The document discusses key aspects of creating a one-year financial model and forecast for a software company, including sensitivity testing assumptions, forecasting revenues and expenses, planning financing and investments, creating pro forma financial statements, and testing the plan for reasonableness. The most significant assumptions for the quarter and year are sales performance, executive compensation, interest rates, equipment purchases financing terms, and marketing spending. Creating the model involves organizing the workbook, forecasting billings and revenues based on sales projections, forecasting expenses by category, planning the capital structure, creating pro forma financial statements, and testing and updating the plan regularly.

1. Pro formas and forecasting 2010

2. Topics Sensitivity testing The one-year financial model The cap (“capitalization”) table

3. Section 1 -- Sensitivity testing Operating scenario Software company Revenues $2m last year, and $3.6m projected this year Profitable -- $230k Headcount to increase from 14 to 26 this year Financial position Cash at end of year projected at $88k Receivables at end of year = $745k

4. Question – which assumptions are the most significant? For one quarter? For the year? $100,000 18% 60% $3,000 35 days 50 days $350,000 $30,000 8% 15% 91% PLAN Sales performance vs. quota Executive compensation Interest rates paid % of equipment purchases financed Spending on new computers for each hire How fast we pay creditors How fast customers pay us Spending on marketing programs Annual travel expenses Commission rates Annual maintenance fees

5. These are the most significant assumptions -2 -- -1 -- -16 -55 -5 -1 +2 -3 -2 $ effect of a (10%) dif One quarter 2 1 Rank 2 3 1 Rank Annual -7 -1 -3 -2 -14 -75 -18 -6 -10 -26 -127 $ effect of a (10%) dif PLAN 91% Sales performance vs. quota $100,000 Executive compensation 18% Interest rates paid 60% % of equipment purchases financed $3,000 Spending on new computers for each hire 35 days How fast we pay creditors 50 days How fast customers pay $350,000 Spending on marketing programs $30,000 Annual travel expenses 8% Commission rates 15% Annual maintenance fees

6. Organize the model (Excel workbook) Forecast billings (and, revenues) Forecast expenses Plan the financing and investing strategies Create the balance sheet Review for reasonableness Make the Plan work Summarize Section 2 – The one year financial model

7. Summary Graphs / Text / Sensitivity analysis Top level financial statements Same format as the monthly financial statements Income statement Balance sheet Cash flow statement (optional) -- Checkbook format Projection details By natural expense By functional area Assumptions Populate actual results year-to-date Step 1 -- Organize the model

8. Productivity of sales force By individual sales person Provide time for new hires to become productive Productivity of sales partners / distributors Based on prior experience Current backlog Funnel size Funnel phases, and time to convert Historic conversion ratios Weighted average calculation (amount by probability factor) Effectiveness of marketing programs Project revenues by customer Step 2 -- Forecast billings (and, revenues)

9. Reconcile to GAAP accounting Billings do not = revenues Software Service companies Construction Different revenue types have different bases Software company – licenses, training, maintenance, consulting Step 2 -- Forecast billings (and, revenues) (ctd)

10. Materials (cost of goods sold) Know the “learning curve” Compensation Salaries – show salary for each employee Bonuses – may be iterative Commissions, including draws – very difficult area Benefits – taxes, health insurance, education Travel Facilities Use market rates Provide for utilities and other tenant costs Step 3 -- Forecast expenses

11. Marketing programs Professional services (legal / accounting) Consultants Interest Income tax provision NOL carry forwards Effect of change in control Step 3 -- Forecast expenses (ctd)

12. Financing Equity Debt Equipment Bank Receivable-based line of credit Factoring accounts receivable Bridge Investing Capital equipment purchases Step 4 – Plan the financing and investing strategies

13. Equity Invested equity from financing plans (FFF, angel, VC) Earned equity from the income statement Debt Borrowings (bank, equipment lessors) based on financing strategy Trade payables – based on payment strategy Deferred / unbilled revenues – when billed in one month, earned in another month Assets Fixed assets -- from cap spending Inventory – based on manufacturing efficiency (“turns”) Accounts receivable – based on collection history (“dso”) Cash balance – balance Step 5 -- Create the balance sheet

14. Step 6 -- Test for reasonableness Questions asked by a potential investor Likelihood of a specific deal closing? Ability to staff up to meet Plan? Revenue recognition issues – samples given out? Revenue recognition issues – sell through by distributors? Level of confidence in board design? (inventory write offs) Who buys the inventory and when do you pay for it? Availability of hardware components needed to manufacture products?

15. Step 6 -- Test for reasonableness (ctd) Questions asked by a potential investor (ctd) Capital spending plan? Salaries – reasonable? Commission structure – market? Map engineering expense to specific product development plans! What are the trigger events for hiring groups of people? Want to see a breakdown of revenue by customer!

16. Step 7 -- Make the Plan work Get buy in. Use cash bonuses based on Plan #’s Get next month’s sales forecast right Eliminate low return development projects Compare your spending to others in the industry Plan for profits Rank the marketing programs by cost, leads received and perceived benefit

17. Step 7 -- Make the Plan work (ctd) Run a sensitivity test – know the EOY cash balance Build in a cushion Keep a waterfall chart Relate the hiring plan to the capitalization table Update frequently

18. Step 8 -- Summarize Graphs Significant numbers Assumptions

19. Section 3 – The cap (“capitalization”) table Reflects changes in ownership, by owner Includes common shares outstanding + Shares issuable upon stock option exercises Shares reserved for future option grants Shares issuable upon conversion of preferred stock and debt Calculates Ownership percentages of all stockholders founders / employees / investors Price per share at various times / events Value multiples Must be consistent with financial plans