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FINANCIAL	
  PLANNING	
  FOR	
  STARTUPS	
  
Tom	
  Schryver,	
  CFA	
  
Visi3ng	
  Lecturer,	
  Johnson	
  Graduate	
  Sc...
Why	
  Create	
  a	
  Financial	
  Plan?	
  
•  Know	
  when	
  you’re	
  running	
  out	
  of	
  money	
  
•  Know	
  how...
Why	
  Pitch	
  a	
  Startup?	
  
©	
  Tom	
  Schryver	
  2014,	
  All	
  Rights	
  Reserved	
  
Why	
  Pitch	
  a	
  Startup?	
  
à	
  Generate	
  interest	
  in	
  the	
  next	
  conversa3on	
  
•  Very	
  very	
  ve...
Financials	
  In	
  A	
  Pitch	
  –	
  Audience	
  View	
  
•  Does	
  the	
  company	
  have	
  a	
  good	
  understandin...
Financials	
  In	
  A	
  Pitch	
  –	
  Ideas	
  of	
  What	
  To	
  Include	
  
You	
  choose	
  what	
  you	
  think	
  i...
Showing	
  Returns	
  To	
  Investors	
  
•  If	
  you	
  are	
  pursuing	
  a	
  loan,	
  demonstra3ng	
  ability	
  to	
...
Financials	
  In	
  A	
  Pitch	
  –	
  What	
  To	
  Avoid	
  
•  $Trillion	
  markets	
  
•  Magical	
  thinking:	
  
–  ...
Key	
  Building	
  Blocks	
  
•  Revenue	
  Model	
  
•  Key	
  Resources	
  
•  Cost	
  Model	
  
©	
  Tom	
  Schryver	
 ...
Revenue	
  Model	
  -­‐	
  Es3ma3on	
  
©	
  Tom	
  Schryver	
  2014,	
  All	
  Rights	
  Reserved	
  
Month	
  0	
   Mont...
Revenue	
  Model	
  -­‐	
  Details	
  
©	
  Tom	
  Schryver	
  2014,	
  All	
  Rights	
  Reserved	
  
•  Experiment	
  wit...
Key	
  Resources	
  
•  What	
  do	
  our	
  value	
  proposi3ons	
  require	
  to	
  happen?	
  
•  How	
  do	
  we	
  su...
Key	
  Resources	
  -­‐	
  Types	
  
•  Physical	
  –	
  buildings,	
  cash	
  registers,	
  phones,	
  trucks,	
  etc.	
 ...
Key	
  Resources	
  -­‐	
  Examples	
  
•  Physical	
  –	
  Dean	
  &	
  Deluca	
  store;	
  FedEx	
  trucks	
  
•  Intell...
Key	
  Resources	
  -­‐	
  	
  Es3ma3on	
  
©	
  Tom	
  Schryver	
  2014,	
  All	
  Rights	
  Reserved	
  
Month	
  -­‐N	
...
Key	
  Resources	
  
•  What	
  key	
  resources	
  will	
  be	
  required?	
  
•  What	
  are	
  a	
  few	
  hidden	
  th...
Cost	
  Model	
  
•  What	
  will	
  your	
  costs	
  be	
  when	
  you	
  are	
  up	
  and	
  running?	
  
•  How	
  will...
Cost	
  Types	
  
•  Fixed	
  costs	
  –	
  remain	
  the	
  same	
  (mostly)	
  regardless	
  of	
  volume	
  
•  Variabl...
Fixed	
  Costs	
  
•  Management	
  and	
  overhead	
  compensa3on	
  
•  Buildings	
  
•  Machinery	
  
•  Permits	
  and...
Variable	
  Costs	
  
•  Direct	
  labor	
  
•  Raw	
  materials	
  
•  Shipping	
  
•  U3li3es	
  
©	
  Tom	
  Schryver	
...
Economies	
  of	
  Scale	
  
•  Buying	
  in	
  bulk	
  
•  Shipping	
  in	
  larger	
  volumes	
  
•  More	
  efficient	
  ...
Economies	
  of	
  Scope	
  
•  One	
  store	
  selling	
  many	
  products	
  
•  Mul3ple	
  value	
  proposi3ons	
  for	...
Categorizing	
  Expenses	
  by	
  Type:	
  COGS	
  
