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Bhavan Suri
Business Plan Finance Workshop
Bhavan Suri
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Agenda
Introductions
Finance Overview (10 10:10 AM)
Financial Statements
Income Statements
Examples and Discussion Lunch and team breakout (11:30 12:00 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 thatdetails your business history, current standingand future plans.
The business plan is the first document that mostinvestors 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 thenumbers come together. The single most important analysis in a business plan is a
cash flow plan, because cash is the most critical element inbusiness.
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, personnelexpenses and other expenses.
And you need to understand your market before doing asales 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, generalassumptions, 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 couldntpay their expenses.
Working capital is critical to business health.
Unfortunately, we dont see the cash implicationsas clearly as we should, which is one of the bestreasons 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 beingreceived and spent by abusiness during a definedperiod of time, sometimestied to a specific project.
This is very important fordescribing the health of thebusiness because althoughyou may have made $1000
in sales, you still may haveto wait to collect that cash(due to the terms you havewith the customer).
Transaction In Out
Incoming Loan $50.00
Sales (which were paid for in cash) $30.00
Materials ($10.00)
Labor ($10.00)
Purchased Capital ($10.00)
Loan Repayment ($5.00)
taxes ($5.00)
TOTAL Cash Flow for the Period $40.00
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Finance Income Statement
Income statements for
companies indicate howRevenue (money receivedfrom the sale of productsand services beforeexpenses are taken out,
also known as the "topline") is transformed intoNet Income (the resultafter all revenues andexpenses have beenaccounted for, also knownas the "bottom line").
Also called Profit andLoss Account (P&L).
Revenues
Net Sales $ 3,400,000
Rent revenue $ 40,000
Interest revenue $ 12,000
Total revenue $ 3,452,000
Expenses (usually sorted by amount)
Cost of goods sold $ 2,000,000
Selling expenses $ 450,000
Administrative expenses $ 350,000
Interest expense $ 45,000
Total expense $ 2,845,000
Income before taxes $ 607,000
Income taxes $ 180,600
Net income $ 426,400
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Finance Balance Sheet
A balance sheet is a
statement of the bookvalue of a business at aparticular date.
A balance sheet is oftendescribed as a "snapshot"
of the company's financialcondition on a given date.Of the basic financialstatements, the balancesheet is the only statement
which applies to a singlepoint in time, instead of aperiod of time.
Assets
Current assets
Cash
Marketable securities
Accounts receivable
Net inventory
Other current assets
Total current assets
Fixed assets (or property, plant, and equipment - PP&E)
Property
Plant & equipment
Gross PP&E
(Accumulated depreciation)
Net PP&E
Total assets
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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 (S&M).
Research and Development (R&D). General and Administrative (GA).
Operating Margin (Earnings Before Interest and Tax).
EBIT = Gross Profit S&M R&D 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 - Salesminus costs are profit.
We have $150 in the bank.
The balance sheet shows the $100 in originalcapital plus $50 in earnings, which are equal tothe $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 thebank.
Instead, a customer owes you $150 this isknown 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 thebank.
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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 forcash.
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 balancesheet is more complex.
Now the case is more like what you have withreal 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 thebottom line of the statement.
Expenses start with personnel and include rent, utilities,equipment, advertising, sales commissions, publicrelations, and other expenses.
The result is profits - Profits are what is left over after youstart with sales, then subtract cost of sales, expenses, andtaxes.
The Income statement is the same as the Profit and Lossstatement.
Also known as "pro forma," meaning projected, as in "proforma income" or "pro forma profit and loss.
The pro forma income is the same as a standard incomestatement 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 yourproducts or services.
E.g. purchases of raw materials, wages (and payroll taxes)of employees directly involved in producing yourproducts/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 elementsof 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 orbuying 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 grossmargin, an importantratio for comparisons
and analysis.
A more detailed Profitand Loss is shown inthe next illustration.
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Operating expensesdivided into categories,including Sales and
Marketing expensesand General andAdministrativeexpenses (SG&A).
The sum of expensesultimately determinesthe company'sprofitability.
This is the budgetedbusiness plan.
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Balance Sheet - Assets
How will the year's operations affect assets,
debts, and equity assuming significant salesgrowth in the coming year:
ASSETS: Inventory and Accounts Receivable will have togrow. New equipment may be needed for increasedproduction. You may draw down on cash to financesome 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 byprofits retained in the business as Retained Earnings.
Your Profit & Loss Projection shows how much might be availablefrom that source.
Funds may also be contributed by the owners throughcontributions of more Invested Capital or loans to the company(Notes Payable to Stockholders).
