Financial Projections for Presentations

Heather Onstott

Today’s Speakers

• Senior Controller Consultant, Venture Advisors

• CPA• Prior Controller,

Accounting Manager at several area startups/high growth companies

• BS, UVM; MSA/MBA Northeastern

• Venture Partner, former Director of Small Business with LaunchCapital

• Interim CEO of the Nanny Caddy, a LaunchCapital portfolio company

• Over 20 years experience in small business finance

• BA, Wofford College; MBA, Dartmouth

Heather Shanahan

Financial Projections: WIFM?

Today’s presentation will focus on the how and why of building and pitching financial projections

•How: Creating financial projections using a spreadsheet and some common accounting knowledge shows you where to focus your resources•Why: Creating financial projections shows investors that you have carefully considered all financial implications

Financial Projections: 3 Objectives

1. Force discipline and objectivity through creating a methodical approach

2. Demonstrate thorough understanding of your company’s business model

3. Provide answers to “what if?”

Building Projections: Yeah, but…I’ve heard that I don’t really have to build a business plan with financial projections because no one actually reads it…

• Business plans with financial projections are necessary…

– Bottoms-up vs. Top-down– HINT: You're trying to talk yourself out of this!

• Financial projections are a key portion of the due diligence most investors perform

FOR YOU

Investors are more interested in the assumptions made when building financial projections, not the exact bottom line

Building Projections: Pulp fiction?Projections are just imaginary anyway, so what does it matter what I put in?

A common mistake is to have illogical numbers in the projections– All numbers should be tied to your growth assumptions

• 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 tie with a rough cash flow statement• Either a separate tab or at the bottom of the P&L

Projections that have not been planned properly make investors question your understanding of your business model

Building Projections: 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 traction– 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 isn't '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 options!

Building Projections: Common Terms

• Revenue/Sales• COGS • Gross Profit/Margin• Operating expenses• EBITDA• Cash flow breakeven• Working capital• Burn rate

Building Projections: How it works

• Fundamental components of model:• Profit & Loss • Balance Sheet• Cash Flow

• Above schedules should be presented by month• Have an assumptions page: this allows flexibility – change

assumptions for different growth scenarios• Assumptions are the backbone of your projections, so you

should know them COLD

Excel is your friend, but be careful with cell references – it’s easy to make a mistake!

Building Projections: Let’s get started…

Estimate 1% of $100 bazillion market

shareJUST

KIDDING!

Projections: Start with RevenueTake a “Bottoms 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 acquisition cost of $Y, we expect a 20% growth rate as a result of marketing efforts

• All revenue projections must be backed up with a sales plan

Econ 101: revenue = price * volume. Knowing which element is driving your company’s revenue is a key metric.

Include details of relevant expenses/activities related to:

Selling Marketing Engineering & Development COGS General & Administrative

Determine headcount first then build expenses around that

Projections: Add in expenses

Projections: Add in expenses

• Payroll expenses– Salaries and payroll taxes– Other compensation (bonuses, commission)– Fringe benefits– Variable expenses (T&E’s)

• Legal and Accounting• Insurance

Projections: Other considerations• You'll need space one day that isn't free• It is illegal to hire someone and not pay them• Equity + cash = total compensation

• As equity values increase, cash compensation should increase as the less expensive long-run pay option (this means you are WINNING!)

• Research how much things cost – don’t guess!• Call your identified suppliers for costs, terms of materials and

development costs

Projections: final checks• Look for gradual (realistic) P&L improvement over

time• EBITDA excludes expenses that are not core to a

company’s operations; allows for comparisons without regard to capital structure.

• EBITDA measures the progression of the business but cash flow is ultimately what the investors look for

• Consider reasonableness of when you get to cash flow breakeven and the total cash you are asking for. Does it make sense?

Pitching projections: What’s the “ask”?

