Part of the MaRS Entrepreneurship 101 series http://www.marsdd.com/ent101 Building a succesful business is about more than simply running a research project. This coming Tuesday's speaker, Ms. Kerri Golden (a chartered accountant and Venture Capitalist), will talk about building realistic budgets for running a start up company - budgets that help you not only identify where you will spend money, but where you will make money! Speaker: Kerry Golden, Managing Partner at Primaxis Technology Ventures This is available as an audio presentation at: http://blog.marsdd.com/2007/03/07/entrepreneurship-101-competitive-intelligence-getting-the-information-you-need-for-your-financial-plan/

1. Fail to Plan: Plan to Fail
Developing a Financial Plan
For your Business
Kerri Golden, CA
Managing Partner
Primaxis Technology Ventures
March 6, 2007

2. Presentation Overview
! Financial Plan: part of your Business Plan
! The Top Line – Sales, Cost of Sales and Margin
! Operating Expenses – R&D, Selling and Admin.
! Balance Sheet - Working Capital and Equipment
! Cash Flow – the most important tool for the
Entrepreneur
! Closing Remarks
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3. The Business Plan ~ 30 pages
! Executive Summary
! Company and Opportunity Summary
! Product and Technology
! Market Size and Growth
! Sales and Marketing Plan
! Competitive Overview
! Operations Plan
! Management Team
! Financials and Investment Requirements – focus for today
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4. Before you start your Financial Plan…
! You need an outline of your Business Plan including:
!Product and Technology
• R&D budget for development of technology and initial products
• Specification of products - bill of material and labor cost to build
• Product’s evolution over time - cost reduction projects/estimates
!Market Information, including Competitive Overview
• Sales Unit Targets, Pricing, Sales Team and Partner Compensation
!Sales and Marketing Plan
• Go to Market Plan, Distribution Strategy, Marketing activities
!Operations Plan
• Details of support program, team, equipment required…
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5. Income Statement – the Top Lines
Year One Year Two Year Three
Sales $0 $1.4M $5.7M
Cost of Sales $0 $0.3M $1.1M
Gross Margin $0 $1.1M $4.6M
R&D Expenses $1.5M $2.3M $3.0M
Selling Expenses $0.7M $2.2M $3.7M
Admin Expenses $0.6M $1.2M $1.5M
EBITDA ($2.8M) ($4.6M) ($3.6M)
ITDA* $200K $300K $400K
Net (Loss) Income ($3.0M) ($4.9M) ($4.0M)
*ITDA = Interest, Taxes, Depreciation and Amortization
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6. Translating Market Share to Sales?
Target 1% of the projected $3 billion market by year five, work
backward to earlier year sales projections
Year five projected sales = $30 million
My Company
Tip:
It can be better to segment the
market and show your market
share in relation to segment –
investors like to back companies All Competitors
who will be significant players in
their market segment
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7. Sales Forecast – bottom up more credible!
! Distribution Channel = Doctors
! Recruit Doctors as follows:
! 150 in year one through trade shows (60 signed up already)
! 2,400 doctors by year five of the plan, serving up to 30,000
patients
! Product pricing:
! Annual patient revenues of $1,000 per year
! Pricing starts at $1,200 per year, competition drives average
price down 20% over period of the plan
! Require 6 regional sales and support reps to
support Doctor Network
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8. Other Sales Forecast Considerations
! Mixed Distribution Model may result in multiple selling
prices for products
! End User Selling Price for product sold directly to customers
! Wholesale Price for sales distribution partners
! Currency
! Most Canadian companies sell their products in US and other markets
– Develop pricing strategies for individual markets, validate and state
assumptions in your plan
! Service Revenues
! Dependent on salary/consulting rates which generally increase over
time
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9. Always ask: Is Your Plan Realistic?
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10. Cost of Sales and Gross Margin
! The direct costs of producing your product
! Bill of Material, Labor, Warehousing, Shipping…for products
! Service Team Labor and Material Costs
! Costs will evolve over time
! Production volume will impact unit cost
! Labor costs will generally increase, although they often drop as a
percentage of costs over time
! Planning for cost reductions – it is common for technology companies
to get version of product to market & then re-engineer it for lowest cost
! Gross Margin
! Expressed in dollars and often a percentage – you should understand
margin targets for your industry/sector (Software – 80-90%, Product
Companies – 45-60%)
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11. Expense Projections - Income Statement
Year One Year Two Year Three
Sales $0 $1.4M $5.7M
Cost of Sales $0 $0.3M $1.1M
Gross Margin $0 $1.1M $4.6M
R&D Expenses $1.5M $2.3M $3.0M
Selling Expenses $0.7M $2.2M $3.7M
Admin Expenses $0.6M $1.2M $1.5M
EBITDA ($2.8M) ($4.6M) ($3.6M)
ITDA* $200K $300K $400K
Net (Loss) Income ($3.0M) ($4.9M) ($4.0M)
*ITDA = Interest, Taxes, Depreciation and Amortization
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12. R&D expenses may be your comfort zone
! Teams generally comfortable forecasting these costs
! Largest component is labor costs for the team - should
consider evolution of team over time from research to
product design/development, testing and QA
! Must address sustaining work on product line, field
support for customers and future product cost reductions
! Costs of patenting/protecting trade secrets
! Any licensing costs to use other’s technologies
! Consider tax credits and grants that can help stretch
your R&D budget
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13. But selling expenses often drive growth!
