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  1. 1. CIE From Invention to Start-Up Cash Flow – More Important Than Your Mother Alan Dishlip CFO – WildTangent, Inc. February 13, 2007 3:30 P.M. – 5:00 P.M.
  2. 2. Agenda <ul><li>Introduction </li></ul><ul><li>Financial Planning </li></ul><ul><li>Financial Projections </li></ul><ul><li>Cash Planning </li></ul><ul><li>Raising Capital </li></ul><ul><li>Summary </li></ul>
  3. 3. Financial Planning - Understanding Risk <ul><li>Finance - a way to think about cash, risk & value </li></ul><ul><ul><li>Creating value is a key responsibility </li></ul></ul><ul><li>Financial risk - uncertainty about future cash flows </li></ul><ul><ul><li>Uncertainty creates risk, but uncertainty can usually be analyzed to understand risk </li></ul></ul><ul><ul><li>Significant value can be created by managing risk </li></ul></ul><ul><ul><ul><li>Market, Management, Technology, Competition </li></ul></ul></ul><ul><li>Finance does not answer questions </li></ul><ul><ul><li>It does not make decisions </li></ul></ul><ul><ul><li>Finance can help identify the right questions to ask and narrow down the options </li></ul></ul><ul><li>When viewed from the finance perspective, some decisions will turn out to be illogical or unfeasible. </li></ul>
  4. 4. Financial Planning 10 Must Answer Questions <ul><li>How much cash will we really need? </li></ul><ul><li>What do the 5 year financials look like? </li></ul><ul><li>What’s the path to profitability? </li></ul><ul><li>What are the risks and rewards? </li></ul><ul><li>How can these be managed successfully? </li></ul><ul><li>How large is the addressable market? </li></ul><ul><li>How fast is the market growing? </li></ul><ul><li>Who’s the management team? </li></ul><ul><li>What is the value of my company? </li></ul><ul><li>What is the exit strategy? </li></ul>
  5. 5. Financial Projections Financial Projections
  6. 6. One angel to others on a cloud Don’t let this be you!
  7. 7. Financial Projections - Investor Quotes <ul><li>“ Financial projections consistently are the weakest part of business plans.” </li></ul><ul><li>“ I rarely see a financial plan I can’t take apart quickly.” </li></ul><ul><li>“ No consistent formats” </li></ul><ul><li>“ Lack of detail – not bottoms up” </li></ul><ul><li>“ Unrealistic and overly optimistic assumptions – especially timing related (revenues, development schedule, cash flow break even)” </li></ul><ul><li>“ Model cannot be easily manipulated (too much hard wiring and not enough assumptions-driven)” </li></ul><ul><li>“ Omission of costs and balance sheet items” </li></ul><ul><ul><li>Understates capital requirements </li></ul></ul>
  8. 8. Projections - Overview <ul><li>A reflection of your business plan quantified </li></ul><ul><ul><li>Consistent with the plan strategy </li></ul></ul><ul><ul><li>Will help demonstrate whether your strategy is financially feasible </li></ul></ul><ul><ul><li>A key indicator of the amount of outside financing necessary to support the execution of your strategy </li></ul></ul><ul><li>Understand the quantitative and financial elements of your business plan </li></ul><ul><ul><li>Not doing so is the fastest way to lose credibility </li></ul></ul><ul><li>Include key financial ratios and compare to competitors’/industry averages </li></ul>
  9. 9. Projections - Overview <ul><li>High level figures </li></ul><ul><ul><li>Underlying detail should be available </li></ul></ul><ul><li>Projections should answer </li></ul><ul><ul><li>How will the company perform financially? </li></ul></ul><ul><ul><ul><li>P & L </li></ul></ul></ul><ul><ul><li>What will the company's cash position be? </li></ul></ul><ul><ul><ul><li>Cash Flow </li></ul></ul></ul><ul><ul><li>What will the company's financial position be? </li></ul></ul><ul><ul><ul><li>Balance Sheet </li></ul></ul></ul><ul><li>Five-years - integrated </li></ul><ul><ul><li>Monthly for the first two years, quarterly for the remaining 3 years </li></ul></ul><ul><ul><li>Well-thought out assumptions </li></ul></ul><ul><ul><li>Include key financial ratios and compare to competitors & industry </li></ul></ul><ul><ul><li>Include any historical financial information, if any </li></ul></ul>
