Business Plan Finance Workshop Bhavan Suri

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Business Plan Finance WorkshopBhavan Suri
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Agenda

• Introductions
• Finance Overview (10 1010 AM)
• Financial Statements
• Income Statements
• Examples and Discussion
• Lunch and team breakout (1130 1200 PM)
• Summary Presentations from Teams
• Q A and feedback forms

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Introduction

• What is a business plan?
• A Business Plan is the document you create that
  details your business history, current standing
  and future plans.
• The business plan is the first document that most
  investors will see about your company.

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Introduction

• As an Entrepreneur at what stage should you
  write a business plan?
• How does investing generally work?
• Angel/Seed, Series A, Series B, etc
• How does ownership work as an entrepreneur
• Your idea
• Investors stakes
• Exit Strategy

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Finance Overview

• A business plan depends on both words and
  numbers.
• In this workshop, we go through the basics of how
  the numbers come together.
• The single most important analysis in a business
  plan is a cash flow plan, because cash is the
  most critical element in business.
• However, you can't do a cash flow plan without
  looking at the income statement and balance
  sheets.
• Also need to understand sales, cost of sales,
  personnel expenses and other expenses.
• And you need to understand your market before
  doing a sales forecast, so a market analysis is
  recommended.
• And then you have the break-even as part of the
  initial assessment, and tables for business
  ratios, general assumptions, and other numbers.
• Step by step, the business plan becomes a
  collection of tables and charts around the text.

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Finance Overview

• Profitable companies can go broke because they
  had all their money tied up in assets and
  couldnt pay their expenses.
• Working capital is critical to business health.
• Unfortunately, we dont see the cash implications
  as clearly as we should, which is one of the best
  reasons for proper business planning. We have to
  manage cash, as well as profits.

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Finance Cash Flow

• Cash flow refers to the amounts of cash being
  received and spent by a business during a defined
  period of time, sometimes tied to a specific
  project.
• This is very important for describing the health
  of the business because although you may have
  made 1000 in sales, you still may have to wait
  to collect that cash (due to the terms you have
  with the customer).

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Finance Income Statement

• Income statements for companies indicate how
  Revenue (money received from the sale of products
  and services before expenses are taken out, also
  known as the "top line") is transformed into Net
  Income (the result after all revenues and
  expenses have been accounted for, also known as
  the "bottom line").
• Also called Profit and Loss Account (PL).

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Finance Balance Sheet

• A balance sheet is a statement of the book value
  of a business at a particular date.
• A balance sheet is often described as a
  "snapshot" of the company's financial condition
  on a given date. Of the basic financial
  statements, the balance sheet is the only
  statement which applies to a single point in
  time, instead of a period of time.

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Some Key Terms

• Income statement
• Revenue (Sales).
• Cost of Goods Sold (COGS or cost of revenue).
• Gross Profit (Gross Margin) Sales COGS.
• Sales and Marketing (SM).
• Research and Development (RD).
• General and Administrative (GA).
• Operating Margin (Earnings Before Interest and
  Tax).
• EBIT Gross Profit SM RD GA.
• Other Income (Interest payments from bank loans,
  etc).
• Taxes.
• Net Income EBIT /- other income taxes.

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Some Key Terms

• Cash Flow Statement
• Not as important to show to investors.
• Need to show you understand and MANAGE cash.
• Balance Sheet
• Not as important to show to investors.
• Assets (what you own and you can convert into
  hard ).
• Cash, Accounts Receivable (A/R), Inventory.
• Property, plant, equipment (PPE).
• Goodwill and intangibles.
• Liabilities (what you owe).
• Accounts payable (A/P), Debt.
• Shareholders Equity (Stockholders Equity).
• NOTE
• ASSETS LIABILITIES EQUITY

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Financial Statements

• Lets start with 100, which well call capital.
• At the beginning of this exercise, your balance
  sheet has assets of 100--the money--and capital
  of 100.
• Assets are equal to capital plus liabilities.
• A summary of the simple financial statement

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Financial Statements

• We have a business that sells widgets.
• We buy a widget for 100 and sell it for 150,
  and end up with 50 profit.
• This is what your income statement cover - Sales
  minus costs are profit.
• We have 150 in the bank.
• The balance sheet shows the 100 in original
  capital plus 50 in earnings, which are equal to
  the 150 in cash (an asset).