•  Cost	
  of	
  Goods	
  Sold	
  (COGS)	
  are	
  the	
  direct	
  co...
Categorizing	
  Expenses	
  by	
  Type:	
  SG&A	
  
•  Selling,	
  General	
  and	
  Administra3ve	
  expenses	
  (SG&A)	
...
Categorizing	
  Expenses	
  by	
  Type:	
  Non-­‐Opera3ng	
  
•  Non-­‐Opera3ng	
  Expenses	
  are	
  business	
  costs	
 ...
Expense	
  Checklist	
  
©	
  Tom	
  Schryver	
  2014,	
  All	
  Rights	
  Reserved	
  
q  Rent	
  
q  Furnishings	
  
q...
Cost	
  Model	
  -­‐	
  Es3ma3on	
  
©	
  Tom	
  Schryver	
  2014,	
  All	
  Rights	
  Reserved	
  
Month	
  1	
   Month	
...
Cost	
  Model	
  -­‐	
  Es3ma3on	
  
•  Start	
  to	
  link	
  revenue	
  growth	
  with	
  costs	
  
•  Keep	
  in	
  min...
Building	
  Your	
  Cash	
  Basis	
  Financial	
  Model	
  
©	
  Tom	
  Schryver	
  2014,	
  All	
  Rights	
  Reserved	
  ...
PLUG	
  	
  
N’	
  
CHUG	
  
“I	
  have	
  no	
  idea	
  what	
  the	
  poten3al	
  financial	
  
performance	
  of	
  my	
  business	
  is”	
  
>	
  
“...
Cash	
  vs.	
  Accrual	
  Method:	
  When	
  To	
  Go	
  Accrual	
  
©	
  Tom	
  Schryver	
  2014,	
  All	
  Rights	
  Res...
Hypothesis	
  Tes3ng	
  
©	
  Tom	
  Schryver	
  2014,	
  All	
  Rights	
  Reserved	
  
Fundamental	
  principles:	
  
•  ...
What	
  Do	
  You	
  Do	
  About	
  It?	
  
©	
  Tom	
  Schryver	
  2014,	
  All	
  Rights	
  Reserved	
  
•  If	
  an	
  ...
What	
  to	
  Present	
  
©	
  Tom	
  Schryver	
  2014,	
  All	
  Rights	
  Reserved	
  
•  How	
  much	
  will	
  it	
  c...
Q&A	
  
©	
  Tom	
  Schryver	
  2014,	
  All	
  Rights	
  Reserved	
  
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Basics of Startup Financial Planning

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What goes into a useful set of financial projections for a startup? How do you go about building a set of projections that meet your needs and best position you for success?

Tom Schryver, Visiting Lecturer of Management at Cornell University, provides an overview of financial modeling and planning principles for startups. This session includes:

• How different reviewers of these projections look at them, and what they look for
• A high level overview of how to construct a set of projections
• How to break down the components of financial projections into actionable blocks

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  • Good presentation that just outlines the basics for Financial Planning (mainly P/L account) for starting companies. It would have been even greater if there were some more that dig deeper in other areas of the Financial plan
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Basics of Startup Financial Planning