  10. 10. What’s Wrong With Most Financial Plans? <ul><li>Waste too much ink on numbers – </li></ul><ul><ul><li>Too little focus on information that really matters </li></ul></ul><ul><ul><li>Numbers should support strategy and key drivers of success </li></ul></ul><ul><ul><ul><li>Manufacturing - yield on a production process </li></ul></ul></ul><ul><ul><ul><li>Magazine publishing - the anticipated renewal rate </li></ul></ul></ul><ul><ul><ul><li>Software - impact of using various distribution models </li></ul></ul></ul><ul><ul><ul><li>At what level of sales is the business profitable? </li></ul></ul></ul><ul><ul><ul><li>When does cash flow turn positive? </li></ul></ul></ul>
  11. 11. What’s Wrong With Most Financial Plans? <ul><li>No need for detailed, month-by-month projections that stretch out for years </li></ul><ul><li>Financials are typically wildly optimistic. </li></ul><ul><ul><li>Few entrepreneurs correctly anticipate how much capital and time will be required to accomplish objectives. </li></ul></ul>
  12. 12. Projection Assumptions <ul><li>Organize input assumptions in an easily accessible separate worksheet </li></ul><ul><ul><li>Helps identify key items in one place </li></ul></ul><ul><ul><li>Can be used for sensitivity and breakeven analysis </li></ul></ul><ul><li>Don’t be afraid to make material assumptions – especially uncertain ones (e.g. re-purchase rate, returns, collections cycle) </li></ul><ul><ul><li>Individualize </li></ul></ul><ul><ul><ul><li>e.g., don't just show advertising costs as a % of sales. </li></ul></ul></ul><ul><ul><ul><ul><li>Most advertising expenditures are made months before sales result </li></ul></ul></ul></ul><ul><ul><li>Include financial obligations of bringing your product/service to market </li></ul></ul><ul><ul><ul><li>New employees ► Deviations from historical trends </li></ul></ul></ul><ul><ul><ul><li>Additional physical space ► Increases in inventory and A/R </li></ul></ul></ul><ul><li>Support your assertions with valid data </li></ul><ul><ul><li>Identify what data you have and also be clear about what you don’t know </li></ul></ul>
  13. 13. Assumptions – Some to Consider <ul><li>Revenue by distribution channel </li></ul><ul><ul><li>Volume </li></ul></ul><ul><ul><li>Pricing </li></ul></ul><ul><ul><li>Sales per sales person </li></ul></ul><ul><li>Manpower plan </li></ul><ul><li>COGS detail (labor, material, overhead) </li></ul><ul><li>Expenses by department </li></ul><ul><ul><li>Dependent on manpower (payroll, space, benefits, supplies) </li></ul></ul><ul><ul><li>Independent of manpower (insurance, prof. fees, advertising, depreciation) </li></ul></ul><ul><li>Fixed assets purchases and depreciation </li></ul><ul><li>Debt and related collateral calculations </li></ul><ul><li>Interest income and expense </li></ul><ul><li>Ratios & Metrics </li></ul><ul><ul><li>Compare to industry averages and specific competitors </li></ul></ul><ul><li>Sensitivity Analysis </li></ul>
  14. 14. Projections – Assumptions Linking <ul><li>Assumption </li></ul><ul><li>Cost of Sales </li></ul><ul><li>Benefits & payroll taxes </li></ul><ul><li>Depreciation Exp </li></ul><ul><li>Headcount Driven Expenses </li></ul><ul><li>Interest Expense </li></ul><ul><li>Interest Income </li></ul><ul><li>Income Taxes </li></ul><ul><li>Net Profit </li></ul><ul><li>Accounts Receivable </li></ul><ul><li>Bad Debt Reserve </li></ul><ul><li>Inventories and Reserves </li></ul><ul><li>Balance Sheet Accruals </li></ul><ul><li>Linked to </li></ul><ul><li>Sales </li></ul><ul><li>Headcount & Salaries </li></ul><ul><li>Fixed Assets & Accum Dep </li></ul><ul><li>Manpower Plan </li></ul><ul><li>Specific Debt Instruments </li></ul><ul><li>Cash and Investments </li></ul><ul><li>Profit before Tax (w/ NOL) </li></ul><ul><li>Equity Section of Bal Sheet </li></ul><ul><li>Sales </li></ul><ul><li>Bad Debt Expense </li></ul><ul><li>COGS </li></ul><ul><li>Underlying Expenses </li></ul>
  15. 15. Bottoms Up Projections <ul><li>Build from low levels of detail </li></ul><ul><ul><li>Vs. Tops Down </li></ul></ul><ul><ul><ul><li>Revenues extrapolated from market size & share </li></ul></ul></ul><ul><ul><ul><li>Expenses are forecast as percentages of revenue </li></ul></ul></ul><ul><li>Start with line items that are relevant to describing the business model </li></ul>
