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Slide 1: Fail to Plan: Plan to Fail Developing a Financial Plan For your Business Kerri Golden, CA Managing Partner Primaxis Technology Ventures March 6, 2007
Slide 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. ! Balance Sheet - Working Capital and Equipment ! Cash Flow – the most important tool for the Entrepreneur ! Closing Remarks 2 Fail to Plan: Plan to Fail – March 2007
Slide 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 3 Fail to Plan: Plan to Fail – March 2007
Slide 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… 4 Fail to Plan: Plan to Fail – March 2007
Slide 5: Income Statement – the Top Lines Year One Sales Cost of Sales Gross Margin R&D Expenses Selling Expenses Admin Expenses EBITDA ITDA* Net (Loss) Income $0 $0 $0 $1.5M $0.7M $0.6M ($2.8M) $200K ($3.0M) Year Two $1.4M $0.3M $1.1M $2.3M $2.2M $1.2M ($4.6M) $300K ($4.9M) Year Three $5.7M $1.1M $4.6M $3.0M $3.7M $1.5M ($3.6M) $400K ($4.0M) *ITDA = Interest, Taxes, Depreciation and Amortization 5 Fail to Plan: Plan to Fail – March 2007
Slide 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 who will be significant players in their market segment All Competitors 6 Fail to Plan: Plan to Fail – March 2007
Slide 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 7 Fail to Plan: Plan to Fail – March 2007
Slide 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 8 Fail to Plan: Plan to Fail – March 2007
Slide 9: Always ask: Is Your Plan Realistic? 9 Fail to Plan: Plan to Fail – March 2007
Slide 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%) 10 Fail to Plan: Plan to Fail – March 2007
Slide 11: Expense Projections - Income Statement Year One Sales Cost of Sales Gross Margin R&D Expenses Selling Expenses Admin Expenses EBITDA ITDA* Net (Loss) Income $0 $0 $0 $1.5M $0.7M $0.6M ($2.8M) $200K ($3.0M) Year Two $1.4M $0.3M $1.1M $2.3M $2.2M $1.2M ($4.6M) $300K ($4.9M) Year Three $5.7M $1.1M $4.6M $3.0M $3.7M $1.5M ($3.6M) $400K ($4.0M) *ITDA = Interest, Taxes, Depreciation and Amortization 11 Fail to Plan: Plan to Fail – March 2007
Slide 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 other’s technologies ! Consider tax credits and grants that can help stretch your R&D budget 12 Fail to Plan: Plan to Fail – March 2007
Slide 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 13 Fail to Plan: Plan to Fail – March 2007
Slide 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 14 Fail to Plan: Plan to Fail – March 2007
Slide 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 15 Fail to Plan: Plan to Fail – March 2007
Slide 16: The Business Case Tool Year One Incremental Revenue Incr. Margin R&D Costs Selling Costs G&A Costs Total Costs Total Margin $0 $0 $1,000K $150K $100K $1,250K ($1,250K) Year Two $2,000K $1,000K $300K $500K $200K $1,000K $0 Year Three $6,000K $3,000K $200K $1,200K $300K $1,700 $1,300 Business case discipline should be added to ensure that future development projects contribute to financial success. 16 Fail to Plan: Plan to Fail – March 2007
Slide 17: The Balance Sheet – an example Year One Cash Accounts Rec. Inventory/Prepaid Fixed Assets Total Assets AP & Liabilities Financing* Ret. (Loss) Income Total Liab/Equity $17K $176K $223K $203K $619K $429K $3,227K ($3,037K) $619K Year Two $4,738K $929K $190K $304K $6,101K $1,020K $13,008K ($8,006K) $6,101K Year Three $898K $1,371K $328K $343K $2,939K $1,786K $13,324K ($12,170K) $2,939K *Financing could be Debt, Equity or combination thereof 17 Fail to Plan: Plan to Fail – March 2007
Slide 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 18 Fail to Plan: Plan to Fail – March 2007
Slide 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 19 Fail to Plan: Plan to Fail – March 2007
Slide 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 20 Fail to Plan: Plan to Fail – March 2007
Slide 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) 21 Fail to Plan: Plan to Fail – March 2007