This document discusses key considerations for creating financial projections for start-up businesses. It outlines the basic building blocks of department budgets, income statements, balance sheets, and cash flow statements. It emphasizes important variables to model like headcount, expenses, revenue drivers, and capital needs. The document provides examples of model companies and advises testing projections through what-if scenarios and understanding how assumptions impact cash consumption and path to profitability.

1. Financial Projections forFinancial Projections for
Start-Up BusinessesStart-Up Businesses
Mark LeslieMark Leslie
mleslie@leslieventures.commleslie@leslieventures.com

2. Financial ProjectionsFinancial Projections
► Why do Financial Plan?Why do Financial Plan?
► Basic Building BlocksBasic Building Blocks
► Key VariablesKey Variables
► Bottoms up / Tops DownBottoms up / Tops Down
► Model CompaniesModel Companies
► Planning IssuesPlanning Issues
► Financial Models – the crucible to test ideasFinancial Models – the crucible to test ideas
► ““What-if” ScenariosWhat-if” Scenarios
► Rule Number 1Rule Number 1

3. Why do a financial PlanWhy do a financial Plan
► Can’t raise money without one?Can’t raise money without one?
► Feasibility of business modelFeasibility of business model
► Understand the key variables for your businessUnderstand the key variables for your business
► Understand the cash requirementsUnderstand the cash requirements
► Sharpens focus on key planning areasSharpens focus on key planning areas
► Focus on key operating metricsFocus on key operating metrics
► Oh, yeah…Oh, yeah…
 Can’t raise money without one!!!Can’t raise money without one!!!

4. Basic Building Blocks –Basic Building Blocks –
Department BudgetDepartment Budget
Eng BudgetEng Budget q1q1 q2q2 q3q3 q4q4 y1y1 y2y2
head 1head 1
head 2head 2
Salary totalSalary total
Salary ovhdSalary ovhd
DepreciationDepreciation
expensesexpenses
capitalcapital

5. Key VariablesKey Variables
Department BudgetDepartment Budget
►HeadcountHeadcount
 Salary / overhead /Salary / overhead /
recruitingrecruiting
 Facilities /Facilities /
communications / ITcommunications / IT
 T& E / otherT& E / other
►Capital EquipmentCapital Equipment
Dept Budget

6. Key VariablesKey Variables
Department BudgetDepartment Budget
► G&AG&A
 HeadcountHeadcount
► Exec office / CFOExec office / CFO
 legallegal
 AccountingAccounting
 Corporate allocatable expensesCorporate allocatable expenses
► IT and communicationsIT and communications
infrastructureinfrastructure
► Real estateReal estate
Dept Budget

7. Key VariablesKey Variables
Department BudgetDepartment Budget
►EngineeringEngineering
 HeadcountHeadcount
 NRENRE
 consulting (e.g. FCCconsulting (e.g. FCC
approval)approval)
 prototypes, expensedprototypes, expensed
materialsmaterials
 product enhancements andproduct enhancements and
sustaining engineeringsustaining engineering
Dept Budget

8. Key VariablesKey Variables
Department BudgetDepartment Budget
►MarketingMarketing
 HeadcountHeadcount
 product launchproduct launch
 Advertising / PRAdvertising / PR
 seminars, trade shows,seminars, trade shows,
web siteweb site
 brochures, literaturebrochures, literature
Dept Budget

9. Key VariablesKey Variables
Department BudgetDepartment Budget
►SalesSales
 HeadcountHeadcount
►Mgrs, SE’sMgrs, SE’s
 Productivity modelProductivity model
 partnerships, coop.partnerships, coop.
AdvertisingAdvertising
 remote officesremote offices
Dept Budget

10. Key VariablesKey Variables
Department BudgetDepartment Budget
►HeadcountHeadcount
►HeadcountHeadcount
►HeadcountHeadcount
Dept Budget

11. Key Variables –Key Variables –
Capital EquipmentCapital Equipment
►Capital equipment per headCapital equipment per head
►NRENRE
►Technology BuyoutTechnology Buyout
►ToolingTooling
►IT infrastructureIT infrastructure
►Purchased BldgsPurchased Bldgs Corp Cap Budget

