If you fail to Plan: will your Plan fail?
                  Developing a Financial Plan
                      for your Bus...
Presentation Overview

   Financial Plan: part of your Business Plan
   The Top Line – Sales, Cost of Sales and Margin
 ...
The Business Plan ~ 30 pages
 Executive Summary

 Company and Opportunity Summary

 Product and Technology

 Market Si...
Before you start your Financial Plan…
 You need an outline of your Business Plan including:
   Product and Technology
  ...
Income Statement – the Top Lines

                                 Year One                 Year Two              Year Thr...
Translating Market Share to Sales?
 Target 1% of the projected $3 billion market by year five, work
 backward to earlier y...
Sales Forecast – bottom up more credible!

  Distribution Channel = Doctors
  Recruit Doctors as follows:
     150 in y...
Other Sales Forecast Considerations

 Mixed Distribution Model may result in multiple selling
  prices for products
    ...
Always ask: Is Your Plan Realistic?




                   10        Financial Planning – February 2008
Cost of Sales and Gross Margin

 The direct costs of producing your product
    Bill of Material, Labor, Warehousing, Sh...
Expense Projections - Income Statement

                                 Year One                 Year Two              Ye...
R&D expenses may be your comfort zone

 Teams generally comfortable forecasting these costs
 Largest component is labor ...
But selling expenses often drive growth!

Newbridge – sales results for the early years
 1987 - $1.3M
 1988 - $17.6M
 1...
What’s in Selling Expenses?

 Labor costs for sales and marketing team members –
  usually a team that is geographically ...
What’s in Admin Expenses?

 Labor costs for operations, customer support, finance,
  HR, IT and admin teams, including CE...
The Business Case Tool
                       Year One         Year Two              Year Three

Incremental              ...
The Balance Sheet – an example
                                  Year One               Year Two               Year Three
...
Asset increase = use of cash

 Accounts Receivable (A/R)
    Amounts owing from customers, partners, tax credit, grant p...
Liability/Equity increase = source of cash

 Accounts Payable and Liabilities (A/P)
    Need to reflect terms with suppl...
Cash Flow Statement – key tool

 Often regarded as something accountant prepares for
  monthly/quarterly/annual financial...
Some Final Thoughts

 Your business plan is quantified in your financial plan
    The assumptions/content must be consis...
Budgeting: If you fail to plan, will your plan fail?
Budgeting: If you fail to plan, will your plan fail?
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Budgeting: If you fail to plan, will your plan fail?

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Developing a Financial Plan for your Business. Speaker: Kerri Golden, CA, Primaxis Technology Ventures

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Budgeting: If you fail to plan, will your plan fail?