  1. 1. FINANCIAL  PLANNING  FOR  STARTUPS   Tom  Schryver,  CFA   Visi3ng  Lecturer,  Johnson  Graduate  School  of  Management   Execu3ve  Director,  Center  for  Regional  Economic  Advancement   Cornell  University  
  2. 2. Why  Create  a  Financial  Plan?   •  Know  when  you’re  running  out  of  money   •  Know  how  much  money  you  need   •  Enable  you  to  describe  your  vision   –  To  partners   –  To  employees   –  To  funders   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  3. 3. Why  Pitch  a  Startup?   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  4. 4. Why  Pitch  a  Startup?   à  Generate  interest  in  the  next  conversa3on   •  Very  very  very  rarely  will  anyone  write  a  check  based  solely  on  a   pitch   •  Uninformed  investors  are  dangerous   •  Tom’s  rule  of  investors:  they  all  add  value,  the  ques3on  is  the  +/-­‐   sign   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  5. 5. Financials  In  A  Pitch  –  Audience  View   •  Does  the  company  have  a  good  understanding  of  its  poten3al   market?   •  Does  the  company  have  a  sense  of  how  much  of  that  market  is   obtainable?    Are  poten3al  unit  sales  reasonable?   •  Are  sales  prices  reasonable?    Is  there  any  evidence  to  back  them   up?   •  Are  projected  costs  complete  and  reasonable?   •  How  much  money  will  be  required  to  start  the  business?   •  How  much  money  will  be  required  to  get  the  company  to  self-­‐ sustainability?   •  How  profitable  could  the  company  be  at  maturity?   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  6. 6. Financials  In  A  Pitch  –  Ideas  of  What  To  Include   You  choose  what  you  think  investors  should  be  most  interested   in  /  know  about  /  have  as  main  takeaways  about  the   opportunity:   •  Details  on  target  market:  size,  basis  of  es3ma3on,  es3mate   on  how  much  is  obtainable  by  you   •  Es3mate  of  startup  costs  with  details  on  major  items   •  Projec3on  of  3me  to  ramp  up  to  cash  flow  breakeven  and   total  startup  +  losses  to  breakeven   •  Projec3on  of  profitability  at  scale   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  7. 7. Showing  Returns  To  Investors   •  If  you  are  pursuing  a  loan,  demonstra3ng  ability  to  service  payments  with   a  safety  margin  is  cri3cal   •  If  you  are  pursuing  an  equity  investment,  demonstra3ng  ability  to  exceed   required  cost  of  capital  is  cri3cal     My  opinion:   •  Defining  a  poten3al  exit  is  very  difficult;  only  volunteer  it  if  an  exit  is  the   only  way  an  investor  can  get  their  money  returned  (no  possibility  of   dividends)   •  Calcula3ng  an  IRR  or  NPV  on  investment  is  not  your  job  –  it’s  the   investor’s:  give  them  the  informa3on  they  need  around  profit  poten3al   and  allow  them  to  do  their  assessment  themselves     ©  Tom  Schryver  2014,  All  Rights  Reserved  
  8. 8. Financials  In  A  Pitch  –  What  To  Avoid   •  $Trillion  markets   •  Magical  thinking:   –  Unreasonably  high  net  income  margins     (sofware  and  pharma  rarely  exceed  30%)   –  Revenue  growing  while  other  costs  remain  flat-­‐line   –  Revenue  growth  without  marke3ng  expense   –  Free  labor,  free  space,  no  insurance  costs,  etc.   –  Ignoring  3ming  impacts  of  acquiring  inventory  or  capital  items  before  revenue   •  Showing  loan  proceeds  without  interest  expense  or  repayment   •  Providing  excessive  detail  that  demonstrates  lack  of  focus  on  key   performance  indicators   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  9. 9. Key  Building  Blocks   •  Revenue  Model   •  Key  Resources   •  Cost  Model   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  10. 10. Revenue  Model  -­‐  Es3ma3on   ©  Tom  Schryver  2014,  All  Rights  Reserved   Month  0   Month  N   Units   Zero   Reasonable  share  of   TM  (total?  per   loca3on  /  store?)   Price  /  Unit   N/A   Validated  Price   Revenue   Zero   Units  *  Price  =   Revenue  
  11. 11. Revenue  Model  -­‐  Details   ©  Tom  Schryver  2014,  All  Rights  Reserved   •  Experiment  with  reasonable  growth  rates   •  Es3mate  number  of  months  to  get  to  “N”   •  Compartmentalize  by  product  line,  loca3on,  store,  etc.  as   much  as  possible   •  Must  stack  up  to  a  reasonable  share  of  reasonable  market  
