Building Financial Projections

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Building Financial Projections

• January 23, 2007
• Charlie Tillett
• SM 91
• 781-276-8448
• charlie.tillett_at_revealimaging.com

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Agenda

• Business Plan Financials
• The Business Model
• Building Financial Projections
• Sharing the Pie

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Background

• 1991 Sloan SM Entrepreneurial Finance
• Third Place 1990 10K Contest
• Summer Intern - Boston Capital Ventures
• 91 to 00 CFO - NetScout Systems (NTCT)
• - VC financings of 6MM and 45MM
• - IPO in August 1999 (38MM)
• Current CFO Reveal Imaging
• Bomb Detection for checked baggage
• Angel financings of 1MM
• VC financings of 10MM and 5MM
• Equity debt of 4 with SVB/Gold Hill
• Debt of 15MM - SVB

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Entrepreneurship. If not now, WHEN?

• Workload
• Expenses
• Experiential Learning
• Alternatives
• Identify industry you want
• Identify best company
• Convince them to hire you

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"The Man In The Arena" Teddy Roosevelt at the
Sorbonne ParisApril 23, 1910
It is not the critic who counts not the man who
points out how the strong man stumbles, or where
the doer of deeds could have done them better.
The credit belongs to the man who is actually in
the arena, whose face is marred by dust and sweat
and blood who strives valiantly who errs, who
comes short again and again, because there is no
effort without error and shortcoming but who
does actually strive to do the deeds who knows
great enthusiasms, the great devotions who
spends himself in a worthy cause who at the best
knows in the end the triumph of high achievement,
and who at the worst, if he fails, at least fails
while daring greatly, so that his place shall
never be with those cold and timid souls who
neither know victory nor defeat.
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Business Plan FinancialsCharlies
Rules-of-Thumb Disclaimer

• Focused on making attractive to investors
• Most relevant for technology companies
• May not apply to your industry
• Most common Business Plan errors
• Revenue too high in year 4
• Profit too high in year 4

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What is The Business Model

• Explanation of how business will MAKE MONEY
• Documented by a Profit Loss Statement
• Financial performance in percentage terms
• In assessing YOUR business model
• Determine critical mass

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Business Model Examples

• MODEL EXAMPLE (New)
• Subscription Magazines (Software, Radio)
• Advertising Radio / TV (Google)
• Razor and blades Gillette (HP Laser Printer)
• Multi-level marketing Amway
• Cut out middleman Pets.com
• Bricks and clicks Barnes Noble (everyone)
• Service Industry IT Services (HR Department)
• Low-cost-carrier Jet Blue (Fung Wah)
• High-service-level Nordstrom (Net Jets)
• Source Wikipedia.com

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Your Business Model

• Spend a lot of money developing really cool
  software
• Productize really cool software
• Build a sales marketing department
• Reach out to customers probably businesses
• Get customers to exchange money for your product
• Get customers buy subscriptions plans
• Repeat
• Questions
• Costs to develop (PEOPLE)
• Costs to produce (minimal)
• Costs to market and sell
• Costs to support

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Profit Loss (PL) StatementAlso called Income
Statement
Sample

• Revenue (after discounts)
• Cost of Goods Sold (COGS)
• Direct product cost
• Mfg but NOT RD
• Gross Margin or Gross Profit
• Departmental Expenses
• Operating Profit / Loss
• Profit before taxes (PBT)
• EBITDA (Earnings before interest, taxes,
  depreciation, amortization)

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Business Model ExampleTypical Data-Com Company
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Actual Business Models- 2005Wall-Mart,
Nordstrom, Home Depot, Lowes
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Actual Business ModelsQ3 98 vs. Q3 00 vs. Q3
03
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Actual Business ModelsQ3 98 vs. Q3 00 vs. Q3
03
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Building YOUR Model

• Start with what you know
• Your Cost of Goods Sold
• RD should end up at 10 to 20
• GA should end up at 5 to 15
• Target an operating profit of 15 to 20
• Only remaining variable is S M
• Verify by looking at comparable companies

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First Major DecisionHow will you sell your
product?
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First Major DecisionHow will you sell your
product?
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Building Financial ProjectionsRules-of-Thumb

• Average employee salary will be 70K to 80K
• Employee benefits will add just 15
• Salaries will be 60 to 75 of non-COGS
• Remainder will be rent, utilities,phones, travel
  
• UNLESS you have extraordinary marketing!!!
• Will reduce to 50 to 55 over time
• Staffing DRIVES departmental expenses

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Building Financial ProjectionsRules-of-Thumb

• Sales Projections
• 50MM to 100MM in year 5
• Market Size
• Between 5 and 25
• Revenue per Employee
• Between 125K and 300K
• Revenue per Salesperson
• Between 1MM and 3MM

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Cash Flow Projections Happiness is a positive
cash flow

• Burn Rate
• Monthly operating loss plus capital expenditures
• Cash Flow Projection
• Cumulative operating losses excluding
  depreciation
• Plus cumulative capital expenses
• To determine the total cash required
• Cumulative operating losses PLUS
• Cumulative capital expenses
• On the month that you turn cash positive

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VC Observations

• Dont expect you to spend you own money
• BUT
• Expect you to spend it as though it were your
  own
• VCs dont want their entrepreneurs to starve
• BUT
• They want them to be hungry

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End Result 4 year Profit and Loss Statement
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Profit and Loss Statement Quarterly
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Sales and COGS Forecast
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Staffing Plan
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Salary Expenses
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Non-Salary Expenses
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Non-Salary Expenses
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Profit and Loss Statement Quarterly
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CAPEX Cash Flow
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Real World Expenses

• See 50K Web Site for more detail
• //50K.mit.edu

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Financial DataPresentation Suggestions

• Steady, consistent evolution of your model
• Revenue growth in
• Expenses over time in
• Show next to quarterly yearly columns
• Show pre-tax only
• Dont allocate GA expenses
• Show depreciation expenses on a separate line

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Executive SummaryPresentation Suggestions

• Annual PL for 4 or 5 years (with )
• Data to justify revenue projections
• Unit sales
• Average selling price (ASP)
• What quarter you will be profitable
• Your total cash requirement

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Full Business PlanPresentation Suggestions

• Page 1 Annual PL for 4 years
• Page 2 3 Quarterly PL for all 4 years
• Page 4 Quarterly Staffing plan for 4 years
• Page 5 Quarterly cash flow for 4 years

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Philosophy on Team Building

• Work to be Completed Work Completed
• Compensate for both risk and sacrifice
• Reward for getting to the End Zone
• Maintain internal equity
• EVERYONE should vest Typically 4 years
• BUT - every situation is different and rules are
  made to be broken

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Three Main Groups

• Founding Team
• Investors
• Employees

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Founding TeamKey Factors

• Value of past contributions
• Value of future contributions
• Over next 12 months
• Over next 4 years
• Sacrifice Commitment
• Ownership of IP
• Individuals external or Market value
• Internal Equity everyone finds out

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EmployeesKey Factors

• Companys stage
• Funding
• Revenue
• Liquidity
• Employees value to company
• Employees market value
• Internal equity

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Employee Specifics

• Ownership after 2 rounds of financing
• CEO 5
• VP 1 to 2 ½
• Sr Manager .25 (1/4 of 1)
• Sr Ind Contributor .1 (1/10 of 1)
• YOU CAN ALWAYS GRANT MORE LATER

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Equity Distribution Example
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Equity Distribution Example
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Equity Distribution Example
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Equity Distribution Example
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Equity Distribution Example