Financial Planning for the startup CEO - Entrepreneurship 101 (2012/2013)

1. For the startup CEO! Presented by: Andrew Graham    March 2013!

2. Memory at Work Pg 3!

3. Memory at Work Have to pay the bills Why money ma*ers in a startup Sign of a Desirable sustainable outcome!! business model Pg 4!

4. Memory at Work ¨  Income Statement! ¨  Cash Flow Forecast! ¨  Balance Sheet! Pg 5!

5. Memory at Work ¨  Financial performance over a period of time! ¨  Usually for a year, quarter or month! Pg 6!

6. Memory at Work Research in Motion! Income Statement! 2012 Fiscal Year! millions of USD! Revenue! $ 18,435! Cost of sales! 11,856 ! Gross margin! 6,579 ! Operating expenses! Research & development! 1,536 ! Selling, general & admin.! 2,476 ! Amortization! 571 ! Total operating expenses! 4,583 ! Income from operations! 1,490 ! Investment income! 21 ! Taxes! 347 ! Net income! 1,164 ! Pg 7!

7. Memory at Work Research in Motion! Income Statement! Revenue! 2012 Fiscal Year! ! millions of USD! Money brought into a company by its business Revenue! $ 18,435! Cost of sales! 11,856 ! activities! Gross margin! 6,579 ! Operating expenses! Research & development! 1,536 ! Selling, general & admin.! 2,476 ! Amortization! 571 ! Revenue Forecasting! Total operating expenses! 4,583 ! ! Top-down! Income from operations! 1,490 ! Investment income! 21 ! vs! Taxes! 347 ! Bottom-up! Net income! 1,164 ! Pg 6!

8. Memory at Work Research in Motion! Income Statement! 2012 Fiscal Year! Cost of Sales! ! millions of USD! Costs that go into creating Revenue! $ 18,435! the products and services Cost of sales! 11,856 ! Gross margin! 6,579 ! that a company sells! Operating expenses! Research & development! 1,536 ! Selling, general & admin.! 2,476 ! Amortization! 571 ! Total operating expenses! 4,583 ! Income from operations! 1,490 ! Investment income! 21 ! Taxes! 347 ! Net income! 1,164 ! Pg 6!

9. Memory at Work Research in Motion! Income Statement! 2012 Fiscal Year! millions of USD! Gross Margin! ! Revenue! $ 18,435! Cost of sales! 11,856 ! Revenue minus cost of Gross margin! 6,579 ! sales! Operating expenses! Research & development! 1,536 ! Selling, general & admin.! 2,476 ! Amortization! 571 ! RIM !36%! Total operating expenses! 4,583 ! !!Linkedin !81%! !!Toyota !13%! Income from operations! 1,490 ! Investment income! 21 ! ! Taxes! 347 ! Net income! 1,164 ! Pg 6!

10. Memory at Work Research in Motion! Income Statement! 2012 Fiscal Year! millions of USD! Operating Expenses! Revenue! $ 18,435! ! Cost of sales! 11,856 ! Gross margin! 6,579 ! Business costs NOT related to producing goods & Operating expenses! Research & development! 1,536 ! services for sale! Selling, general & admin.! 2,476 ! Amortization! 571 ! Total operating expenses! 4,583 ! Income from operations! 1,490 ! Investment income! 21 ! Taxes! 347 ! Net income! 1,164 ! Pg 6!

11. Memory at Work Research in Motion! Income Statement! 2012 Fiscal Year! millions of USD! Research & Development! Revenue! $ 18,435! ! Cost of sales! 11,856 ! Gross margin! 6,579 ! Activities with the intention of making a discovery that Operating expenses! Research & development! 1,536 ! can lead to new or Selling, general & admin.! 2,476 ! improved products! Amortization! 571 ! Total operating expenses! 4,583 ! Income from operations! 1,490 ! Investment income! 21 ! Taxes! 347 ! Net income! 1,164 ! Pg 6!

12. Memory at Work Research in Motion! Income Statement! 2012 Fiscal Year! millions of USD! Revenue! $ 18,435! Cost of sales! 11,856 ! Gross margin! 6,579 ! Selling, General and Operating expenses! Administrative Expenses Research & development! 1,536 ! Selling, general & admin.! 2,476 ! (SG&A)! Amortization! 571 ! Total operating expenses! 4,583 ! Income from operations! 1,490 ! Investment income! 21 ! Taxes! 347 ! Net income! 1,164 ! Pg 6!

13. Memory at Work Research in Motion! Income Statement! 2012 Fiscal Year! millions of USD! Revenue! $ 18,435! Cost of sales! 11,856 ! Gross margin! 6,579 ! Amortization! ! Operating expenses! Research & development! 1,536 ! Deduction of capital Selling, general & admin.! 2,476 ! expenses over a period of Amortization! 571 ! Total operating expenses! 4,583 ! time! Income from operations! 1,490 ! Investment income! 21 ! Taxes! 347 ! Net income! 1,164 ! Pg 6!

14. Memory at Work Research in Motion! Income Statement! 2012 Fiscal Year! millions of USD! Revenue! $ 18,435! Cost of sales! 11,856 ! Gross margin! 6,579 ! Operating expenses! Research & development! 1,536 ! Selling, general & admin.! 2,476 ! Amortization! 571 ! Investment Income! Total operating expenses! 4,583 ! ! Income from operations! 1,490 ! Income from interest Investment income! 21 ! payments, dividends, etc! Taxes! 347 ! Net income! 1,164 ! Pg 6!