  12. 12. Key  Resources   •  What  do  our  value  proposi3ons  require  to  happen?   •  How  do  we  support  our  channels?   •  Do  we  need  resources  to  have  the  customer  rela3onships  we   want?   •  How  about  suppor3ng  our  revenue  streams?   ©  Tom  Schryver  2014,  All  Rights  Reserved   Key  Resources  are  all  the  things  required  to  open  your   business  
  13. 13. Key  Resources  -­‐  Types   •  Physical  –  buildings,  cash  registers,  phones,  trucks,  etc.   •  Intellectual  –  patents,  databases,  process  knowledge   •  Human  –  salespeople,  customer  service  reps,  store  managers,   produc3on  staff,  R&D   •  Financial  –  funds  to  pre-­‐buy  inventory,  vendor  financing   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  14. 14. Key  Resources  -­‐  Examples   •  Physical  –  Dean  &  Deluca  store;  FedEx  trucks   •  Intellectual  –  drug  patent;  process  knowledge  on  how  to   make  beer   •  Human  –  people  to  fill  and  cap  toothpaste  tubes;  picking   orders  and  packaging  goods  for  shipment;  people  to  answer   the  phone   •  Financial  –  money  to  buy  the  product  that  will  be  sold  in  the   store,  or  to  buy  raw  materials  to  be  made  into  finished  goods;   funds  to  cover  gap  between  sending  an  invoice  and  receiving   payment;  vendor  lease   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  15. 15. Key  Resources  -­‐    Es3ma3on   ©  Tom  Schryver  2014,  All  Rights  Reserved   Month  -­‐N   Month  0   Building   Equipment   Patents   Beginning   Inventory   Etc.  
  16. 16. Key  Resources   •  What  key  resources  will  be  required?   •  What  are  a  few  hidden  things  that  might  otherwise  get   forgoren?   •  How  much  will  it  cost  to  get  these  in  place?   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  17. 17. Cost  Model   •  What  will  your  costs  be  when  you  are  up  and  running?   •  How  will  those  costs  change  as  you  grow?   •  What  risks  are  inherent  in  your  cost  assump3ons?   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  18. 18. Cost  Types   •  Fixed  costs  –  remain  the  same  (mostly)  regardless  of  volume   •  Variable  costs  –  vary  propor3onally  based  on  how  many  you   make   Consider:     •  Economies  of  scale  –  savings  as  you  grow  in  volume   •  Economies  of  scope  –  savings  as  you  grow  in  breadth   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  19. 19. Fixed  Costs   •  Management  and  overhead  compensa3on   •  Buildings   •  Machinery   •  Permits  and  licenses   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  20. 20. Variable  Costs   •  Direct  labor   •  Raw  materials   •  Shipping   •  U3li3es   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  21. 21. Economies  of  Scale   •  Buying  in  bulk   •  Shipping  in  larger  volumes   •  More  efficient  use  of  machinery   •  More  efficient  use  of  labor  (ie:  specializa3on)   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  22. 22. Economies  of  Scope   •  One  store  selling  many  products   •  Mul3ple  value  proposi3ons  for  a  single  customer   •  Mul3ple  revenue  streams  from  the  same  transac3on  (product   +  extended  warranty)   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  23. 23. Categorizing  Expenses  by  Type:  COGS   •  Cost  of  Goods  Sold  (COGS)  are  the  direct  costs  associated   with  providing  the  product  or  service.  Examples:   –  Direct  labor   –  Raw  materials   –  Warehousing   –  Produc3on  equipment   •  Revenue  –  COGS  =  Gross  Profit   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  24. 24. Categorizing  Expenses  by  Type:  SG&A   •  Selling,  General  and  Administra3ve  expenses  (SG&A)  are  the   indirect  costs  associated  with  opera3ng  a  business.     Examples:   –  Adver3sing   –  Sales  salaries  and  commissions   –  Management  salaries   –  Fringe  benefits   –  Office  rents   –  Insurance   •  Revenue  –  COGS  =  Gross  Profit   •  Gross  Profit  –  SG&A  =  Opera3ng  Profit   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  25. 25. Categorizing  Expenses  by  Type:  Non-­‐Opera3ng   •  Non-­‐Opera3ng  Expenses  are  business  costs  that  do  not   impact  regular  opera3ons.    