  16. 16. Bottoms Up Projections <ul><li>Revenues </li></ul><ul><ul><li>Forecast sales at the lowest level of product or service detail (channel, sales person, region) </li></ul></ul><ul><ul><li>Assumptions of volume and pricing </li></ul></ul><ul><ul><ul><li>By geographic market, customer or distribution channel </li></ul></ul></ul><ul><li>Expenses </li></ul><ul><ul><li>Break into relevant categories </li></ul></ul><ul><ul><ul><li>Separate line items for most important and/or magnitude </li></ul></ul></ul>
  17. 17. Bottoms Up Projections Create Line Items that are Activity Driven <ul><li>Don’t plan the dollars – plan the underlying activities that drive profits and cash flow </li></ul><ul><li>Assumptions come from table above </li></ul><ul><ul><li>Don’t forget that productivity improves over time </li></ul></ul><ul><ul><li>Sales ramp over time </li></ul></ul><ul><ul><li>Understand the cost impacts </li></ul></ul><ul><ul><ul><li>By linking between selling activities, productivity assumptions and cost rates for the variable expenses </li></ul></ul></ul>Salaries, Commissions, Taxes, Benefits, T&E, Conferences 12 $1,000,000 per Sales Person $12,000,000 Related Costs No. Sales People Productivity Sales Target
  18. 18. Projections Should be Integrated <ul><li>Enter assumptions and data and set up links </li></ul><ul><ul><li>The statements build themselves according to GAAP </li></ul></ul><ul><li>P&L </li></ul><ul><ul><li>Segregate revenues, COGS, Op Ex, Income Taxes </li></ul></ul><ul><ul><ul><li>Subtotals for gross margin, operating profit, net income </li></ul></ul></ul><ul><li>Balance Sheet </li></ul><ul><ul><li>Segregate short- and long-term assets and liabilities </li></ul></ul><ul><ul><li>Account for retained earnings and equity capital </li></ul></ul><ul><li>Cash Flow </li></ul><ul><ul><li>Tie out to balance sheet </li></ul></ul><ul><ul><li>Segregate operating, investing and financing activities </li></ul></ul>
  19. 19. Projections - Alternative Scenario Analysis <ul><li>Changing many assumptions for different strategy or business environment </li></ul><ul><ul><li>Vs. Sensitivity where change an individual assumption to reveal financial impact </li></ul></ul><ul><li>Examples </li></ul><ul><ul><li>Alternate distribution channels strategy </li></ul></ul><ul><ul><li>Timing issues (sales or development delayed) </li></ul></ul><ul><ul><li>Alternate volumes and pricing </li></ul></ul><ul><li>Use this to run your business!! </li></ul>
  20. 20. Projections - Plug Cash <ul><li>On the balance sheet </li></ul><ul><ul><li>Cash = [Total Liabilities + Equity] minus </li></ul></ul><ul><li>[Total Assets other than Cash] </li></ul><ul><li>If cash is negative, the company is undercapitalized </li></ul><ul><ul><li>Need to raise equity capital or borrow or both </li></ul></ul><ul><li>If cash is positive and growing, the company is generating positive cash flow </li></ul><ul><li>Identifies seasonality needs </li></ul>
  21. 21. Income Statement
  22. 22. Balance Sheet
  23. 23. Ratios and Metrics <ul><li>Ratios </li></ul><ul><ul><li>Gross margin % </li></ul></ul><ul><ul><li>Days sales in A/R; days sales in inventory </li></ul></ul><ul><ul><li>Current Ratio & quick ratio </li></ul></ul><ul><ul><li>Debt to equity </li></ul></ul><ul><ul><li>EBITDA </li></ul></ul><ul><li>Metrics </li></ul><ul><ul><li>Headcount </li></ul></ul><ul><ul><li>Sales per employee </li></ul></ul><ul><ul><li>Sales per sales person </li></ul></ul><ul><ul><li>Customer acquisition cost </li></ul></ul><ul><ul><li>Unique ratios to your business </li></ul></ul><ul><li>Show trends and compare to similar companies </li></ul>
  24. 24. Other Information
  25. 25. Cash Planning Financial Projections