12. Basic Building BlocksBasic Building Blocks
Corp Rollup and Cap ScheduleCorp Rollup and Cap Schedule
Dept Budget
Dept Budget
Dept Budget
Dept Budget
Corp Exp Budget
Corp Cap Budget

13. Key VariablesKey Variables
Revenue Model (cross checked)Revenue Model (cross checked)
► MarketMarket
 Available / ServedAvailable / Served
► PricePrice
 List / discount / Avg selling priceList / discount / Avg selling price
► Forecast – by ProductForecast – by Product
 Product mixProduct mix
 Trajectory of RampTrajectory of Ramp
► Forecast – by ChannelForecast – by Channel
 Net cost by channelNet cost by channel
► Forecast – by Sales CapacityForecast – by Sales Capacity
 Sales Yield (sum of quota less safetySales Yield (sum of quota less safety
margin)margin)
 Productivity rampProductivity ramp
 Attrition calculationAttrition calculation
 Staffing planStaffing plan
► Cost for customer acquisitionCost for customer acquisition
Revenue Model

14. Key VariablesKey Variables
Cost ModelCost Model
► ProductProduct
 Estimated BOMEstimated BOM
► Rush chargesRush charges
► Design changesDesign changes
► WarrantyWarranty
► Obsolescence / write–offsObsolescence / write–offs
 LaborLabor
 VolumeVolume
► ServicesServices
 LaborLabor
 TrainingTraining
 EfficiencyEfficiency
Cost Model

15. Basic Building Blocks – IncomeBasic Building Blocks – Income
StatementStatement
Revenue Model
Income Statement
Revenue
COGS
Expenses
Profit
Product Cost
Model
Dept Budget
Dept Budget
Dept Budget
Dept Budget

16. Key VariablesKey Variables
Capitalization (Funding) PlanCapitalization (Funding) Plan
► Equity Financing – amount and timingEquity Financing – amount and timing
 SeedSeed
 Startup AStartup A
 Development BDevelopment B
 Mezzanine CMezzanine C
 IPOIPO
 Post IPOPost IPO
► Debt FinancingDebt Financing
 Capital equipment LeasingCapital equipment Leasing
 Working capital bank LineWorking capital bank Line
 Convertible debt securitiesConvertible debt securities Capitalization
Plan

17. Key Variables –Key Variables –
Capital EquipmentCapital Equipment
►Cost per headCost per head
►NRENRE
►Technology BuyoutTechnology Buyout
►ToolingTooling
►IT infrastructureIT infrastructure
►Purchased BldgsPurchased Bldgs
Corp Cap Budget

18. Key Variables –Key Variables –
Working Capital AssumptionsWorking Capital Assumptions
►Account ReceivableAccount Receivable
►Accounts PayableAccounts Payable
►InventoryInventory
Work Cap
Assumptions

19. Basic Building Blocks – BalanceBasic Building Blocks – Balance
Sheet and Cash FlowSheet and Cash Flow
Balance Sheet
Cash Flow
Dept Budget
Dept Budget
Dept Budget
Dept Budget
Revenue Model
Income Statement
Revenue
COGS
Expenses
Profit
Product Cost
Model
Capitalization
Plan
Corp Cap BudgetWork Cap
Assumptions

20. Bottoms-up / Tops-downBottoms-up / Tops-down
► Bottom-upBottom-up
 Built from detailsBuilt from details
 Variable assumptionsVariable assumptions
 Start up and growth stageStart up and growth stage
► Top-downTop-down
 ““model” of the mature companymodel” of the mature company
 Similar to other companies / products / marketsSimilar to other companies / products / markets
► The Five-Year PlanThe Five-Year Plan
 Year 5 = model company (or close to it)Year 5 = model company (or close to it)
 Year 1 = raw start upYear 1 = raw start up
 Year 2Year 2  5 development stage to mature company5 development stage to mature company