Examples:   –  Interest   –  Income  taxes   –  One-­‐3me  revenues  and  expenses  (ie  asset  sales)   –  Foreign  exchange  gain  /  loss   •  Revenue  –  COGS  =  Gross  Profit   •  Gross  Profit  –  SG&A  =  Opera3ng  Profit   •  Opera3ng  Profit  –  Non-­‐Opera3ng  Expenses  =  Net  Income   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  26. 26. Expense  Checklist   ©  Tom  Schryver  2014,  All  Rights  Reserved   q  Rent   q  Furnishings   q  Computers   q  Sofware!   q  U3li3es   q  Electric     q  Internet   q  Payroll   q  Payroll  taxes   q  Workman’s    comp   q  Unemployment   insurance   q  Gen.  liab.  Insurance   q  Key  man  Insurance   q  Banking  and  Credit  Card   fees   q  Patent  fees   q  Professional  services   q  Cleaning  services   q  Lawn  care   q  Lawyers   q  Accountant   q  Bookkeeper   q  Recrui3ng   q  Other  freelance   q  Marke3ng  expenses   q  Web  development   q  Print   q  Conferences   q  Memberships   q  Ads   q  trademarks   q  Other   q  Travel   q  Discounts   q  Sales  taxes   q  Shipping   q  Customs   q  Supplies   q  Toner!   q  Misc   q  Repairs  and   Maintenance   q  Facili3es   q  Equipment   q  Licenses   q  Royal3es   Use  this  as  a  guide  and  apply   the  level  of  detail  that   matches  your  business  
  27. 27. Cost  Model  -­‐  Es3ma3on   ©  Tom  Schryver  2014,  All  Rights  Reserved   Month  1   Month  N   Raw  Material  /  Unit   Costs  at  Low  Volume   Costs  at  Full  Volume   Labor   Divide  total  by  units  /  mo   Divide  total  by  units  /  mo   Produc3on  Equipment   Divide  total  by  units  /  mo   Divide  total  by  units  /  mo   Total  COGS  /  Unit   Adver3sing   Startup   Run-­‐Rate   Other  SG&A   Startup   Run-­‐Rate   Non-­‐Opera3ng  Expenses  
  28. 28. Cost  Model  -­‐  Es3ma3on   •  Start  to  link  revenue  growth  with  costs   •  Keep  in  mind  3ming  of  costs  compared  to  revenues!   •  Use  unit  growth  to  drive  breakpoints  in  cost  decreases  as  you  get  to  scale   ©  Tom  Schryver  2014,  All  Rights  Reserved  
  29. 29. Building  Your  Cash  Basis  Financial  Model   ©  Tom  Schryver  2014,  All  Rights  Reserved   Startup  Costs:   Acquire  Key   Resources   Revenue:  Units  *  Price   Cost  of  Goods  Sold:  Units  *  COGS  /  Unit   Selling,  General,  Administra3ve   Non-­‐Opera3ng  Expenses  (Including  Costs  of  Financing!)   Net  Income  (Cash  Basis)   Pre-­‐Revenue  Startup    Growth    Profitable  Maturity   Source  of  Cash:   Investments  
  30. 30. PLUG     N’   CHUG  
  31. 31. “I  have  no  idea  what  the  poten3al  financial   performance  of  my  business  is”   >   “I  don’t  know  what  these  numbers  signify,   there’s  lirle  thinking  behind  them  –  I  just  have   them  because  I  was  told  I  have  to”   “I  don’t  know  what  this  model  does  –  I  just  filled   out  someone  else’s  form”  
  32. 32. Cash  vs.  Accrual  Method:  When  To  Go  Accrual   ©  Tom  Schryver  2014,  All  Rights  Reserved   •  Do  you  have  significant  3ming  risks?   •  Inventory   •  Holding  other  peoples’  money   •  Other  people  holding  your  money   •  High  upfront  capex  
  33. 33. Hypothesis  Tes3ng   ©  Tom  Schryver  2014,  All  Rights  Reserved   Fundamental  principles:   •  The  financial  plan  you  just  created  is  made  up  of  a  large  number  of   hypotheses   •  It  is  cri3cal  to  maintain  your  plan  as  a  living  document  to  reflect  new   knowledge   •  Your  financial  plan  should  help  you  iden3fy  key  areas  of  risk  –  which  is   made  up  of:   1.  Areas  of  high  magnitude:  large  profit  drivers,  big  capital  expenses   2.  Areas  of  high  uncertainty:  shaky  es3mates,  factors  with  a  large  number  of   con3ngencies  
  34. 34. What  Do  You  Do  About  It?   ©  Tom  Schryver  2014,  All  Rights  Reserved   •  If  an  item  is  substan3al  and  you  are  es3ma3ng,  dig  to  ensure  no  cheap  /   free  informa3on  is  available  that  could  help  you  refine   •  Treat  revenue  model,  key  resources,  and  cost  model  as  areas  of  testable   hypotheses   •  Iden3fy  key  data,  test,  and  measure  
  35. 35. What  to  Present   ©  Tom  Schryver  2014,  All  Rights  Reserved   •  How  much  will  it  cost  to  get  started  –  and  how  long   •  How  long  will  it  take  you  to  become  self-­‐sustaining   •  What  does  the  sunny,  happy  future  look  like  (how  profitable)   •  Choose  metrics  and  graphs  based  on  industry  norms  
  36. 36. Q&A   ©  Tom  Schryver  2014,  All  Rights  Reserved  

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