This document summarizes a seminar on financial planning and management for startups. It discusses building financial forecasts, including developing sales forecasts and estimating costs. It explains key financial concepts like gross profit, break-even analysis, and cash flow. It emphasizes the importance of financial planning to ensure business viability and support fundraising. The document provides guidance on managing cash flow in startups, financial controls, making use of small investments, R&D tax credits, and setting up a limited company.

1. Academic excellence for business and the professions
BOOTSTRAP SEMINARS 2014
Making sense of the numbers

2. Introduction
• Why Financial planning is important
• Building Forecasts
• Gross Profit & Breakeven
• Managing cash in a start up
• Financial Control
• How much funding should you raise and when should
you raise it
• Making best use of a £3K investment/competition prize
• R&D Tax Credits
• How to set up a company

3. Why it’s important
• Ensure the business is likely to be viable
• Support your investment case.
• Most important ensure Cash managed – Cash is king.
• By planning know in advance if cash flow problem – its
too late when bank account empty. Must be able to pay
bills as they fall due. Raising finance takes 3-6 months
minimum.
• Usually have a limited amount of cash to spend – ensure
allocated to desired activities eg marketing, development
etc
• Growing business can very often have cash flow
problems

4. BUILDING A BUDGET
FORECAST

5. Some terminology
• Profit/Loss = Sales less costs of producing those sales.
Sales £1,000 Goods/services sold to
customer
Cost of Sales £200 Direct costs of producing
those sales – materials,
factory labour.
Gross Profit £800 Gross profit = 80%
Other Costs £300 Marketing, admin, sales,
depreciation, travel,
office, R&D etc.
Profit/Loss £500

6. Cash and Profit
• Cash Flow and Profit are usually different, eg £100K
profit doesn’t always = £100K of increased cash balance.
• This is caused by
– Payments from customer usually on credit
– Payments to suppliers usually on credit
– Items of capital expenditure eg computers charged to
P&L over a long period (Depreciation)
• However suggest that for initial forecasts you assume
cash and profit are the same.

7. How to build a forecast
• Investors typically want a 3-5 yr forecast but
concentrate on year 1
• Start with setting up template (See Spreadsheet)
• What are the projected sales (Revenue Model) – number
of units, price, when etc – is the business seasonal?
• When will the cash be received – cash sales , credit
sales typically paid 30-60 days after supply
• Set up costs – hardware/software development, factory
fit out , website development etc.

8. How to build a forecast
• Cost of sales – what does it cost to make/buy in the
units.
• What are the overheads – staff, rent, marketing etc
• Having identified Income + expenditure set out in a
spreadsheet by month
• Show net cash flow for mth + cash flow at month end
• Remember a forecast is a best estimate!

9. Where does the info come from?
• Personal knowledge
• Competitors eg what do competitors charge
• Competitor accounts
• Industry statistics
• Suppliers ask them what they will charge to supply when do
volume discounts kick in.
• Property – ask an estate agent
• Work with someone who has industry knowledge
• How are going to acquire customers – salesman ,advertising,
what is the cost of acquiring customers likely to be. Resulting
forecast is a best estimate
• State assumptions - particularly Sales, cost of sales,
marketing plan

10. Building a sales forecast
• Forecast unit sales and average selling price per month
• Use results of your market research
• Use past data if you have it – either for your business or
similar business
• Is business seasonal? A lot of internet businesses are
seasonal. Eg Christmas, games see drop-off in August
• If you have a new technology it can be very difficult to
predict sales levels and timing of take-up.

11. What costs do we typically incur?
Most companies
• Office costs - rent, rates Electricity, gas, cleaning,
security, coffee, postage etc (Consider serviced office
when starting up eg The Hangout)
• Marketing
• Professional Fees eg Accountancy, Tax, Payroll, Legal
• Insurance - Employers Liability legally required
Employee salaries
• Capital Expenditure - computers , office furniture

12. What costs do we typically incur?
Manufacturing business
• Capital Expenditure - Plant and machinery
• Production salaries
• Raw Materials including packaging
• Distribution
• Factory building - Lease or Buy - keep it flexible, may not
be possible if high set up costs

13. What costs do we typically incur?
Web Business
• Web site design and maintenance - in house or
outsource
• Hosting
• Domain registration
• Office Space
• Employees
• Fulfilment costs – postage, storage

14. What costs do we typically incur?
Software/ other intellectual Property
• Development Staff - Biggest cost
• Patent fees/Royalties and legal costs
• Computer hardware/software

15. GROSS PROFIT &
BREAK-EVEN

16. Gross Profit and Break Even
• Gross Profit = Selling price – Cost Price
• Gross Profit % - above expressed as a %
Bar sells drink for £10
Cost of drink £4
Gross Profit £6
Gross Profit % 60%
• Break Even - How many £/units to sell each day/week/
month to cover your costs

17. Why is this important?
• Gross Profit drives the amount you need to sell to
breakeven – increased margin means you need to sell
less to breakeven – e.g. a bar
• Changing gross profit may indicate problems
Selling Price £10 £10
Cost Price £6 £5
Gross Profit £4 £5
Gross Profit % 40% 50%
Daily Costs £500 £500
No of drinks to sell to
break even each day
125 drinks 100 drinks

18. Summary slide for presentations
Year 1 Year 2 Year 3
Sales £1,000 £1,500 £3,000
Cost of Sales £200 £300 £500
Gross Profit £800 £1,200 £2,500
Other Costs £700 £1,000 £1,500
Net Profit £100 £200 £1,000
Cash Balance £50 £100 £1,050
Gross Profit % 80% 80% 83.33%
Breakeven Units 100 120 140

19. MANAGING CASH FLOW
IN A START-UP

20. Managing the cash in a start-up
• Cash is always tight in the start-up phase
– Initial start up capital is expensive so rarely have lots of
surplus cash
– Launch delayed
– Unexpected costs
– Customers pay late
– Suppliers won’t give credit

21. Managing the cash in a start-up
• How can the cash be stretched out
– Defer salaries – founders work for free
– Try and get things for free – use your network
– Credit from suppliers
– Find a way of generating revenue quickly – proof of
concept, test customers, discounts for early adoption or
early payment.