  26. 26. Understanding Cash <ul><li>First rule : Cash is the most important resource </li></ul><ul><ul><li>More cash is better than less cash </li></ul></ul><ul><ul><li>Cash now is better than cash later </li></ul></ul><ul><li>Focus on cash flow versus accounting income </li></ul><ul><li>Growth often absorbs cash flow because of a higher need for working capital and fixed investments </li></ul><ul><ul><li>Entrepreneurial firms with negative income and high growth can have a very fast cash burn rate </li></ul></ul><ul><ul><li>Today’s investments are tomorrow’s growth opportunities </li></ul></ul><ul><li>Focus on the dynamic picture of cash flow </li></ul><ul><ul><li>Cash cycles (A/R collections, A/P payments), seasonality </li></ul></ul><ul><li>Last rule : CFIMITYM !!! </li></ul><ul><ul><li>Cash Flow is More Important Than Your Mother!! </li></ul></ul><ul><ul><li>DON’T RUN OUT of CASH!! </li></ul></ul>
  27. 27. How Does Cash Planning Work? <ul><li>One part of financial statement forecasting </li></ul><ul><ul><li>Falls out of developing the Income Statement and Balance Sheet </li></ul></ul><ul><li>Goal: Provide well-balanced cash flow (ins & outs) </li></ul><ul><li>Understand the Operating Cycle (“OC”) </li></ul><ul><ul><li>The OC is the system through which cash flows (purchase inventory, collect A/R, expenses, loan borrowing & payments). </li></ul></ul><ul><ul><ul><li>Measures flow of assets into cash. </li></ul></ul></ul><ul><ul><li>Need to finance a continuous OC </li></ul></ul><ul><li>Cash flow analysis shows whether daily operations generate enough cash to meet obligations. </li></ul><ul><li>Compare actual cash flow to plan </li></ul><ul><ul><li>Analysis allows opportunity to prepare for growth and fine tune plan </li></ul></ul>
  28. 28. The Cash Flow Projection <ul><li>How cash flows in & out of your business </li></ul><ul><ul><li>Indicates capital investment requirements </li></ul></ul><ul><li>Components </li></ul><ul><ul><li>From operations </li></ul></ul><ul><ul><ul><li>Net income or loss (revenues, expenses) </li></ul></ul></ul><ul><ul><ul><li>Changes in operating assets and liabilities (A/R, A/P, Prepaid Expenses, Accrued Expenses) other than cash </li></ul></ul></ul><ul><ul><li>From Investing </li></ul></ul><ul><ul><ul><li>Property & equipment </li></ul></ul></ul><ul><ul><li>From Financing </li></ul></ul><ul><ul><ul><li>Long and short-term debt </li></ul></ul></ul><ul><ul><ul><li>Issuance of equity </li></ul></ul></ul>
  29. 29. Control Your Cash Flow <ul><li>Prepare realistic projections </li></ul><ul><li>Compare actual results to the plan </li></ul><ul><ul><li>Identify patterns and constantly refine projections </li></ul></ul><ul><ul><li>Investigate variances and make operating changes, if necessary </li></ul></ul><ul><ul><li>Spend most time in areas you can make quick and large impact </li></ul></ul><ul><ul><ul><li>A/R, A/P, Inventory, Discretionary Expenses </li></ul></ul></ul>
  30. 30. Increasing Cash Flows <ul><li>Collect receivables </li></ul><ul><ul><li>Actively manage and quickly collect past dues </li></ul></ul><ul><ul><li>Shortens operating cycle </li></ul></ul><ul><ul><li>However, increasing sales (on credit), actually decreases cash flow (timing of collection and purchase of inventory) </li></ul></ul><ul><li>Tightening credit requirements </li></ul><ul><ul><li>More cash sooner </li></ul></ul><ul><ul><li>But may cost in less sales </li></ul></ul><ul><ul><li>Need the proper balance </li></ul></ul><ul><li>Pricing </li></ul><ul><ul><li>Proper pricing is critical to achieving a profit and maintaining positive cash flow </li></ul></ul><ul><ul><li>Must understand market, competition and distribution channels structure </li></ul></ul><ul><li>Manage your expenses – necessary and reasonable </li></ul>
  31. 31. Cash Reserve <ul><li>Always keep enough cash on hand to cover expenses for at least 3 months and, preferably more. </li></ul><ul><ul><li>Provides cushion against “unknown unknowns” </li></ul></ul><ul><li>But don’t keep too much in cash </li></ul><ul><ul><li>Invest excess in interest bearing instruments with priority: </li></ul></ul><ul><ul><ul><li>Safety (gov’t securities, CDs, etc.) </li></ul></ul></ul><ul><ul><ul><li>Liquidity </li></ul></ul></ul><ul><ul><ul><li>Return </li></ul></ul></ul>
