Finance for Start-ups

Finance for Start-ups
NSRCEL, IIM Bangalore
1st August 2015
Anjana Vivek
beanie@venturebean.com

VentureBean Consulting Private Limited
At the start: The Foundation
Strategic Financial Planning
Financial Forecasts
Select Areas: Costing&Pricing / Governance&MIS
Valuation and Value Creation
In Summary
Agenda
2 2

BEFORE YOU START: The Foundation
• WHAT is your Dream?
• Dreams get you started
Best
.. LARGEST..
.. first..
.. contribute..
.. impact..
.. change..
3

BEFORE YOU START: The Foundation
• WHAT is your motivation .. for this Dream?
NAME
FAME
MONEY
IMPACT
….
OTHER
4

BEFORE YOU START: Reflections
• WHAT is the stage of your business/idea now?
• WHERE do you want to go from here?
– Short Term: In the coming Year
– Medium Term: 3-5 years from today
– Long Term: 10-15 years
• Does the Long term map/connect to your
Dream?
5

Finance and Business Planning
• WHAT does the growth plan mean in financial
terms
• Finance is the Language of Business
• The dreams need to be communicated in this
language
6

At the start
Financial Forecasts
In Summary
Agenda
7 7

Financial Planning
Four items to think about:
• Revenue
• Profits/Costs
• Cash / Cash Burn
• Value
8

Three dimensions of time:
• Short term: Typically 1 year; month-wise; more
easily available, fewer assumptions
• Medium term: Typically 3-5 years; Estimates and
Guesstimates… trends
• Long term: Typically 10 – 15 years; less numbers
Action – minute to minute (Plan): Balancing Act between
planned activities and unplanned sudden requirements..
9

• Projections need to be achievable and realistic in
the immediate term.. may get into dream zones in
long term
• Periodically FLIP back and forth between time zones
• As you plan, keep an eye on the volatile business
environment, changing patterns, disruption,
expectation of the future in a few years and more
• As you work, check for patterns, consistency,
thought process..
10

Projections are just … projections
• Periodically compare: Projections vs. actuals
• Try to see where the difference between reality
and projection is and the reason for this
– Is the difference due to errors in assumptions made
– due to ecosystem changes or..??
• This helps you
– understand your business and yourself better
– get a better sense of how well you can project
– project better the next time around
• Update the projections to reflect reality, this is a
continuous and iterative process
11

• Forecasting is like a game of probability.. of
scenarios and chance.. with a dose of reality
thrown in
• “To Trigger Thinking” you may also like to
prepare with different scenarios in mind
– Pessimistic, realistic and optimistic
– Boot-strap and funded
– With alternate business models; impacting strategy
and cash flow
– And more..
12

At the start
Financial Forecasts
In Summary
Agenda
13 13

FINANCIAL FORECAST: Overview
• This is based on and driven by your business
model
• It helps to spend significant time thinking of your
business strategy and business model
• A business model develops and evolves over
time – it is not static

FINANCIAL STATEMENTS
BALANCE SHEET: The State of affairs of the
organization:
• PROFIT AND LOSS ACCOUNT: Working results for a
given period:
CASH FLOW STATEMENT: Cash receipts & payments
during a period:
• If you do not understand the basics of financial statements
please take time to learn basics.
• Reference
http://www.slideshare.net/rajnishsingh92351/understandin
g-business-finance
15

Where the entrepreneur did not track finance
• A services business took advance in cash. The
founder, Tim Perry did not keep track of project-
wise expenses, on a regular basis. At the time of
finalization of accounts, 4 months after a project
was completed, Tim found out that he had made
a substantial loss in the project. He realised that
if he had tracked expenses, he could have
contained expenditure and perhaps even been
profitable in this key project.
• If you had been the founder what would you
have done differently, to avoid the situation
above?
• How can Tim take corrective measures to
address this loss?
FINANCIAL STATEMENTS: Caselet

Where the entrepreneur did not track finance
• Ram Kumar focused on sales and operations. He
did not know how to read and interpret financial
statements. After two years of business, there was a
conflict between him and his co-founder Dinesh.
Ram was given a statement showing loss in the
business. Ram was shocked because he had
expected the business to be profitable. He felt that it
was his mistake in not keeping track of the finances
on a periodic and regular basis.
• If you had been the founder what would you
have done differently, to avoid the situation
above?
• Is there any way in which Ram can address this
issue?
FINANCIAL STATEMENTS: Caselet

Look at
• Various revenue streams
• Capital expenditure (land, computers,
vehicles, furniture etc.)
• Revenue expenditure (Salary, raw material
cost, maintenance and repair costs etc.)
You may be able to convert a capital
expenditure into a revenue and vise-versa
.. HOW?

