Resource requirements and cost estimation

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Resource requirements and cost estimation

  1. 1. Business StartUp Resource Requirements and Cost Estimation Ray Crispin University of Bristol Research and Enterprise Development [email_address]
  2. 2. Content of session <ul><li>Review role of Balance Sheet and Profit/Loss statement </li></ul><ul><li>Discuss role of planning and estimating </li></ul><ul><li>The Cash Flow Forecast </li></ul><ul><li>Estimation examples </li></ul><ul><li>How cash flow relates to financing strategies </li></ul><ul><li>Estimation in practice </li></ul>
  3. 3. Management Accounts – A summary Debit Credit Balance Sheet Bank balance Debtors Capital assets Creditors Share capital Reserves Profit year to date Balances P&L below Balances BS above Profit & Loss Expenses Sales
  4. 4. Management Accounts Current position Past Performance Debit Credit Balance Sheet Bank balance Debtors Capital assets Creditors Share capital Reserves Profit year to date Balances P&L below Balances BS above Profit & Loss Expenses Sales
  5. 5. Role of Planning and Estimating
  6. 6. Planning and Estimating <ul><li>A view of the future incorporating </li></ul><ul><ul><li>Effects of management decisions </li></ul></ul><ul><ul><ul><li>Both already made and proposed </li></ul></ul></ul><ul><ul><li>Informed judgement about uncertain events </li></ul></ul><ul><ul><ul><li>Both magnitude and timing </li></ul></ul></ul><ul><ul><ul><li>Both sales and expenses </li></ul></ul></ul><ul><ul><li>An attitude to risk </li></ul></ul><ul><ul><ul><li>And risk management strategy </li></ul></ul></ul>
  7. 7. Goals <ul><li>Don’t run out of cash and go broke! </li></ul><ul><li>Know how much finance is needed to take company through peak cash demands </li></ul><ul><li>Pinpoint the key events and do ‘what ifs’ </li></ul><ul><ul><li>Highlight management actions that could be taken to improve the situation and/or reduce risk </li></ul></ul><ul><li>Make explicit the assumptions underlying the business </li></ul><ul><ul><li>Enormously helpful for the management team and the business owners </li></ul></ul><ul><li>Hence enable a learning process </li></ul>
  8. 8. Influence of type of business on planning <ul><li>Physical capital intensive businesses </li></ul><ul><ul><li>Financing is influenced by the re-sale value of capital items such as equipment </li></ul></ul><ul><ul><li>Stock in trade: working stock must be financed – amounts depend on the pipeline and stock turns per year </li></ul></ul><ul><li>People intensive businesses </li></ul><ul><ul><li>70+% of costs are people-driven </li></ul></ul>
  9. 9. Cash Flow Forecast Spreadsheet Jan’12 Feb’12…etc Source Notes Opening bank balance [A] [A]+[B] -[C] BS As per bank statement <ul><li>Receipts </li></ul><ul><li>Existing Debtors </li></ul><ul><li>New items </li></ul>Total = [B] BS (current) Forecast When will they pay? Probabilities <ul><li>Payments ( Exp’s) </li></ul><ul><li>Existing Creditors </li></ul><ul><li>New items </li></ul>Total = [C] BS (current) Forecast When will we have to pay? Probabilities
  10. 10. Expense estimation examples <ul><li>People </li></ul><ul><li>Space </li></ul><ul><li>Equipment and Infrastructure </li></ul><ul><li>Variable Operating Costs </li></ul><ul><li>Annual costs </li></ul>
  11. 11. People <ul><li>Skills, salary levels, timing of recruitment? </li></ul><ul><li>Employees or subcontractors? </li></ul><ul><li>One-off </li></ul><ul><ul><li>Recruitment and relocation costs </li></ul></ul><ul><li>Monthly </li></ul><ul><ul><li>Salary </li></ul></ul><ul><ul><li>Employers National Insurance (12.8%) </li></ul></ul><ul><ul><li>Employers Pension Contribution [if any] </li></ul></ul><ul><ul><li>Payroll and personnel administration overhead </li></ul></ul><ul><li>Annual </li></ul><ul><ul><li>Employers Liability Insurance [legal requirement] </li></ul></ul>