Financial projections need to tie to the amount of the raise– Fundraising takes time, so 12-18 months of cash per raise– Identify 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%, it's the cost difference in

the most likely scenarios

The secret to life is “t”– “t” is the variable for “time” in mathematical equations… and

time in projections is everything

Pitching Projections: Rookie moves

– CTRL+C+P entire excel model into a slide– Using anything less than 18-point font

– Littering clipart from 1995… or 2013– Stating projections to the $.01– Failing to summarize projections– Using ANY of the following phrases:

• “conservatively estimated…”• “at only X% of the market…”• “with no competition…”

– Forgetting to explain what the amount you raise achieves– Relying on a short-term exit at a high multiple

Pitching Projections: Expert moves

• Know your audience– The earlier you are in the development of your business,

the more interested in your assumptions 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 timing of a new hire.• Don’t forget that headcount is a step-function • What is B/E expectation for a new hire?

– Good metric for HC is sales/employee – these numbers are benchmarked and available with some research.

Bad ExampleRevenue

Custom runners $ 480,000 624,000 811,200 1,054,560 1,370,928 Standard runners 60,000 78,000 101,400 131,820 171,366

Total Revenue $ 540,000 $ 702,000 $ 912,600 $ 1,186,380 $ 1,542,294

COGSCustom runners $ 120,000 $ 156,000 $ 202,800 $ 263,640 $ 342,732 Standard runners 39,000 50,700 65,910 85,683 111,388

Total COGS $ 159,000 $ 206,700 $ 268,710 $ 349,323 $ 454,120

GROSS PROFIT $ 381,000 $ 495,300 $ 643,890 $ 837,057 $ 1,088,174 Expenses

Selling ExpensesCommission $ 36,000 $ 46,800 $ 60,840 $ 79,092 $ 102,820 Marketing/Advertising 50,000 50,000 100,000 150,000 200,000

Research and Development 40,000 50,000 62,500 78,125 97,656 General and Administrative Expenses

Office Rent 30,000 30,000 30,000 30,000 30,000 Insurance 9,600 9,600 9,600 9,600 9,600 Office Utilities 4,800 4,800 4,800 4,800 4,800 Supplies 18,000 18,000 18,000 18,000 18,000 Salaries 120,000 120,000 120,000 120,000 120,000 Benefits 30,000 30,000 30,000 30,000 30,000 Miscellaneous 21,600 21,600 21,600 21,600 21,600

Total Expenses $ 360,000 $ 380,800 $ 457,340 $ 541,217 $ 634,476

EBITDA $ 21,000 $ 114,500 $ 186,550 $ 295,840 $ 453,698

Good Example - Financial Projections

2009 2010 2011 2012 2013 2014 2015Revenue

Network* 123$ 2,854$ 7,223$ 13,730$ 20,707$ 28,336$ Risk Management Services -$ -$ 1,609$ 4,262$ 7,645$ 11,530$

Total Revenue 123$ 2,854$ 8,831$ 17,992$ 28,352$ 39,866$

ExpenseResearch & Technology 20$ 134$ 817$ 2,009$ 3,427$ 4,866$ 6,679$

Labor 10 53 505 1,353$ 2,352$ 3,299$ 4,338$ Data Acquisition 27 111 188$ 287$ 395$ 540$ Technology 0.3 45 158 388$ 663$ 995$ 1,537$ Other 10 9 43 80$ 125$ 177$ 263$

Sales & Client Svcs 3$ 38$ 696$ 1,519$ 2,338$ 3,931$ 5,042$ Labor 32 668 1,464$ 2,252$ 3,787$ 4,798$ Travel 3 5 24 46$ 70$ 122$ 206$ Other 0.1 1 4 9$ 15$ 23$ 38$

General & Administrative 14$ 46$ 229$ 568$ 951$ 1,368$ 1,922$ Total Expense 37$ 218$ 1,742$ 4,095$ 6,715$ 10,165$ 13,643$

Net Income pre-tax (37)$ (95)$ 1,112$ 4,736$ 11,277$ 18,187$ 26,223$

* Cash basis contract value

Capital Market Exchange ($000)

Stream 2

Licensing

Stream 1

Equipment

Lease spaceSalaries

22

Good Example – “Breakeven 2015”Raise $750K

Raise $3 MM