Newbridge – sales results for the early years
! 1987 - $1.3M
! 1988 - $17.6M
! 1989 - $67.4M
! 1990 - $121.2M
! 1991 - $149.1M
! 1992 - $181.M
! 1993 - $307.6M
Newbridge spent 50%+ on selling and only 33% on
R&D to generate spectacular sales growth
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14. What’s in Selling Expenses?
! Labor costs for sales and marketing team members –
usually a team that is geographically remote
! Commissions – how does your plan compare with
industry to enable recruiting top resources?
! Marketing Costs – Public Relations, Advertising, Trade
Shows, Website, Lead Generation, Case Studies,
Customer Documentation, Partner recruiting costs
! Travel, Living and Entertainment – strategy to ensure
customer coverage and policy to control costs
! Performance measures to ensure the costs of pursuing
customers are matched with margin on sales
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15. What’s in Admin Expenses?
! Labor costs for operations, customer support, finance,
HR, IT and admin teams, including CEO
! Rent and related costs (telephone, internet, supplies…)
associated with running the office and operation
! Recruiting and other HR costs – may be significant as
team is ramped up
! Professional Fees including legal, audit, tax, insurance
! Board/Investor Relations costs
! Travel expenses for CEO/CFO
! Misc. Costs – bank charges, courier, postage
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16. The Business Case Tool
Year One Year Two Year Three
Incremental $0 $2,000K $6,000K
Revenue
Incr. Margin $0 $1,000K $3,000K
R&D Costs $1,000K $300K $200K
Selling Costs $150K $500K $1,200K
G&A Costs $100K $200K $300K
Total Costs $1,250K $1,000K $1,700
Total Margin ($1,250K) $0 $1,300
Business case discipline should be added to ensure that future
development projects contribute to financial success.
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17. The Balance Sheet – an example
Year One Year Two Year Three
Cash $17K $4,738K $898K
Accounts Rec. $176K $929K $1,371K
Inventory/Prepaid $223K $190K $328K
Fixed Assets $203K $304K $343K
Total Assets $619K $6,101K $2,939K
AP & Liabilities $429K $1,020K $1,786K
Financing* $3,227K $13,008K $13,324K
Ret. (Loss) Income ($3,037K) ($8,006K) ($12,170K)
Total Liab/Equity $619K $6,101K $2,939K
*Financing could be Debt, Equity or combination thereof
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18. Asset increase = use of cash
! Accounts Receivable (A/R)
! Amounts owing from customers, partners, tax credit, grant program,
GST input tax credits – assumptions regarding terms/collection
! As business grows, company may require cash or alternative financing
to fund A/R growth (e.g. customers pay 60 days after delivery)
! Inventory and Prepaid Expenses
! For product business, inventory build plan and management are critical
! Need product on hand to ensure sales targets can be met
! Some expenses (insurance, trade shows, rent) may be paid in advance
! Fixed Assets
! Equipment to be used in the business, expensed over longer-term
! Some businesses can be very capital-intensive
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19. Liability/Equity increase = source of cash
! Accounts Payable and Liabilities (A/P)
! Need to reflect terms with suppliers, should be negotiated based on your
business cycle to minimize cash flow impact
! Other liabilities can include: Leases, Sales Tax Payable
! Debt Financing
! Small Business Loan for equipment
! Venture Debt, may be available along with equity funding
! Operating Line of Credit – usually secured against Accounts Receivable
and maybe Inventory assets
! Long-term Equipment Loan – may be available for capital-intensive
business
! Equity Financing
! Proceeds from sale of either common or preferred shares
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20. Cash Flow Statement – key tool
! Often regarded as something accountant prepares for
monthly/quarterly/annual financial statements
! Should be used as a weekly or daily planning tool to
manage your business
! Opening Cash Balance
! + Cash Receipts from customers/other Receivable
! - Payroll Costs
! - Cash Payments to suppliers for Expenses/Inventory/Fixed Assets
! + Cash received from lenders or equity financing
! - Cash Payments, including interest for repayment of debt
! = Closing Cash Balance
! Understanding & managing cash flow is key to success
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21. Some Final Thoughts
! Your business plan is quantified in your financial plan
! The assumptions/content must be consistent between the two plans
! The key aspects of the business plan need to be researched and
thought through before starting the financial plan
! Your financial plan can be a work in progress
! Not all elements of the plan need to be finalized before seeking funding
! Be honest about where there is higher degree of confidence in the plan
and where more work is required to complete
! Monitoring your business’ progress against your financial
plan is as important as developing the plan
! “Cash is king” in start-ups and the balance should be
monitored on a regular basis (daily or weekly)
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