRIGHT © 2012
  • 24. Developing The Financial Forecast 1. Defined 2. What about the assumptions? 3. Creating the sales forecast 4. Spreading the numbers 5. Creating the statements COPYRIGHT © 2012
  • 25. Ty Danco Member, Mass Medical Angels Member, North Country Angels "I'll never believe your revenue numbers anyway, but I sure want to scrutinize your assumptions and expenses!" COPYRIGHT © 2012
  • 26. Developing The Financial Forecast 1.What are financial projections? Collection of statements that present your business in numbers (IS, BS, CF, Cap) “Does the story make sense?” “Does the story add up?” COPYRIGHT © 2012
  • 27. Set your goals from top down but….. Prepare the model from the bottom up then….start over with your top down goals COPYRIGHT © 2012
  • 28. Developing The Financial Forecast 2. What about the assumptions? Document the source of each number you produce - Why? - Knowledge of the assumptions proves that the entrepreneur understands the business - Prove it to yourself Sources of assumptions - Desired goal to be obtained - Primary market research – surveys, vendor quotes - Second market research – purchased or gov’t information - Estimated or best guess (really try not to SWAG) COPYRIGHT © 2012
  • 29. Developing The Financial Forecast 2. What about the assumptions? (part 2) Start-up costs (uses of $) Financing (sources of $) Capital expenditures (costs with >1 yr life) Fixed expense (cost of being in business) Variable expense (cost of doing business) Projected sales (anticipated revenue earned) Cash flow (anticipated $ received and spent) COPYRIGHT © 2012
  • 30. • Expenses up to the point when you are open for business…….which is when? • List uses of money – describe how spent • Like: Fixed assets & Working Capital • Examples? Fixed Assets = Equipment, Furniture Working Capital = Rental deposits, Insurance Start-up cost assumptions COPYRIGHT © 2012
  • 31. • Sources where $ will come from • Where? Entrepreneur and team F&F Bank loan (though not likely for start-ups) Debt from owner or outside creditor Non-dilutive financing (maybe ) Equity capital • For loan – know amount, terms of repayment (mos), and rate of interest or return Financing assumptions COPYRIGHT © 2012
  • 32. • Costs that have a “lifetime” greater than one year AND an individual or collective cost greater than $2k • Predict some fixed assets by headcount, some by significant changes in sales volume, some by changes in product lines, etc. • Examples: Leasehold improvements, Furniture & fixtures, Machinery • Note: Expense the PCs & Macs & iPads (but keep track of them anyway) Capital Expenditures (aka Fixed Assets) COPYRIGHT © 2012
  • 33. • Costs of being in business • Do not vary by sales volume (i.e. day-to-day) • But DO increase as the business scales • Create fixed cost projections on monthly basis • Research through correspondence with outside vendors • Record the source & amount from each vendor…….. • Examples: Rent, Utilities, Salaries, Benefits, Marketing expenses, Administrative expenses Fixed cost assumptions COPYRIGHT © 2012
  • 34. • Costs of doing business • May vary directly with sales volume • DO increase as the business scales • Expenses incurred with the next “unit” of product or service • Research through correspondence with outside vendors • Examples: Materials, direct/indirect labor, and shipping costs Variable cost assumptions COPYRIGHT © 2012
  • 35. What product(s) and/or service(s) Quantities Price When (seasonality/cyclicality)? T&C’s Projected sales assumptions COPYRIGHT © 2012
  • 36. • Convert your business activity to cash activity • When will cash be collected from customers? May vary by product line and by customer Generally assume 45 days---though currently customers are extending to 60 days • When do you pay your vendor’s invoices? May vary by product line and by vendor Generally assume 30-45 days Need to create “referenceable” vendors Cash flow assumptions COPYRIGHT © 2012
  • 37. Ben Littauer Member, Boston Harbor Angels "I like to see a business model spreadsheet with the assumptions clearly called out as variables. Then I can twiddle the knobs and see how sensitive profits are to the assumptions." COPYRIGHT © 2012
  • 38. Developing The Financial Forecast 3. Creating the sales forecast BEST - Predict by customer as detailed as possible ….but include customer turnover BETTER – Predict by market COPYRIGHT © 2012
  • 39. Developing The Financial Forecast 3. Creating the sales forecast (part 2) How do I start? Market research! • Trade associations • Primary & secondary research • Gov’t resources US Census Bureau IRS Statistical Data Select your geography COPYRIGHT © 2012
  • 40. Developing The Financial Forecast 3. Creating the sales forecast (part 3) Small Client Medium Client Large Client Average Hours Per Week 4 Hours 8 Hours 16 Hours Average Contract $ Per Week $500 $1,250 $2,500 Predict by client (customer) types • By market • By size Then ID certain characteristics COPYRIGHT © 2012