22. FINANCIAL CONTROL

23. What is Financial Control
• Measurement of actual v plan P+L and cash, balance sheet, KPIs,
keeping track of product costs.
• Ratio analysis
• How are doing against our plan
• Thinking ahead revising our budgets

24. Importance of Financial Control
• Allows us to indentify how we are doing – good and bad from a
financial point of view and it may point to problems in specific areas
of the business – eg lack of sales, poor margins may mean
problems in purchasing, marketing dept spending in excess of
budget
• Allows you to take corrective action in plenty of time – its too late to
worry about a lack of cash when the bank account empty – avoid
surprises.
• Plan for growth ahead of time if sales are growing quicker than
anticipated
• Board should review mgt accounts at regular board meetings.

25. What do we do
• Mthly mgt accounts – compare actual v budget analyse the
variances
• Mgt a/c may be as simple as a review of bank statement
• Understand product costs
• Reforecast – budget typically fixed for 12 mths but each mth/qtr
reforecast
• Calculation of ratios/key performance indicators – benchmark

26. HOW TO MAKE BEST
USE OF A £3K
INVESTMENT

27. How much cash to raise?
• Your forecast will indicate how much cash you estimate
you will need to reach profitability.
• Raising finance is expensive – how much of the
company do you have to sell to raise the money ?
• If your forecast indicates that you need £2M to reach
profitability it is very unlikely that you will be able to raise
this in one financing round
• Company Valuations and attractiveness to potential
investors are related to the risk of the investment.

28. How much cash to raise?
• In early stage companies some of the key risks are
- Will the technology/product/service work
- How much will the product cost to develop/service launch
- Can the business overcome some regulatory issues eg planning
permission
- Will anyone buy the product/service
- What will the sales price be
Aim to raise sufficient funds (plus a contingency) at
each round to eliminate risks with the result you
achieve a better valuation and a greater chance of
raising the next round. Ensure this is reflected in your
forecast.

29. How to make best use of £3K
• Use it to mitigate some of the risks
– Build a proof of concept
– Find early customer(s)
– Carry out detailed market research
– Sort out regulatory issues eg get necessary licences
– If specific risks with the technology attempt to resolve
them

30. R&D TAX CREDITS

31. R&D Tax Credits
• Tax refund from HMRC for R&D Costs
• You do not need to have previously paid tax
• Get refund of approx 24% of Salary, Employers national
insurance and consumables used in the R&D process eg cost
of building a prototype.
• Contractor cost refund is approx 16%
• Claimed when you file your annual tax return. Supporting
narrative is required
• Refund is usually paid within 4-10 weeks of submitting the
claim
• Suggest you use a firm of accountants that understands R&D
tax credits – not of all of them do.

32. SETTING UP A LIMITED
COMPANY

33. Company
• Key Advantages
– Shareholders and directors have limited liability - (worst
is loose investment)
– Separate legal entity from directors/ shareholders so
directors not personally liable for debts – (except in
cases of negligence/fraud/Wrongful trading)
– Raise finance by issuing shares
• (Wrongful trading – if directors knowingly make a
financial commitment that they know the company cant
pay for they can be personally liable)

34. Types of Company
• XYZ Limited (Private Limited Company)
– Most common for small/medium business not listed on
stock exchange.
– This is what you will use
• XYZ PLC (Public Limited Company)
– Companies listed on a stock exchange
– More onerous reporting/shareholder protection than
Limited Company

35. How to incorporate a Company
• Companies House
– Cardiff based government agency that is the Registrar of
Companies.
– Companies file specific details that are available on the
public record.
– www.companieshouse.gov.uk

36. How to incorporate a Company
• To incorporate a company
– Use a lawyer or Company formation agent
– Or do it yourself on Companies House Website – cost
£15
– It is a straight forward process
– Directors/shareholders/Articles can all be changed later
by filing appropriate forms so don't worry if you get initial
details wrong

37. DIY Incorporation
Website Address
http://www.companieshouse.gov.uk/infoAndGuide/
companyRegistration.shtml
You will need
– Company name and registered office address ( Company name
must be unique check first not used at Co House Webcheck
– NB worth checking if web domain for proposed name is available
– Director and Secretary – name, address, date of birth (need at least
1 director, no longer requirement for secretary)
– Shareholder name, address, no of shares, amount paying per share
– £15 Payment

38. Articles of Association
• Company rule book
• must be filed at Companies House
• Standard Articles are available – suggest you use these
for initial incorporation
• It is likely that investors will require special terms
• Approved by shareholders

39. Articles usually contain
• The issuing of shares – what authority board has
• Different rights attached to different classes of shares
• The appointments of directors - which shows whether a shareholder
dominates or shares equality with all contributors
• Directors meetings – the quorum and percentage of vote
• Management decisions – Investor, Board or Management (reserved
matters)
• Transferability of shares – Permitted transfers
• Special voting rights of a Chairman, and his/her mode of election
• The dividend policy - a percentage of profits to be declared when
there is profit or otherwise
• Winding up - the conditions, notice to members
• Founders e.g. Founders share buy back provisions
• First right of refusal on issue of new shares (Pre-emption rights)

40. Academic excellence for business and the professions
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