Revenue Models - The Financial Forecast - Erez Katan, Partner ...


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Revenue Models - The Financial Forecast - Erez Katan, Partner ...

  1. 1. Building financial projections Erez Katan High-tech Partner PwC/Kesselman & Kesselman January 2007
  2. 2. Getting started - Start Up ingredients <ul><ul><li>Product Product </li></ul></ul><ul><ul><li>Market </li></ul></ul><ul><ul><li>Team Team </li></ul></ul><ul><ul><li>Capital requirements/Economic Model Economic Fit </li></ul></ul><ul><ul><li>Analysis </li></ul></ul>
  3. 3. Capital requirements <ul><li>Before your business plan will be considered by investors, you must answer the following questions: </li></ul><ul><li>How much time and money does it take to build the product? How much time and money does it take to get to a break even? </li></ul><ul><li>What is the total amount of funds needed by your business? Is it needed immediately or over the next two to five years? </li></ul><ul><li>What part of this financing is being sought from the investors or lending institution who will receive this business plan? (including the amount, terms, and any related security agreement) </li></ul><ul><li>What percentage of the company are you willing to give up and what is the proposed return on investment and anticipated method of taking out the investor (e.g., buy-back, public offering, sale)? </li></ul><ul><li>Will the capital markets finance a project of this size and duration? </li></ul>
  4. 4. <ul><li>Explanation of how business will MAKE MONEY </li></ul>The Purpose of Financial Forecasts
  5. 5. Financial information <ul><li>Should be a reflection of your business plan quantified (therefore, it must be consistent with the body of the plan) </li></ul><ul><li>Will help demonstrate whether your strategy is financially feasible and whether it allows you to reach your goals and objectives </li></ul><ul><li>Is a key indicator of the amount of outside financing necessary to support the execution of your strategy </li></ul><ul><li>Should include future projections which answer the following questions: </li></ul><ul><li>How will the company perform financially? - Profit and Loss Projections </li></ul><ul><li>What will the company's cash position be? - Cash Flow Projections </li></ul><ul><li>What will the company's financial position be? - Projected Balance Sheets </li></ul>
  6. 6. Financial information (cont.) <ul><li>Should include a list of significant assumptions used in any individual section or throughout the financial projections that are: </li></ul><ul><li>Material to the projected amounts </li></ul><ul><li>Especially sensitive to variations </li></ul><ul><li>Deviations from historical trends </li></ul><ul><li>Especially uncertain </li></ul><ul><li>Should include key financial ratios and should compare to competitors/industry averages. Key ratios include current, debt-to-net worth, return on equity, gross margin, and break-even point (in both sales units and dollars) </li></ul>
  7. 7. Creating Financial Forecasts <ul><li>Step 1: Products/Services </li></ul><ul><ul><li>Development timeline </li></ul></ul><ul><ul><li>How many products? Versions? Upgrades? </li></ul></ul><ul><ul><li>Prices, discounts, price erosion </li></ul></ul><ul><ul><li>Sales/person </li></ul></ul><ul><ul><li>Commissions </li></ul></ul><ul><ul><li>Distribution channels </li></ul></ul><ul><ul><li>Customer support </li></ul></ul>
  8. 8. Creating Financial Forecasts <ul><li>Step 2: Staffing </li></ul><ul><ul><li>How many departments? </li></ul></ul><ul><ul><li>How many people to develop product? </li></ul></ul><ul><ul><li>Timing of marketing and salespeople. </li></ul></ul><ul><ul><li>Sufficient R&D staff for future products? </li></ul></ul><ul><ul><li>Competitive salaries, benefits, commissions, recruiting. </li></ul></ul><ul><ul><li>Administration Department </li></ul></ul>
  9. 9. Creating Financial Forecasts <ul><li>Step 3: Marketing and Advertising </li></ul><ul><ul><li>Tradeshows </li></ul></ul><ul><ul><li>Public relations </li></ul></ul><ul><ul><li>Advertising </li></ul></ul><ul><ul><li>Consultants </li></ul></ul><ul><ul><li>Lead time </li></ul></ul>
  10. 10. Creating Financial Forecasts <ul><li>Step 4: Other Expenses </li></ul><ul><ul><li>Capital equipment </li></ul></ul><ul><ul><li>Licensing technology </li></ul></ul><ul><ul><li>Patent filings </li></ul></ul><ul><ul><li>Telecom </li></ul></ul><ul><ul><li>Recruiting/Relocation </li></ul></ul><ul><ul><li>Tie as many expenses as possible to headcount </li></ul></ul>
  11. 11. Creating Financial Forecasts <ul><li>Step 5: Evaluate the Results </li></ul><ul><ul><li>Perform scenario analysis </li></ul></ul><ul><ul><li>Evaluate your operating ratios </li></ul></ul><ul><ul><li>Look at comparable companies </li></ul></ul><ul><ul><li>Determine your cash requirements </li></ul></ul><ul><ul><li>Consider a three month cash cushion </li></ul></ul>
  12. 12. Creating Financial Forecasts <ul><li>Step 6: Financing Options </li></ul><ul><ul><li>Equity </li></ul></ul><ul><ul><li>Leases </li></ul></ul><ul><ul><li>LOC’s </li></ul></ul><ul><ul><li>Loans </li></ul></ul>
  13. 13. Building YOUR Model – Do’s and don’ts – Sales Assume that you achieve a certain percentage of market share just because it is a small percentage. Typically, the plan should state an average selling price per unit along with the projected number of units to be sold each reporting period. Sales prices should be competitive with similar offerings in the market and should take into consideration the cost to produce and distribute the product. Don’t Do
  14. 14. Building YOUR Model – Do’s and don’ts – Cost of Sales Assume a certain percentage for gross margin based on industry average. (while this can be a great sensitivity check…) Accurate unit cost data, taking into consideration the labor, material, and overhead costs to produce each unit. Be sure to have a good grasp on initial product costing so it is protected against price pressure from competitors Don’t Do
  15. 15. Building YOUR Model – Do’s and don’ts – Product Development Assume that you can have a world record in the timing of development and/or a minimal compensation to employees. Product development expenses should be closely tied to product introduction timetables elsewhere in the plan. Usually, the headcount should come out directly from the timeline for development. Don’t Do
  16. 16. Building YOUR Model – Do’s and don’ts – S&M and G&A Take industry/certain company ratios A detailed set of expense assumptions should take into consideration headcount, selling and administrative costs, space, and major promotions. It is useful to compare final expense projections with industry norms. All expense categories should be considered. Don’t Do
  17. 17. Who are the first investor to approach?
  18. 18. Building financial projections [email_address] January 2007