21. The Model CompanyThe Model Company
► Income StatementIncome Statement
 RevenueRevenue
 Gross MarginGross Margin
 Departmental expenses as percentage of revenueDepartmental expenses as percentage of revenue
 Operating IncomeOperating Income
► Balance sheet itemsBalance sheet items
 DSO (A/R days sales outstanding)DSO (A/R days sales outstanding)
 Inventory turnsInventory turns
► Employee MetricsEmployee Metrics
 Revenue / employeeRevenue / employee
 Expense / employeeExpense / employee
 Expenses as a percent of revenueExpenses as a percent of revenue

22. The Five Year PlanThe Five Year Plan
S t a r t u p  M o d e l
Income
Statement
Balance
Sheet
Cash Flow
Y1
Income
Statement
Balance
Sheet
Cash Flow
Y4
Income
Statement
Balance
Sheet
Cash Flow
Y2
Income
Statement
Balance
Sheet
Cash Flow
Y5

23. Critical AssumptionsCritical Assumptions
► Income StatementIncome Statement
 Unit RevenueUnit Revenue
 Number of unitsNumber of units
 Cost of goods and servicesCost of goods and services
 Operating costsOperating costs
► R&DR&D
► S G & AS G & A
 Interest ratesInterest rates
► Balance SheetBalance Sheet
 Collections of receivablesCollections of receivables
 Inventory turnsInventory turns
 Capital equipment and depreciationCapital equipment and depreciation
 Payable timingPayable timing
 Debt and equity financing availableDebt and equity financing available

24. Intergalactic Optical Nanotubes, Inc.Intergalactic Optical Nanotubes, Inc.
(ION)(ION)
Income StatementIncome Statement
Y1Y1 Y2Y2 Y3Y3 Y4Y4 Y5Y5
RevenueRevenue 00 2.02.0 20.020.0 160.0160.0 350.0350.0
Gross MrgnGross Mrgn 00 1.61.6 16.016.0 128.0128.0 280.0280.0
EngineeringEngineering 2.02.0 2.52.5 2.52.5 2.52.5 2.52.5
SG&ASG&A 0.50.5 1.51.5 1.51.5 1.51.5 1.51.5
Total Op ExTotal Op Ex 2.52.5 4.04.0 4.04.0 4.04.0 4.04.0
Op ProfitOp Profit (2.5)(2.5) (2.0)(2.0) 12.012.0 124.0124.0 176.0176.0

25. Model Companies – Operating Stacks ($M)Model Companies – Operating Stacks ($M)
CiscoCisco DellDell MicrosoftMicrosoft YahooYahoo RambusRambus
RevenueRevenue 18,87818,878 35,40435,404 32,18732,187 953953 9797
CogsCogs 5,6455,645 29,05529,055 5,6865,686 163163 88
Gross MarginGross Margin 13,23313,233 6,3496,349 26,50126,501 790790 8989
EngEng 3,1353,135 455455 4,6594,659 143143 2222
SG&ASG&A 4,8184,818 3,0503,050 8,6258,625 537537 3535
Total Op ExpTotal Op Exp 8,3518,351 3,5053,505 13,28413,284 702702 5757
OperatingOperating
IncomeIncome
4,8824,882 2,8442,844 13,21713,217 8888 3131
Net IncomeNet Income 3,5783,578 2,1222,122 9,9939,993 4343 2525
EPSEPS .50.50 .91.91 .19.19 .20.20 .20.20

26. Model Companies – Common Sizing (%)Model Companies – Common Sizing (%)
CiscoCisco DellDell MicrosoftMicrosoft YahooYahoo RambusRambus
RevenueRevenue 100100 100100 100100 100100 100100
CogsCogs 3030 8282 1818 1717 88
Gross MarginGross Margin 7070 1818 8282 8383 9292
EngEng 1717 11 1515 1515 2323
SG&ASG&A 2525 99 2626 5656 3636
Total Op ExpTotal Op Exp 4444 1010 4242 7474 5959
Operating IncomeOperating Income 2626 88 4141 99 3232
Net IncomeNet Income 1919 66 3131 4.54.5 2626