  32. 32. Cash Flow and Accounting Punch List <ul><li>Prepare monthly financial statements. </li></ul><ul><ul><li>Compare with prior periods. </li></ul></ul><ul><li>Frequently update your projections and cash flow plan. </li></ul><ul><li>Keep track of key income statement percentages. </li></ul><ul><ul><li>If you're in manufacturing, your COGS % should be relatively the same or better as competitors in your industry. </li></ul></ul><ul><li>Maintain good internal controls to prevent dishonesty and shrinkage. </li></ul><ul><li>Do not delegate the authority to sign checks or purchase orders. </li></ul><ul><li>Don't use money that you have withheld for payroll taxes or sales taxes for other purposes. </li></ul><ul><ul><li>A &quot;payroll service provider&quot; can be used to manage these responsibilities. </li></ul></ul><ul><li>Liquidity is not the same as making money. </li></ul><ul><ul><li>You can be making a profit and still go broke by running out of cash. Learn and practice cash flow control . </li></ul></ul><ul><li>Arrange for financing well before the need arises. </li></ul>
  33. 33. Cash Flow
  34. 34. Thoughts on Raising Capital <ul><li>Be prepared to concisely link the strategy & financial elements of your plan </li></ul><ul><ul><li>Milestone-based </li></ul></ul><ul><li>Raising capital is a long, hard and challenging process that requires a substantial time & effort </li></ul><ul><li>Who you raise capital from is much more important than how much capital you raise </li></ul><ul><li>Listen, learn & improve your plan along the way </li></ul><ul><li>Have realistic expectations about how much money you can raise and have a “plan B” </li></ul><ul><li>Friends, family & personal funds are usually the only source of capital available for new ventures </li></ul>
  35. 35. Milestones <ul><li>Milestones and expected cost </li></ul><ul><ul><li>Shows business understanding and intention to track performance closely against the business plan </li></ul></ul><ul><li>Milestone Examples </li></ul><ul><ul><li>Hiring of a full management team </li></ul></ul><ul><ul><li>Completing product specifications </li></ul></ul><ul><ul><li>Completing prototype </li></ul></ul><ul><ul><li>Product testing </li></ul></ul><ul><ul><li>First customer shipment </li></ul></ul><ul><ul><li>First full quarter of profitability </li></ul></ul><ul><ul><li>Achieving $X million in revenue </li></ul></ul>
  36. 36. The “Fully Funded” Folly A Customer Buys Fully Fund IPO (……….pray……………….) Capital Risk ( ß) Valuation Idea is Feasible Technology Works
  37. 37. Capital Funding to Milestones aka “Old-Fashioned Venture Capital” Risk ( ß) Valuation Idea is Feasible Technology Works A Customer Buys Seed Funding R&D Capital Go-to-Market Capital Expansion Capital P(success) = 30% Req’d IRR = 100% P(success) = 40% Req’d IRR = 70% P(success) = 50% Req’d IRR = 50% P(success) = 80% Req’d IRR = 30%
  38. 38. What is the planned &quot;Use of Proceeds&quot;? <ul><li>Investors want to know how their money is being deployed </li></ul><ul><ul><li>Capital to invest in sales/market growth </li></ul></ul><ul><ul><ul><li>What will it allow you to accomplish? </li></ul></ul></ul><ul><ul><li>When will your company break even in terms of profitability and cash flow? </li></ul></ul><ul><li>The ultimate goal is to reach an exit scenario </li></ul><ul><ul><li>Profitable businesses are more attractive to potential buyers or public markets </li></ul></ul>
  39. 39. Summary <ul><li>Create value by managing risk </li></ul><ul><li>Communicate the business strategy in easily understandable and believable financial terms </li></ul><ul><ul><li>Strategy & Financials - complementary and consistent </li></ul></ul><ul><li>Projections need to be realistic and believable </li></ul><ul><ul><li>Focus on information that really matters </li></ul></ul><ul><ul><ul><li>Numbers should support strategy and key drivers of success </li></ul></ul></ul><ul><ul><li>Integrate assumptions and statements </li></ul></ul><ul><ul><li>Bottoms Up approach </li></ul></ul><ul><ul><li>Funding milestones within cash and revenue projections </li></ul></ul><ul><ul><li>Reduce risks of the business </li></ul></ul><ul><ul><ul><li>Funding milestones Especially mng’t quality and experience </li></ul></ul></ul><ul><li>Understand the Operating Cycle </li></ul><ul><li>Don’t run out of Cash!! </li></ul>►