  1. 1. If you fail to Plan: will your Plan fail? Developing a Financial Plan for your Business Kerri Golden, CA Partner – Primaxis Technology Ventures CFO – Infobright Inc. February 13, 2008
  2. 2. Presentation Overview  Financial Plan: part of your Business Plan  The Top Line – Sales, Cost of Sales and Margin  Operating Expenses – R&D, Selling and Admin.  Business Case Tool  Balance Sheet - Working Capital, Equipment and Debt/Equity Financing  Cash Flow – Entrepreneur’s most important tool  Closing Remarks 3 Financial Planning – February 2008
  3. 3. The Business Plan ~ 30 pages  Executive Summary  Company and Opportunity Summary  Product and Technology  Market Size and Growth  Sales and Marketing Plan  Competitive Overview  Operations Plan  Management Team  Financials and Investment Requirements – focus for today 4 Financial Planning – February 2008
  4. 4. Before you start your Financial Plan…  You need an outline of your Business Plan including: Product and Technology • R&D budget for development of technology and initial products • Specification of products - bill of material and labor cost to build • Product’s evolution over time - cost reduction projects/estimates Market Information, including Competitive Overview • Sales Unit Targets, Pricing, Sales Team and Partner Compensation Sales and Marketing Plan • Go to Market Plan, Distribution Strategy, Marketing activities Operations Plan • Details of support program, team, equipment required… 5 Financial Planning – February 2008
  5. 5. Income Statement – the Top Lines Year One Year Two Year Three Sales $0 $1.4M $5.7M Cost of Sales $0 $0.3M $1.1M Gross Margin $0 $1.1M $4.6M R&D Expenses $1.5M $2.3M $3.0M Selling Expenses $0.7M $2.2M $3.7M Admin Expenses $0.6M $1.2M $1.5M EBITDA ($2.8M) ($4.6M) ($3.6M) ITDA* $200K $300K $400K Net (Loss) Income ($3.0M) ($4.9M) ($4.0M) *ITDA = Interest, Taxes, Depreciation and Amortization 6 Financial Planning – February 2008
  6. 6. Translating Market Share to Sales? Target 1% of the projected $3 billion market by year five, work backward to earlier year sales projections Year five projected sales = $30 million My Company Tip: It can be better to segment the market and show your market share in relation to segment – investors like to back companies All Competitors who will be significant players in their market segment 7 Financial Planning – February 2008
  7. 7. Sales Forecast – bottom up more credible!  Distribution Channel = Doctors  Recruit Doctors as follows:  150 in year one through trade shows (60 signed up already)  2,400 doctors by year five of the plan, serving up to 30,000 patients  Product pricing:  Annual patient revenues of $1,000 per year  Pricing starts at $1,200 per year, competition drives average price down 20% over period of the plan  Require 6 regional sales and support reps to support Doctor Network 8 Financial Planning – February 2008
  8. 8. Other Sales Forecast Considerations  Mixed Distribution Model may result in multiple selling prices for products  End User Selling Price for product sold directly to customers  Wholesale Price for sales distribution partners  Currency  Most Canadian companies sell their products in US and other markets – Develop pricing strategies for individual markets, validate and state assumptions in your plan  Service Revenues  Dependent on salary/consulting rates which generally increase over time 9 Financial Planning – February 2008
  9. 9. Always ask: Is Your Plan Realistic? 10 Financial Planning – February 2008
  10. 10. Cost of Sales and Gross Margin  The direct costs of producing your product  Bill of Material, Labor, Warehousing, Shipping…for products  Service Team Labor and Material Costs  Costs will evolve over time  Production volume will impact unit cost  Labor costs will generally increase, although they often drop as a percentage of costs over time  Planning for cost reductions – it is common for technology companies to get version of product to market & then re-engineer it for lowest cost  Gross Margin  Expressed in dollars and often a percentage – you should understand margin targets for your industry/sector (Software – 80-90%, Product Companies – 45-60%) 11 Financial Planning – February 2008
  11. 11. Expense Projections - Income Statement Year One Year Two Year Three Sales $0 $1.4M $5.7M Cost of Sales $0 $0.3M $1.1M Gross Margin $0 $1.1M $4.6M R&D Expenses $1.5M $2.3M $3.0M Selling Expenses $0.7M $2.2M $3.7M Admin Expenses $0.6M $1.2M $1.5M EBITDA ($2.8M) ($4.6M) ($3.6M) ITDA* $200K $300K $400K Net (Loss) Income ($3.0M) ($4.9M) ($4.0M) *ITDA = Interest, Taxes, Depreciation and Amortization 12 Financial Planning – February 2008
  12. 12. R&D expenses may be your comfort zone  Teams generally comfortable forecasting these costs  Largest component is labor costs for the team - should consider evolution of team over time from research to product design/development, testing and QA  Must address sustaining work on product line, field support for customers and future product cost reductions  Costs of patenting/protecting trade secrets  Any licensing costs to use technologies from 3rd parties  Tax credits/grants can help stretch your R&D budget  Scientific Research and Experimental Development (SRED) – federal  Ontario Innovation Tax Credit (OITC) and other provincial programs  NRC-IRAP programs – advisory services and R&D funding (matching) 13 Financial Planning – February 2008