  • 41. Developing The Financial Forecast 3. Creating the sales forecast (part 4) Predict using Sales staff • Assume lag time (3-6 mos.) • Estimate the pipeline • # of calls / meetings per staff • # of sales per staff • Remember: Not all staff start same date • Spread out the volume by month – with realistic goals • ….Consider turnover of sales staff COPYRIGHT © 2012
  • 42. Forecast Trap: Why they call them “Gross Sales” • Returns • Discounts • Coupons • Rebates • Chargebacks • Markdowns COPYRIGHT © 2012
  • 43. Forecast Trap: Do not over-estimate first year revenue (what, we can’t sell millions in first month?) COPYRIGHT © 2012
  • 44. Developing The Financial Forecast 4. Spreading the Numbers • Yes, you need to do it monthly -- for the entire period • Avoid flat numbers – consider the meaning – use % increases or $ per some type of unit • Think: As headcount increases rent increases (just not variably) • Start with revenue, then cost of services COPYRIGHT © 2012
  • 45. Tip: Integration Must use an integrated model Headcount added Payroll and benefits calculation Summarized employee costs Income Statement Cash Flow COPYRIGHT © 2012
  • 46. Tip: Use Rounding Use the MS Excel “rounding function” --- otherwise your numbers may not add up (and some people are really a pain about this……) COPYRIGHT © 2012
  • 47. Question? Is the methodology Accrual or Cash? COPYRIGHT © 2012
  • 48. Tip: Project payroll & benefits in detail • Payroll & benefits are often the most costly expense yet they are often neglected • Project monthly to handle start dates correctly (everyone cannot start in January) • Match people adds with milestones COPYRIGHT © 2012
  • 49. Tip: Projection Numbers are not separate from the Company Plans Company Plans Milestone Projects Responsible Revenue/ Cost Dates COPYRIGHT © 2012
  • 50. Multiple Model Trap: One investor model, Multiple options (triggers) But…why not? Fundamental changes made in base model will not be reflected in the clones COPYRIGHT © 2012
  • 51. Tip: Don’t forget the….. Sales commissions – Direct connect them to your sales staff’s (or sales rep) sales Bonuses – Include with payroll Recruiting expenses – Peg them to change in new employees Debt - Many forget to include Interest Expense on the income statement even though the Company has incurred Debt COPYRIGHT © 2012
  • 52. Presentation Suggestions Steady, consistent evolution of the model Revenue growth in $ Expenses over time in % Know the % change for major components (and be able to explain them) Do not allocate G&A/Facilities expenses COPYRIGHT © 2012
  • 53. Tip: Reasonableness 1. Once you think you are done take the smell test --- Do the numbers really make sense (i.e. can you really increase revenue w/o an increase in costs)? 2. Do the Like-Kind test. Compare your “metrics” versus your competition COPYRIGHT © 2012
  • 54. Creating the Statements 1. Consider it a Marketing Effort 2. Present the Pro-Forma Financial Statement 3. Graph the Revenues, Income, and Cash 4. Present the Headcount COPYRIGHT © 2012
  • 55. ABC Co. ($ 000's omitted) 2010 2011 2012 2013 2014 Pro Forma Financial Statement Revenue -$ 1,875$ 44,953$ 108,238$ 180,161$ Cost of Service - 1,162 12,739 5,369 - Gross Margin - 712 32,214 102,868 180,161 38% 72% 95% 100% Operating Expenses Employee Costs 1,303 2,972 3,587 4,198 4,379 Professional Fees 253 637 1,780 1,230 1,135 Marketing & Travel 61 525 2,340 293 658 Administrative Expenses 60 55 232 41 47 Development & Pilot Manufacturing 409 819 262 965 1,733 Facility & Other 195 801 1,206 1,612 2,023 Total Expenses 2,282 5,807 9,407 8,340 9,976 Depreciation & Amortization 42 98 301 590 791 EBIT (2,324) (5,193) 22,507 93,939 169,394 Net Income (2,639) (5,411) 16,893 55,530 100,603 0% -289% 38% 51% 56% Pro Forma Cash Flow Cash from Operations (2,597) (5,313) 17,193 56,120 101,393 Cash from Working Capital (31) (936) (2,879) (2,754) (3,437) Cash from Investments (57) (297) (1,052) (607) (600) Cash from Financing 7,000 - 42,000 - - Net Cash Flow 4,315 (6,545) 55,262 52,759 97,357 Ending Cash 6,644$ 99$ 55,360$ 108,119$ 205,476$ Income Statement Cash Flow Statement COPYRIGHT © 2012
  • 56. ABC Company – Financials by Year ($000’s omitted) COPYRIGHT © 2012 ($25,000) $25,000 $75,000 $125,000 $175,000 $225,000 2010 2011 2012 2013 2014 Revenue Income Cash Milestone #1 Prototype Milestone #2 Pilots Milestone #3 Commercialization Seeking $250k Investment
  • 57. Universal Truths: 1. Project monthly, Present annually 2. Projections constantly change, let them. Not an annual exercise. Develop as a monthly exercise. 3. Financials must be consistent with rest of presentation 4. P&L Income ≠ Cash Flow (we know this right?) COPYRIGHT © 2012
  • 58. Don’t let Gust blow you away……… 1. Set forecast in stone 2. Complete the boxes 3. Consistent with other docs and financials 4. Be able to back it up (details?) COPYRIGHT © 2013
  • 59. COPYRIGHT © 2013 Thank you Ben Hron!
  • 60. Contact Information: Email: Website: Twitter: Phone: Cell: COPYRIGHT © 2012
  • 61. COPYRIGHT © 2012
  • 62. COPYRIGHT © 2013
  • 63. Even More Universal Truths: • Be consistent – Don’t portray cost categories (or individuals) differently by year • Have “Checks” • Do not need to be hung up with GAAP, but….don’t go rogue COPYRIGHT © 2012