27. Model Companies – Market ValueModel Companies – Market Value
CiscoCisco DellDell MicrosoftMicrosoft YahooYahoo RambusRambus
Market Cap ($B)Market Cap ($B) 146146 9595 317317 33 22
Revenue ($B)Revenue ($B) 1919 3535 3232 11 .1.1
Multiple ofMultiple of
RevenueRevenue
88 33 1010 33 2020
Earnings ($B)Earnings ($B) 3.63.6 2.12.1 1010 .04.04 .02.02
Multiple ofMultiple of
EarningsEarnings
4141 3838 3131 7575 100100

28. Planning IssuesPlanning Issues
► Revenues (always) take longerRevenues (always) take longer
 Sales forecasts are optimisticSales forecasts are optimistic
 Un-tested “sales model”Un-tested “sales model”
 Unrealistic productivity assumptionsUnrealistic productivity assumptions
► Margins aren’t as great as plannedMargins aren’t as great as planned
 Design creepDesign creep
 Hidden costs like yield, scrap, obsolescence, warrantyHidden costs like yield, scrap, obsolescence, warranty
► Operating expenses higher than planOperating expenses higher than plan
► Capital needs are high . . . and not freeCapital needs are high . . . and not free
 Cost of capital is inversely proportional to the execution of the planCost of capital is inversely proportional to the execution of the plan

29. Sanity TestingSanity Testing
►Income StatementIncome Statement
 Rate of Sales GrowthRate of Sales Growth
 StaffingStaffing
►GrowthGrowth
►Non-growthNon-growth
 (engineer one product, sell it forever)(engineer one product, sell it forever)
 ProfitsProfits

30. Sanity TestingSanity Testing
►Balance SheetBalance Sheet
 A/R, Inventory levelsA/R, Inventory levels
 Capitalization PlanCapitalization Plan
►How much money to build what size business?How much money to build what size business?
 Can your investors realize 10 – 100X return onCan your investors realize 10 – 100X return on
investment?investment?
►More information later on VC fundingMore information later on VC funding
►Proxy – compare your plan to theProxy – compare your plan to the
experience of existing companiesexperience of existing companies

31. Financial Models --Financial Models --
The crucible to test your ideas!The crucible to test your ideas!
►If you understand the model, feasibility ofIf you understand the model, feasibility of
ideas are more self-evidentideas are more self-evident
►Make Key Assumptions into variablesMake Key Assumptions into variables
 Investigate alternativesInvestigate alternatives
 Sensitivity AnalysisSensitivity Analysis
►Determine CASH consumptionDetermine CASH consumption
►Understand the path to profitabilityUnderstand the path to profitability

32. Modeling –Modeling –
“What-if” Scenarios“What-if” Scenarios
►Document assumptionsDocument assumptions
 Facilitates changes in futureFacilitates changes in future
 Operational (e.g.,product engineeringOperational (e.g.,product engineering
plan/milestones)plan/milestones)
►Develop a feel for the dynamicsDevelop a feel for the dynamics
 E.g., Reduced investment in engineering =E.g., Reduced investment in engineering =
product schedule slip of X months = revenueproduct schedule slip of X months = revenue
delaydelay

33. Rule Number 1Rule Number 1
Cash is Oxygen…Cash is Oxygen…
……Oxygen isOxygen is
LifeLife

34. Financial Projections forFinancial Projections for
Start-Up BusinessesStart-Up Businesses
Mark LeslieMark Leslie
mleslie@leslieventures.commleslie@leslieventures.com
650.561.1228650.561.1228

35. Copyright Mark LeslieCopyright Mark Leslie
One Final Thought…One Final Thought…

36. Copyright Mark LeslieCopyright Mark Leslie
it is regret for the things we didit is regret for the things we did
not do that is inconsolablenot do that is inconsolable..
Sidney J. Harris (1917–86)Sidney J. Harris (1917–86)
Regret for the things we did can
be tempered by time;