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Financial Statements

• Replicate the sale - buy another widget for 100
  and sell it again for 150,
• Now there is 200 in the bank. Do it again, and
  there is 250 in the bank.
• The Income Statement shows sales of 450, cost of
  sales of 300, and profit of 150.
• Income statement and balance sheet below.

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Financial Statements

• The business has sold 3 units and made 150
  profit. In theory it has 250 in the bank.
• Lets add Some Realism.
• Most sales of products to businesses go on terms,
  with the money due in 30 days.
• So if the widget was sold on credit you dont
  have 150 in the bank - you still have 50 in
  your bottom line, but now you have nothing in the
  bank.
• Instead, a customer owes you 150 this is known
  as Accounts Receivable.

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Financial Statements

• Sales and profits are the same as in, but you
  sold on credit, so now you have no money in the
  bank.

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Financial Statements

• You now get your Widget supplier to sell to you
  on the same terms you sell, net 30, instead of
  for cash.
• Now you have 100 that you owe to suppliers -
  called Accounts Payable.
• You also have 100 worth of widget in inventory.

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Financial Statements

• Business looked good, so you borrowed the money
  to buy another widget and continue.
• You have an extra 100 in assets (the widget in
  inventory) and an extra 100 as liabilities.
  (Accounts Payable), so you are still in balance
• And you still have no money.

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Financial Statements

• So you have the same sales and profits as in the
  Sell 3 Widgets earlier example, but the balance
  sheet is more complex.
• Now the case is more like what you have with real
  business numbers.
• You have to manage your cash very carefully.
• The amounts sitting in inventory and accounts
  receivable are significant.

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Income Statement Detail

• The standard Income statement in accounting
  subtracts costs and expenses from sales and shows
  profits as the bottom line of the statement.
• Expenses start with personnel and include rent,
  utilities, equipment, advertising, sales
  commissions, public relations, and other
  expenses.
• The result is profits - Profits are what is left
  over after you start with sales, then subtract
  cost of sales, expenses, and taxes.
• The Income statement is the same as the Profit
  and Loss statement.
• Also known as "pro forma," meaning projected, as
  in "pro forma income" or "pro forma profit and
  loss.
• The pro forma income is the same as a standard
  income statement except that it projects the
  future.

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Income Statements

• COST OF GOODS SOLD (Cost of Sales or COGS) COGS
  are expenses directly related to producing or
  buying your products or services.
• E.g. purchases of raw materials, wages (and
  payroll taxes) of employees directly involved in
  producing your products/services. These expenses
  usually go up and down along with the volume of
  production or sales.
• Control of COGS is the key to profitability for
  most businesses.
• For each category of product/service, analyze the
  elements of COGS labor, materials, packing,
  shipping, sales commissions, etc.
• Underestimating COGS can lead to under pricing,
  which destroys profit.
• Analyze carefully and be realistic.

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Income Statements

• GROSS PROFIT Gross Profit is Total Sales minus
  Total COGS.
• OPERATING EXPENSES (Overhead) These are
  necessary expenses which are not directly related
  to making or buying your products/services.
• E.g. Rent, utilities, telephone, interest, and
  the salaries (and payroll taxes) of office and
  management employees
• Most operating expenses remain reasonably fixed
  regardless of changes in sales volume.
• Some, like sales commissions, may vary with
  sales. Some, like utilities, may vary with the
  time of year. Your projections should reflect
  these fluctuations.
• NET PROFIT This is Gross Profit minus Total
  Operating Expenses.

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Income Statement

• Subtract cost of sales from sales.
• This gives gross margin, an important ratio for
  comparisons and analysis.
• A more detailed Profit and Loss is shown in the
  next illustration.

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• Operating expenses divided into categories,
  including Sales and Marketing expenses and
  General and Administrative expenses (SGA).
• The sum of expenses ultimately determines the
  company's profitability.
• This is the budgeted business plan.

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Balance Sheet

• Projecting your balance sheet can be quite
  complex.
• The result should be a plan detailing what
  additional resources will be needed by the
  company, and how they will be financed.
• Use your historical balance sheet as a starting
  point for your projections.
• Balance sheet is composed of ASSETS and
  LIABILITIES and these MUST balance.