15. Memory at Work Research in Motion! Income Statement! 2012 Fiscal Year! millions of USD! Revenue! $ 18,435! Cost of sales! 11,856 ! Gross margin! 6,579 ! Operating expenses! Research & development! 1,536 ! Selling, general & admin.! 2,476 ! Amortization! 571 ! Total operating expenses! 4,583 ! Income from operations! 1,490 ! Investment income! 21 ! Taxes! Taxes! 347 ! Net income! 1,164 ! Pg 6!

16. Memory at Work Research in Motion! Income Statement! 2012 Fiscal Year! millions of USD! Revenue! $ 18,435! Cost of sales! 11,856 ! Gross margin! 6,579 ! Operating expenses! Research & development! 1,536 ! Selling, general & admin.! 2,476 ! Amortization! 571 ! Total operating expenses! 4,583 ! Income from operations! 1,490 ! Investment income! 21 ! Net income! Taxes! 347 ! ! Net income! 1,164 ! Proﬁt!!! Pg 6!

17. Memory at Work Example: Tom’s Solar Power Company, Inc.! Input Cost: !$50! Sell for: !$100! Pg 7!

18. Memory at Work Revenue $400,000 $300,000 $200,000 $100,000 $-‐ Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Units Sold! - ! 50 ! 150 ! 250 ! 400 ! 550 ! 750 ! 1,050 ! 1,400 ! 1,900 ! 2,500 ! 3,500 ! Unit Price! $100/unit! Revenue! $ - ! 5,000 ! 15,000 ! 25,000 ! 40,000 ! 55,000 ! 75,000 ! 105,000 ! 140,000 ! 190,000 ! 250,000 ! 350,000 ! Pg 8!

19. Memory at Work Tom's Solar Power Co, Inc! Monthly Income Statement! January-June, 2012! $! Jan! Feb! Mar! Apr! May! Jun! Revenue! $ - ! 5,000 ! 15,000 ! 25,000 ! 40,000 ! 55,000 ! Cost of Sales! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 ! Gross Margin! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 ! SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! Net Income! (1,000)! 1,500 ! 6,500 ! 11,500 ! 19,000 ! 26,500 ! Cash Projection! Starting Cash! $25,000 ! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)! Revenue (1 month delayed)! - ! 5,000 ! 15,000 ! 25,000 ! 40,000 ! Cost of sales (1 month ahead)! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 ! 37,500 ! SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! Cash gain/(loss)! (3,500)! (8,500)! (8,500)! (6,000)! (3,500)! 1,500 ! Ending Cash! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)! (3,500)! Pg 9!

20. Memory at Work Tom's Solar Power Co, Inc! Monthly Income Statement! January-June, 2012! $! Jan! Feb! Mar! Apr! May! Jun! Revenue! $ - ! 5,000 ! 15,000 ! 25,000 ! 40,000 ! 55,000 ! Cost of Sales! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 ! Gross Margin! - ! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 ! SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! Net Income! (1,000)! 1,500 ! 6,500 ! 11,500 ! 19,000 ! 26,500 ! Cash Projection! Starting Cash! $25,000 ! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)! Plus: Revenue (1 month delayed)! - ! 5,000 ! 15,000 ! 25,000 ! 40,000 ! Minus: Cost of sales (1 month ahead)! 2,500 ! 7,500 ! 12,500 ! 20,000 ! 27,500 ! 37,500 ! Minus: SG&A! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! 1,000 ! Cash gain/(loss)! (3,500)! (8,500)! (8,500)! (6,000)! (3,500)! 1,500 ! Ending Cash! 21,500 ! 13,000 ! 4,500 ! (1,500)! (5,000)! (3,500)! Pg 9!

26. Memory at Work Pg 10!

27. Memory at Work If you don’t forecast cash ﬂows, you’re ﬂying blind!! Pg 10!

28. Memory at Work ¨  Earnings Before Interest, Taxes, Depreciation and Amortization! ¨  A measure of a company’s cash ﬂow from operations! Pg 11!

29. Memory at Work ¨  Snapshot of assets and liabilities at a point in time! Pg 12!

30. Memory at Work Tom's Solar Power Co, Inc! Tom's Solar Power Co, Inc! Monthly Income Statement! Balance Sheet! February 2012! February 29, 2012! $! Feb! $! Revenue! 5,000 ! Assets! Cost of Sales! 2,500 ! Cash! $ 13,000 ! Gross Margin! 2,500 ! Accounts Receivable! 5,000 ! Inventory (prepaid)! 7,500 ! Building and Equipment! 50,000 ! SG&A! 1,000 ! Land! ! 100,000 ! Net Income! 1,500 ! Total Assets! 175,500 ! Cash Projection! Liabilities! Accounts Payable! - ! Starting Cash! 21,500 ! Loan! ! 25,000 ! Plus: Revenue (1 month delayed)! - ! Total Liabilities! 25,000 ! Minus: Cost of sales (1 month ahead)! 7,500 ! Minus: SG&A! 1,000 ! Owner's Equity! ! 150,500 ! Cash gain/(loss)! (8,500)! Total Liabilities and Owner's Eq.! ! 175,500 ! Ending Cash! 13,000 ! Pg 13!

31. Memory at Work ¨  It’s all about cash!! ¨  Forecast from the bottom! ¨  Create multiple scenarios: how sensitive is your business to changes:! –  In revenue! –  In expenses! ¨  Get expert advice when you need it! Pg 14!

32. Andrew Graham    agraham@marsdd.com!

Financial Planning for the startup CEO - Entrepreneurship 101 (2012/2013)

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