Think through
• Requirements of cash infusions at different
stages of the business
• Resource constraints
• Possible valuations at these stages

FINANCIAL FORECAST: Preparation
• Uncertainties and unknowns can be captured
through:
– Scenario and sensitivity analysis
– Templates that allow for different scenarios – i.e.
optimistic, pessimistic, expected. For example
making the changes in the input, the output
financials should show the impact
• Use tools available – i.e. spreadsheets
• Link and create templates, suitable to your
requirement

Financial Forecasts
• Key elements in a forecast
– Revenue
– Costs: operational, sales and general administration
– Capital expenses
– Working capital expenses
– Earnings
– Tax, interest and other costs
– Sources of funding
– Uses of funding
• Reference
http://www.financialexpress.com/news/forecast-
financials-in-a-business-plan/83853/0
21

At the start
Financial Forecasts
In Summary
Agenda
22 22

Costs: Some terms
• Direct
• Indirect
• Committed
• Flexible
• Fixed
• Variable
• Semi variable

Life cycle costing
Cost of product from start to finish, for example,
• if a mobile phone is built, if the R&D costs are
high for the company, the repairs and
maintenance cost to the customer may be low
• Buildings of stone instead of brick and mortar
require less lifetime painting and maintenance
costs

VentureBean Consulting Private Limited 25
Life cycle costs
• Upstream costs
– R&D, design, prototyping, testing, quality
development
• Manufacturing/Operations costs
– Purchasing, manufacture/service
• Downstream costs
– marketing, sales and distribution, customer
service and warranty

Implementation of LCC
• Identify stages in product life cycle
• Identify target customer
• Understand target customers perspective and
estimate need
• Understand costs over multiple users
• Analyse cost and pricing in detail

Pricing
• Intuitive
• Rule of thumb
• Trial and error
• Discount
• Premium
• Cost based
• Mark up

Pricing decisions
Influenced by
• Costs
• Competitors
• Customers
• Time horizon – short run or long run decisions
• Strategic reasons

Pricing for long run
• Important to consider long term pricing for
long term sustainability and growth of
business
• Initial pricing and short term pricing should
keep long term pricing in mind
• Image and brand of business to be
considered in pricing
• Costs to be understood and allocated
• Consistency in pricing in long term
• Target segments to be considered

A cup of coffee
• A cup of coffee costs Rs. 15 to make
• HOW will you plan to price this?
……….. continued..

A cup of coffee
• Will you charge based on the price of coffee in
similar coffee shops and restaurants?

A cup of coffee
• Will you charge cost plus a margin?

A cup of coffee
• OR will you think differently?

A cup of coffee
For example ..
• You could charge differently during the rush
hour
• You could have special rates in non rush hours
• i.e. you could differentiate between your
customers, and charge different rates …
just like the airlines do!

Some thoughts…
You can … if you want
• Think differently about your pricing
• Think differently about your negotiations for pricing and selling
• Experiment with pricing..
• For example in e-commerce: a seller experimented with
the same total sales price; in one case shipping and
handling was shown as included, in the other cases the
two were shown separately. The sales pattern showed
a difference.
• Pricing can therefore sometimes be a matter of trial and
error

Measure, review, correct.. measure..
• Have you prepared a business plan with financial
forecasts?
• Is this business plan an implementable one or is it
just on paper?
• Have you compared the actual numbers with the
business plan numbers?
• What are the signals you get when you compare
actuals with forecasts?
• Regular capturing, monitoring and analysis of data is
an important and critical part of planning.
36

• Capture data periodically;
monthly/fortnightly/weekly …
• Design a reporting Management Information
System (MIS) to evaluate
– the Key Performance Indices (KPIs)
– Key Value Drivers and
– Key Value Depleters
• Reference:
• http://bangalore.citizenmatters.in/blogs/entrepren
eur-s-corner/blog_posts/135-business-plan
37