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Balance Sheet - Assets

• How will the year's operations affect assets,
  debts, and equity assuming significant sales
  growth in the coming year
• ASSETS Inventory and Accounts Receivable will
  have to grow. New equipment may be needed for
  increased production. You may draw down on cash
  to finance some of this.

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Balance Sheet - Liabilities

• The balance sheet must balance, so on the other
  side we have liabilities
• LIABILITIES EQUITY Some of the growth may be
  financed by profits retained in the business as
  Retained Earnings.
• Your Profit Loss Projection shows how much
  might be available from that source.
• Funds may also be contributed by the owners
  through contributions of more Invested Capital or
  loans to the company (Notes Payable to
  Stockholders).
• Suppliers may provide some of the financing via
  increased Accounts Payable.
• The rest will have to be financed by borrowing,
  which can be Short term loans (due within 12
  months) such as a line of credit. Or by Long Term
  Debt (maturity greater than 12 months).

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Balance Sheet
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Balance Sheet
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Finance Overview

• Steps to take when building a financial model
• Market Size and Growth
• How big is the market and how fast is it growing?
• Will your company grow with the market or will it
  take share from existing competitors?
• How will you price your product(s)?
• Based on your growth, how many products (volume)
  do you need to sell each year?
• What does it cost on a cash basis to support this
  growth?
• What assets (equipment, cash, etc.) do you need
  to support this growth?

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Examples and Discussion

• Starting from scratch
• Forecasting sales is the starting point for the
  financial projection.
• The sales forecast is key, so it is important to
  use realistic estimates.
• Divide projected monthly sales into "Categories
  which are divisions that make sense for your type
  of business. Example categories are product
  lines, departments, branch locations, customer
  groups, geographical territories, or contracts.
• Enter annual sales, by category, in the four
  "Sales History" columns on the right side of the
  sheet. (Startup businesses can delete this
  section).
• Analyze past sales and note seasonal/periodic
  fluctuations determine what caused them and when
  they are expected to recur.
• Build these fluctuations into your projections
  for the coming year.

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Examples and Discussion
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Examples and Discussion

• Cash Flow
• On the Profit Loss Projection, check line by
  line when cash should come and go. This is to
  determine when you will actually collect from
  customers.
• On the expense side, predict when you will
  actually have to write the check to pay those
  bills.
• Most items will be the same as on the PL. Rent
  and utility bills, for example, are paid in the
  month they are incurred.
• Insurance, taxes, for example, may be payable
  quarterly or semiannually, even though you
  recognize them as monthly expenses.
• The payoff for an accurate cash flow is the
  ability to manage and forecast working capital
  needs.

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Finances - Summary

• This is where you present your company's
  financial history and projections.
• Do not be overly creative in this section of your
  plan.
• You should be "vanilla-flavored Present your
  finances in the standardized manner to which
  accountants and investors are accustomed.
• Provide past results (if applicable), and two to
  three years of projections (pro forma).
• When presenting to investors create three
  scenarios a worst case, expected, and best case.

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Example Sample Market/Company

• Market Size and Growth
• Total market is growing at 60 per year according
  to X.
• Enterprise software segment at 46.
• Software-as-a-Service segment at 165.
• Demand for Web Analytics solutions is high
  (survey).

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Example - Sample Market/Company

• Profitable in 2008.
• Revenue CAGR of 150 over 6 years.

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Workshop Project

• Consulting Company Financial Summary.
• Basic Revenue Assumptions
• Hours per week that you bill per consultant 48.
• Current (2006) Utilization Rate is 66, assume
  this will go up to 75.
• Average Billable Rate is 150/hr, assume this
  goes up to 180/hr.
• Currently (2006) 8 consultants, assume this will
  go up.
• Assume you will have software products in 1 year,
  that will generate revenue starting at 20,000
  but will never exceed 1 of consulting revenue.

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• Consulting Company
• Basic Expense Assumptions
• Fully loaded cost per consultant is 75 of
  revenue that the consultant brings in.
• Product Development is 40 of the revenue that
  product sales brings in.
• You have infrastructure costs that are 75,000
  (2006), assume these will grow doubling for the
  next few years before slowing down.
• You have General and Administrative costs that
  are 75,000 (2006), assume these will grow
  doubling for the next few years before slowing
  down.
• You have RD costs associated with product sales.
• Create a Profit and Loss projection for 2008 out
  through 2013.