  12. 12. Space <ul><li>Location? Temporary or long-term? </li></ul><ul><li>Buy or rent? How long a lease? </li></ul><ul><li>How much rent? </li></ul><ul><li>What about </li></ul><ul><ul><li>Local taxes, heating, lighting, power, maintenance, cleaning, fixtures and fittings, security, building insurance etc? </li></ul></ul><ul><li>Typical package for short term space </li></ul><ul><ul><li>£350 per month per person (i.e. ‘workstation’) in central Bristol </li></ul></ul>
  13. 13. How much space ? <ul><li>Workstation 7.0 m 2 </li></ul><ul><li>Central storage 1.0 m 2 </li></ul><ul><li>Additional space for non- </li></ul><ul><li>open plan 1.0 m 2 </li></ul><ul><li>Reception, post, comms, </li></ul><ul><li>print room 1.0 m 2 </li></ul><ul><li>Board room and meeting rooms 1.5 m 2 </li></ul><ul><li>Rest room and break space 0.7 m 2 </li></ul><ul><li>Corridors etc 1.8 m 2 </li></ul><ul><li>Total space per person 14.0 m 2 </li></ul>
  14. 14. Off i ce rental cost <ul><li>Check the current prices! £8.50 per sq foot? </li></ul><ul><li>Rent only: other costs could add 50% </li></ul><ul><li>Up to date figures, see: www.actiumconsult.co.uk </li></ul>
  15. 15. Equipment and Infrastructure <ul><li>Is it capital or expense? </li></ul><ul><li>Capital policy (example) </li></ul><ul><ul><li>Over £250 in value </li></ul></ul><ul><ul><li>Trackable and identifiable (labelled) </li></ul></ul><ul><ul><li>Not ‘used up’ in course of business – i.e. has a (reduced) resale value </li></ul></ul><ul><ul><li>Depreciation rate? (An expense) </li></ul></ul><ul><li>Special rules for SME IT equipment in the UK </li></ul><ul><ul><li>Can be counted as ‘written off’ for tax purposes in year of acquisition (but only relevant if making a profit) </li></ul></ul>
  16. 16. Variable costs <ul><li>Tend to be linked to type and level of business activity and can be controlled on a day-to-day basis </li></ul><ul><li>Travel </li></ul><ul><li>Telecoms costs </li></ul><ul><li>Stationery </li></ul><ul><li>Etc </li></ul><ul><li>History is often a good guide to the future expense pattern </li></ul>
  17. 17. Annual costs <ul><li>Usually quite predicable when they occur and often how much they will be </li></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><li>Preparation of the annual accounts </li></ul></ul><ul><ul><li>Audit if turnover greater than £1M </li></ul></ul><ul><ul><li>The Christmas staff party! </li></ul></ul>
  18. 18. Sales estimation <ul><li>Making an offer, getting a sale and getting paid… </li></ul><ul><li>Using probabilities (e.g. verbal agreement to purchase might be 50%, a written contract might be 75%) – only money in the bank is 100%! </li></ul><ul><li>Timing issues – payment terms (‘30 days’), & customer’s payment systems </li></ul><ul><li>Getting heavy – interest for late payment, threatening legal action etc. </li></ul>
  19. 19. Cash flow and Financing <ul><li>You fill in the spreadsheet, including the sales forecast, and though you expect the business to be profitable you don’t have enough cash… </li></ul><ul><li>Getting paid early </li></ul><ul><ul><li>Part or all prepayment </li></ul></ul><ul><li>Negotiating payment terms with suppliers based on when you get paid </li></ul><ul><li>Factoring </li></ul><ul><ul><li>Bank pays you 80% of invoice value in exchange for fee </li></ul></ul>
  20. 20. Estimation in Practice <ul><li>Fair amount of systematic work, but do-able a piece at a time </li></ul><ul><ul><li>One limitation is the emergence of unexpected items: can use contingency budgets </li></ul></ul><ul><ul><li>Possible to be too pessimistic on the cost side – recheck it is realistic </li></ul></ul><ul><li>Be prepared to update it at regular intervals – spreadsheets were designed for this work! </li></ul><ul><li>Very good focus for the management team to check assumptions are shared </li></ul><ul><li>A cash flow forecast based on clear assumptions is a valuable tool for management and investors </li></ul>

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