Financial Projections for Presentations September 18, 2012
Today’s Speakers Alicia Amaral Heather Onsto, Sco, Goodwin • Managing Director, • Venture Partner with • CPA, Wolf & Company Scalar Analy<cs LaunchCapital • Accoun<ng and (business valua<on • Interim CEO of the audi<ng ﬁrm) Nanny Caddy, a • Leads the High Tech • Visi<ng Professor, LaunchCapital prac<ce Clark University and porUolio company • BOD and program chair TuIs University • Over 20 years commi,ee at TCN • CPA and CVA experience in small • Prior CFO, Sen<nel business ﬁnance Wolf & Company, PC, is a 100 Financial Group and • BA, MBA, and the far year old regional ﬁrm with 19 IHI more expensive owners and 185 • Recovering auditor School of Hard Knocks professionals, focused on CPA core competencies with a • BA, Furman, MSA, dedicated tech services team. Bentley
Financial Projec<ons: WIFM? Today’s presenta<on will focus on the how and why of building and pitching ﬁnancial projec<ons • How: Crea<ng ﬁnancial projec<ons using a spreadsheet and some common accoun<ng knowledge shows you where to focus your resources • Why: Crea<ng ﬁnancial projec<ons shows investors that you have carefully considered all ﬁnancial implica<ons
Financial Projec<ons: 3 Objec<ves 1. Force discipline and objec<vity through crea<ng a methodical approach 2. Demonstrate thorough understanding of your company’s business model 3. Provide answers to “what if?”
Building Projec<ons: Yeah, but… I’ve heard that I don’t really have to build a business plan with ﬁnancial projec8ons because no one actually reads it… • Business plans with ﬁnancial projec<ons are necessary… FOR YOU – Bo,oms-‐up vs. Top-‐down – HINT: Youre trying to talk yourself out of this! • Financial projec<ons are a key por<on of the due diligence most investors perform Investors are more interested in the assump1ons made when building ﬁnancial projec1ons, not the exact bo;om line
Building Projec<ons: Pulp ﬁc<on? Projec8ons are just imaginary anyway, so what does it maCer what I put in? A common mistake is to have illogical numbers in the projec<ons – All numbers should be <ed to your growth assump<ons • Ex 1: If sales cycle is 6 weeks, should there be sales in month 1? • Ex 2: If business is seasonal, should growth be smooth in every month? – All numbers should <e with a rough cash ﬂow statement • Either a separate tab or at the bo,om of the P&L Projec1ons that have not been planned properly make investors ques1on your understanding of your business model
Building Projec<ons: What if… Scenario planning is just worst-‐case (out of business), expected (what I really think will happen), and best-‐case (Google buys us for a bazillion dollars), right? Focus on YOUR key success metrics to drive scenario planning – Sales trac<on – Gross margins – Incremental headcount Fundraise amount range should encompass most likely scenarios to avoid expensive “Bridge” or “A-‐1” rounds
More on Scenario Planning… Worst-‐case scenarios should answer “What happens if there is no outside capital?” – if the answer isnt grow slower, is this a pipe dream? Best-‐case scenarios should answer “What does this business look like if everything goes right?” – if the answer isn’t a huge ﬁnancial win for your investor, is this a pipe dream? Most-‐likely scenarios should answer “What does this business look like following comparable companies’ growth paths?” – if the answer isn’t able to be funded with the current “ask”, is this a pipe dream? Goldilocks got it right: examine all op1ons!
Building Projec<ons: Common terms • EBITDA • Margin • Working capital • Sustainable growth rate • Burn rate • Accrual vs. cash basis • Cash ﬂow breakeven • CapEx • Capital structure • Cost of capital
Building Projec<ons: How it works • Have an assump8ons page and reference cells for your P&L (don’t hard code anything) • A separate assump<ons page allows ﬂexibility – change them for diﬀerent growth scenarios • Assump<ons are the backbone of your projec<ons, so you should know them COLD Excel is your friend, but be careful with cell references – it’s easy to make a mistake!