  13. 13. But selling expenses often drive growth! Newbridge – sales results for the early years  1987 - $1.3M  1988 - $17.6M  1989 - $67.4M  1990 - $121.2M  1991 - $149.1M  1992 - $181.M  1993 - $307.6M Newbridge spent 50%+ on selling and only 33% on R&D to generate spectacular sales growth 14 Financial Planning – February 2008
  14. 14. What’s in Selling Expenses?  Labor costs for sales and marketing team members – usually a team that is geographically remote  Commissions – how does your plan compare with industry to enable recruiting top resources?  Marketing Costs – Public Relations, Advertising, Trade Shows, Website, Lead Generation, Case Studies, Customer Documentation, Partner recruiting costs  Travel, Living and Entertainment – strategy to ensure customer coverage and policy to control costs  Performance measures to ensure the costs of pursuing customers are matched with margin on sales 15 Financial Planning – February 2008
  15. 15. What’s in Admin Expenses?  Labor costs for operations, customer support, finance, HR, IT and admin teams, including CEO  Rent and related costs (telephone, internet, supplies…) associated with running the office and operation  Recruiting and other HR costs – may be significant as team is ramped up  Professional Fees including legal, audit, tax, insurance  Board/Investor Relations costs  Travel expenses for CEO/CFO  Misc. Costs – bank charges, courier, postage 16 Financial Planning – February 2008
  16. 16. The Business Case Tool Year One Year Two Year Three Incremental $0 $2,000K $6,000K Revenue Incr. Margin $0 $1,000K $3,000K R&D Costs $1,000K $300K $200K Selling Costs $150K $500K $1,200K G&A Costs $100K $200K $300K Total Costs $1,250K $1,000K $1,700 Total Margin ($1,250K) $0 $1,300 Business case discipline should be added to ensure that future development projects contribute to financial success. 17 Financial Planning – February 2008
  17. 17. The Balance Sheet – an example Year One Year Two Year Three Cash $17K $4,738K $898K Accounts Rec. $176K $929K $1,371K Inventory/Prepaid $223K $190K $328K Fixed Assets $203K $304K $343K Total Assets $619K $6,101K $2,939K AP & Liabilities $429K $1,020K $1,786K Financing* $3,227K $13,008K $13,324K Ret. (Loss) Income ($3,037K) ($8,006K) ($12,170K) Total Liab/Equity $619K $6,101K $2,939K *Financing could be Debt, Equity or combination thereof 18 Financial Planning – February 2008
  18. 18. Asset increase = use of cash  Accounts Receivable (A/R)  Amounts owing from customers, partners, tax credit, grant program, GST input tax credits – assumptions regarding terms/collection  As business grows, company may require cash or alternative financing to fund A/R growth (e.g. customers pay 60 days after delivery)  Inventory and Prepaid Expenses  For product business, inventory build plan and management are critical  Need product on hand to ensure sales targets can be met  Some expenses (insurance, trade shows, rent) may be paid in advance  Fixed Assets  Equipment to be used in the business, expensed over longer-term  Some businesses can be very capital-intensive 19 Financial Planning – February 2008
  19. 19. Liability/Equity increase = source of cash  Accounts Payable and Liabilities (A/P)  Need to reflect terms with suppliers, should be negotiated based on your business cycle to minimize cash flow impact  Other liabilities can include: Leases, Sales Tax Payable  Debt Financing  Small Business Loan for equipment  Venture Debt, may be available along with equity funding  Operating Line of Credit – usually secured against Accounts Receivable and maybe Inventory assets  Long-term Equipment Loan – may be available for capital-intensive business  Equity Financing  Proceeds from sale of either common or preferred shares 20 Financial Planning – February 2008
  20. 20. Cash Flow Statement – key tool  Often regarded as something accountant prepares for monthly/quarterly/annual financial statements  Should be used as a weekly or daily planning tool to manage your business  Opening Cash Balance  + Cash Receipts from customers/other Receivable  - Payroll Costs  - Cash Payments to suppliers for Expenses/Inventory/Fixed Assets  + Cash received from lenders or equity financing  - Cash Payments, including interest for repayment of debt  = Closing Cash Balance  Understanding & managing cash flow is key to success 21 Financial Planning – February 2008
  21. 21. Some Final Thoughts  Your business plan is quantified in your financial plan  The assumptions/content must be consistent between the two plans  The key aspects of the business plan need to be researched and thought through before starting the financial plan  Your financial plan can be a work in progress  Not all elements of the plan need to be finalized before seeking funding  Be honest about where there is higher degree of confidence in the plan and where more work is required to complete  Monitoring your business’ progress against your financial plan is as important as developing the plan  “Cash is king” in start-ups and the balance should be monitored on a regular basis (daily or weekly) 22 Financial Planning – February 2008

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