• An individual measures height, weight, BP, sugar
levels etc.. as key parameters for wellness
• What are the Wellness and Value measures for
your business/idea?
– Top Line: Revenue
– Bottom Line: earnings/profits
– Cash Flow
– Number of employees
– Key costs
– More illustrative parameters to follow in next few
slides..
38

Quality parameters - Example
• QUALITY CAN IMPACT VALUATION MULTIPLE
• Illustrative parameters, for sales
– Sales Quantity
– Quality of revenue - in terms of
product/service/vertical/location etc.
– Average revenue per employee
– Number of customers, number of high value customers
– Number of customers who are above a certain revenue or
category, eg. MNC’s, listed companies ..
– New customers added
– Customers lost
– Pipeline customers
– Etc.
39

• More illustrative indicative parameters
– Key expenses
– Number of employees
– Average cost per employee
– Receivables and payables
– Cash balance
– Key assets
– Loans outstanding
– Equity capital
40

• Design MIS with care:
– too little information is not helpful
– too much data can be counter productive
• Analyse data, look for patterns and trends, recast
– Check for variances over time, with underlying causes
– Compare with benchmark companies
– Factor learnings into business strategy and action plan
– Recast and redo projections and plan if required
• Periodically revisit the MIS framework and add or
update parameters
41

At the start
Financial Forecasts
In Summary
Agenda
42 42

Strategic Planning – Creating value
• Alliances and partnerships, whether relating to
advisors/mentors or to operations or to
investment should lead to value creation not
value depletion
• Understand financial and non-financial aspects
of business and transactions and impact on
growth and sustainability
• Most importantly, is it adding to your brand
perception in the market or depleting from this
43

Strategic Planning – Creating value
• Preparing for alliances and partnerships across
the life cycle, this includes
– Partner identification
– Due diligence review
– Forecasts and valuation (with and without deal)
– Negotiation, acceptable and non-acceptable terms
(deal breaker and deal maker issues)
– Other deal terms and conditions
– Deal closure
– Post deal integration
– Exit plan if required for eg. for VC
44

Valuation
• Based on
– Tangibles and intangibles
– Data and assumptions
– Subjectivity and objectivity
• Many methods of computation including but not
limited to
– Multiples of revenue, earning, user base etc
– Cash flow based, discounted
– Exit valuation
– Cost based
• Must factor statutory, accounting, tax implications
45

Valuation
• Driven by markets including flavor of season,
competitive scenario, team at helm etc.
• Driven by percentage of stake offered,
negotiation etc.
• Driven by demand vs. supply
• Deals can sometimes be structured to
accommodate valuation perceptions; by linking
to future performance etc.
• For more on valuation: detailed notes are at
http://www.slideshare.net/anjanavivek/valuation-
basics (from the popular set of the TOP 4% and
5% viewed on SlideShare in 2013, 2014)
46

At the start
Financial Forecasts
In Summary: Beyond Finance
Agenda
47 47

MOST IMPORTANTLY
Entrepreneurship needs an understanding of
• People
• Business
• Environment
• Deal issues
• Synergies
In addition to finance..
48

Financial Planning
• Finance involves
– Financial planning
– Resource allocation
– Funding strategy
– Managing working capital needs
– Managing cash
– Monitoring, measuring, governance systems
– Understanding impact of business model on
finance/strategy/cash flow
– Value creation
– And more
49

MOST IMPORTANTLY
• Finance is important to survival, sustainability
and success; however finance is not everything
• As …
All the entrepreneurs who have money are
not successful
&
All those with no money or limited money are
not unsuccessful
50

MOST IMPORTANTLY
• Finance is important to survival, sustainability
and success; however finance is not everything
• As…
All VC funded companies do not succeed
&
All non-funded companies do not fail
51

In Summary
• Take care and plan well ..
• Execute .. Monitor.. Evaluate.. Adjust.. Update..
Execute..
• And Success will come your way
52

In Summary
• Wishing you all the Very Best in your Entrepreneurial Journey
• Delighted to invite you to view/follow for periodic insights, class
notes & more, from thought leaders, academicians…
@ The VentureBean K.Hub: (Knowledge Hub)
http://www.linkedin.com/company/venturebean-consulting-private-
limited
https://twitter.com/VentureBean
www.slideshare.net/anjanavivek;
https://twitter.com/anjana_vivek
• Contact for more information and inputs: beanie@venturebean.com
53

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