Building Projec<ons: Proper start…? Es<mate 1% of $100 bazillion market share
Building Projec<ons: Proper start…? Es<mate 1% of $100 bazillion market share JUST KIDDING!
Projec<ons: Start with Revenue Take a “Bo,oms Up” approach • Ex: We have tracked X unique visitors to our website and with an industry averages 2% conversion rate, sales will be Y. • Ex: Survey revealed customers are willing to pay $X for a product with Y features. • Ex: Q4 sales were $X. With a customer acquisi<on cost of $Y, we expect a 20% growth rate as a result of marke<ng eﬀorts Econ 101: revenue = price * volume. Knowing which element is driving your company’s revenue is a key metric.
Projec<ons: Add in expenses This also has a “Bo,oms-‐up” approach • Include details of all categories – Ex. Inventory = raw materials, WIP, and ﬁnished goods – Ex. Headcount is a step-‐func<on (hard to ﬁnd .25 person) – Ex. Income taxes, no; Sales tax, use tax, payroll tax… yes! • COGS (gross proﬁt margin) – Inventory, shipping, packaging, direct labor • SG&A – Marke<ng – Development – Overhead
Projec<ons: Understand EBITDA piUalls • EBITDA excludes expenses that are not core to a company’s opera<ons; allows for comparisons without regard to capital structure • Be careful about using EBITDA as proxy for cash ﬂow even though most investors expect it • EBITDA excludes deprecia<on because it’s noncash but CapEx requires cash “References to EBITDA make us shudder – does management think the tooth fairy pays for capital expenditures?” – Warren Buﬀet
Projec<ons: ﬁnal checks • Map out cash inﬂows and ouUlows to determine funding needs – do this by month! • Revenue collec<on – <ming impacts cash projec<ons. 30 or 60 days? 2/10, n30? • Inventory turn – becomes COGS when you sell it but need cash up front • Deprecia<on = noncash expense (include?) • Don’t forget to include CapEx in cash ﬂow (tooth fairy doesn’t exist)
Projec<ons: MORE ﬁnal checks "The GOAL” is to make money – Social jus<ce, triple net bo,om line, etc, come AFTER proﬁtability • "You cant give away what you dont have" (unless youre the Feds) – Youll need space one day that isnt free – It is illegal to hire someone and not pay them – Equity + cash = total compensa<on • As equity values increase, cash compensa<on should increase as the less expensive long-‐run pay op<on (this means you are WINNING!) – Research ﬁnancial statements to get an idea of expenses you may have missed – Research how much things cost – don’t guess!
Pitching projec<ons: What’s the “ask”? Fin projec<ons need to <e to the amount of the raise – Fundraising takes <me, so 12-‐18 months of cash per raise – Iden<fy milestones to be hit and cost of each one – The sum of those milestone costs is the raise amount – The "cushion" in the raise is not X%, its the cost diﬀerence in the most likely scenarios The secret to life is “t” – “t” is the variable for “<me” in mathema<cal equa<ons… and <me in projec<ons is everything
Pitching Projec<ons: Expert moves • Know your audience – The earlier you are, the more interested in your assump<ons the investors are – so know you’ll be discussing them in detail. Painstaking detail. • Be rich, not king – Does a new hire cut costs or increase revenue? This will drive the <ming of a new hire. • Don’t forget that headcount is a step-‐func<on • What is B/E expecta<on for a new hire? – Good metric for HC is sales/employee – these numbers are benchmarked and available with some research.
Good Example – “Breakeven 2015” Raise Raise $750K $3 MM 21
Pitching Projec<ons: Rookie moves – CTRL+C+P en<re excel model into a slide – Using anything less than 18-‐point font – Li,ering clipart from 1995 – Sta<ng projec<ons to the $.01 – Failing to summarize projec<ons – Using ANY of the following phrases: • “conserva<vely es<mated…” • “at only X% of the market…” • “with no compe<<on…” – Forge|ng to explain what the amount you raise achieves – Assuming a short-‐term exit at a high mul<ple