If you fail to plan, will your plan fail?
Developing a financial plan for your business
Kerri Golden, CA
February 4, 2009

 Executive Summary
 Company and Opportunity Summary
 Product and Technology
 Market Size and Growth
 Sales and Marketing Plan
 Competitive Overview
 Operations/Execution Plan
 Management Team
 Financials and Investment Requirements – focus for today
3 Financial Planning – February 2009

 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/Execution Plan
• Details of support program, team, equipment required…
4 Financial Planning – February 2009

 www.trizle.com/topics/985-how-to-budget-your-startup
has this little story:
1. Sally gets new idea
2. Sally gets funding
3. Sally spends 100% of $$ developing the idea
4. Sally runs out of cash
5. Sally goes bankrupt
 Sad but frequent ending to the entrepreneurial dream!
5 Financial Planning – February 2009

 She spent all/ most of her funding on the development of the
technology or product and almost no time and money selling and
marketing her product to customers
 Like most technology entrepreneurs, she assumed that marketing/
sales were easy --- once she’d developed the perfect product the
customers would come knocking & in meantime investors would be
impressed with the perfect product she’d developed
 She didn’t use her funding to achieve milestones needed for more
funding --- investors are always looking for investment prospects that
have customer traction and that’s more likely in tough times
 She also missed the opportunity to lower her start-up’s dependence
on outside financing by securing early sales dollars
6 Financial Planning – February 2009

 Cash Flow Forecast based on Business/ Execution Plan
 How much money do you need for the business now and over forecast
period and what milestones will you accomplish with the funding?
 Business Income Statement
 Sales forecasts, margin, fixed and variable expenses (R&D, Sales &
Marketing & Administrative costs, interest, etc) and net profit/loss
 Should consider 3 scenarios: optimistic, pessimistic and probable
 Should help you and prospective investors determine the level of sales
needed to generate profit in the business and timing of profitability
 Need to consider what changes/factors will have greatest impact on
profitability and timing?
7 Financial Planning – February 2009

 “Cash is king” in start-ups
 Your cash balance needs to be monitored frequently (daily or weekly)
 Understanding & managing cash flow is key to success
 You’ll need to forecast:
1. How much total funding your business will require over its life?
2. What is the logical timing and available sources for getting funding and
what milestones will you have to achieve to ensure you get next
required investment?
3. Based on the above, what is estimated round size and how much can
you reasonably invest yourself or raise from your network of investors?
 Develop forecasts for time horizons that make sense
 Monthly/weekly in near-term for your own management tool
 For investors: monthly for term of first round, may be quarterly thereafter
8 Financial Planning – February 2009

Round One Round Two Round Three
Opening Cash $- $15K $40K
+Equity/Debt $250K $500K $500K
+Customer receipts - $200K $1,350K
-Payroll expenses ($200K) ($500K) ($800K)
-Supplier expenses ($50K) ($125K) ($200K)
- Product exp (40%) - ($100K) ($600K)
+Grants/other funds $15K - -
+ITC credit (prior yr) - $50K $115K
-Debt incl. interest - - -
Closing Cash $15K $40K $405K
Sales are $250K before Round Two and $1.5M before Round Three
9 Financial Planning – February 2009

Reduce technology risk, earn revenues earlier
Q1 ’09 Q2 09 Q3 ‘09 Q4 ‘09 Q1 ‘10 Q2 ‘10
v0.1 Proof of Concept
v0.2 Early feature set
v0.3
Live processing
v0.4 Lab Trial
Platform, Management
v0.5 Advanced Features Lab Trial
v0.6 Trials
Features Complete
v1.0 First Commercial
Shipments
10 Financial Planning – February 2009
10

Q1 ’09 Q2 09 Q3 ‘09 Q4 ‘09 Q1 ‘10 Q2 ‘10
v0.1 Business Plan/Customer Requirements
v0.2 Go-To-Market Plan/Customer Business Case (ROI)
v0.3
Customer/Partner Meetings
v0.4 Lab Trial
Customer Demos
v0.5 Customer Trial Management/ Lab Trial
Feedback
v0.6 Trials
Customer Testing, Finalize Pricing, Initial Contracts
v1.0
PR & Launch Plan
11 Financial Planning – February 2009
11

 Top-line revenues should be derived from:
 Market forecasts for your business and bottom up view of customers
 Pricing and cost assumptions for your product and your business model
 Need to consider the pros and cons of the “hockey stick”
 Expenses:
 Develop bottom-up forecast based on your expectations
 Review benchmark targets for other companies in your industry and
compare with later years in your plan
 Identify fixed versus variable components of your plan – i.e. those costs
that may vary with your top-line performance
 EBITDA – Operating Income for the business
 Earnings before interest, taxes, depreciation and other amortization
 Benchmark for exit values in M&A and performance of public companies
12 Financial Planning – February 2009

Year One Year Two Year Three
Sales $0 $250K $1,500K
Cost of Sales $0 $100K $600K
Gross Margin $0 $150K $900K
R&D Expenses $150K $275K $300K
ITC Credits ($50K) ($115K) ($125K)
Selling Expenses $75K $275K $600K
Admin Expenses $10K $75K $100K
EBITDA $185K ($360K) $25K
ITDA* - - -
Net (Loss) Income ($185K) ($360K) $25K
*ITDA = Interest, Taxes, Depreciation and Amortization
13 Financial Planning – February 2009

Entrepreneur states: We only need to get 1% of the projected $3 billion
market by year five and have worked backward to develop earlier
year sales projections in the plan…
Year five projected sales = $30 million
Your Company
Tip:
It is better to segment the
market and show your market
share in relation to a specific
smaller segment. Investors like
to back companies who will be All Competitors
significant players in their
market segment (15-25%) and
are focused in their approach.
14 Financial Planning – February 2009

 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 the Doctor Network
15 Financial Planning – February 2009

 Mixed Distribution Model may result in multiple selling
prices for products
 End User Selling Price for product sold directly to customers
 Need to consider discount practices in the industry
 Wholesale Price for sales to distribution partners and OEMs
 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
 Current volatilty is challenging – err on side of conservatism in your plan
 Service Revenues
 Dependent on salary/consulting rates which generally increase over time
16 Financial Planning – February 2009

17 Financial Planning – February 2009

 The direct costs of producing your product
 Bill of Material, Labor, Warehousing, Shipping, Warranty…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%)
18 Financial Planning – February 2009

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
19 Financial Planning – February 2009

 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 technologies from 3rd parties
 Tax credits/grants can help stretch your R&D budget
 Scientific Research and Experimental Development (SRED) – federal
 Ontario Innovation Tax Credit (OITC) and other provincial programs
 NRC-IRAP programs – advisory services and R&D funding (matching)
20 Financial Planning – February 2009

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
 If Sally had been Terry Matthews, she might have
spent 50%+ on selling and only 33% on R&D to
generate spectacular sales growth!
21 Financial Planning – February 2009

% of Revenue Cisco Adobe F5 Networks
$40B $3.6B $662M
R&D Expenses 16% 17% 23%
Sales & 25% 30% 52%
Marketing Exp.
General & 6% 9% 12%
Admin. Exp.
22 Financial Planning – February 2009

 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
23 Financial Planning – February 2009

 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
24 Financial Planning – February 2009

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.
25 Financial Planning – February 2009

Completes the financial statements along with Cash Flow and Income Statement
Year One Year Two Year Three
Cash $15K $40K $405K
A/R and ITC Rec $50K $165K $325K
Inventory/Prepaid - - -
Fixed Assets - - -
Total Assets $65K $205K $730K
AP & Liabilities - - -
Financing* $250K $750K $1,250K
Ret. (Loss) Income ($185K) ($545K) ($520K)
Total Liab/Equity $65K $205K $730K
*Financing could be Debt, Equity or combination thereof
26 Financial Planning – February 2009

 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
27 Financial Planning – February 2009

 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
 Bank loan with personal guarantee from business owner
 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
28 Financial Planning – February 2009

 Your business/execution plan is quantified in your
financial plan
 The assumptions/content must be consistent
 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
 In today’s economic times, it is important to develop
plans that generate early sales & cash flow
29 Financial Planning – February 2009