Suppliers may provide some of the financing via increasedAccounts 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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A B C D E F G H
Basic Excel: Balance SheetDec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05
Assets
Accounts Receivable 500$ 1,000$ 2,000$ 4,000$ 8,000$ 16,000$Inventory 600$ 630$ 662$ 695$ 729$ 766$Prepaid Expenses 200$ 230$ 260$ 290$ 320$ 350$Property, Plant, Equipment 11,900$ 12,810$ 13,734$ 14,676$ 15,639$ 16,628$
Total 13,200$ 14,670$ 16,656$ 19,660$ 24,689$ 33,744$
Liabilities and Equity
Accounts Payable 730$ 873$ 924$ 1,087$ 1,175$ 1,267$Debt 1,000$ 800$ 600$ 400$ 200$ -$Preferred Equity 500$ 500$ 500$ 500$ 500$ 500$Common Equity 10,970$ 12,497$ 14,632$ 17,673$ 22,814$ 31,977$
Total 13,200$ 14,670$ 16,656$ 19,660$ 24,689$ 33,744$
Capital Account
Starting PPE 11,000$ 11,900$ 12,810$ 13,734$ 14,676$ 15,639$Depreciation 1,100$ 1,190$ 1,281$ 1,373$ 1,468$ 1,564$Capital Expenditure 2,000$ 2,100$ 2,205$ 2,315$ 2,431$ 2,553$
Ending PPE 11,900$ 12,810$ 13,734$ 14,676$ 15,639$ 16,628$
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Balance Sheet
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Basic Excel: Balance SheetDec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05
Assets
Accounts Receivable 500$ 1,000$ 2,000$ 4,000$ 8,000$ 16,000$Inventory 600$ 630$ 662$ 695$ 729$ 766$Prepaid Expenses 200$ 230$ 260$ 290$ 320$ 350$Property, Plant, Equipment 11,900$ 12,810$ 13,734$ 14,676$ 15,639$ 16,628$
Total 13,200$ 14,670$ 16,656$ 19,660$ 24,689$ 33,744$
Liabilities and Equity
Accounts Payable 730$ 873$ 924$ 1,087$ 1,175$ 1,267$Debt 1,000$ 800$ 600$ 400$ 200$ -$Preferred Equity 500$ 500$ 500$ 500$ 500$ 500$Common Equity 10,970$ 12,497$ 14,632$ 17,673$ 22,814$ 31,977$
Total 13,200$ 14,670$ 16,656$ 19,660$ 24,689$ 33,744$
Capital Account
Starting PPE 11,000$ 11,900$ 12,810$ 13,734$ 14,676$ 15,639$Depreciation 1,100$ 1,190$ 1,281$ 1,373$ 1,468$ 1,564$Capital Expenditure 2,000$ 2,100$ 2,205$ 2,315$ 2,431$ 2,553$
Ending PPE 11,900$ 12,810$ 13,734$ 14,676$ 15,639$ 16,628$
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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 fromexisting competitors?
How will you price your product(s)?
Based on your growth, how many products (volume) do youneed 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 thisgrowth?
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Examples and Discussion
Starting from scratch:
Forecasting sales is the starting point for the financialprojection.
The sales forecast is key, so it is important to use realisticestimates.
Divide projected monthly sales into "Categories which are
divisions that make sense for your type of business. Examplecategories 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 businessescan delete this section).
Analyze past sales and note seasonal/periodic fluctuations;determine what caused them and when they are expected torecur.
Build these fluctuations into your projections for the comingyear.
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Examples and Discussion
Sales Forecast (12 Months)Enter your Company Name here
Fiscal Year Begins Jun-05
12-month Sales Forecast Sales History
Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06
Annual
Totals
Current
Month
Ending
mm/yy 2004 2003 2002
Cat 1 units sold 0
Sale price @ unit
Cat 1 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Cat 2 units sold 0
Sale price @ unit
Cat 2 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Cat 3 units sold 0Sale price @ unit
Cat 3 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Cat 4 units sold 0
Sale price @ unit
Cat 4 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Cat 5 units sold 0
Sale price @ unit
Cat 5 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Cat 6 units sold 0
Sale price @ unit
Cat 6 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Cat 7 units sold 0
Sale price @ unit
Cat 7 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
All Categories 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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Examples and Discussion
Cash Flow:
On the Profit & Loss Projection, check line by line whencash should come and go. This is to determine when youwill actually collect from customers.
On the expense side, predict when you will actually haveto write the check to pay those bills.
Most items will be the same as on the P&L. Rent andutility bills, for example, are paid in the month they areincurred.
Insurance, taxes, for example, may be payablequarterly or semiannually, even though you recognize
them as monthly expenses.
The payoff for an accurate cash flow is the ability tomanage and forecast working capital needs.
Cash Flow (12 months) Enter Company Name Here Fiscal Year Begins: Jan 06
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Cash Flow (12 months) Enter Company Name Here Fiscal Year Begins: Jan-06Pre-Startup
ESTJan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06
Total Item
EST
Cash on Hand(beginning of
month)0 0 0 0 0 0 0 0 0 0 0 0 0
CASH RECEIPTS
Cash Sales
Collections fm CR accounts
Loan/ other cash inj.
TOTAL CASH RECEIPTS 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Cash Available (before
cash out)0 0 0 0 0 0 0 0 0 0 0 0 0 0
CASH PAID OUT
Purchases (merchandise)
Purchases (specify)
Purchases (specify)
Gross wages (exact withdrawal)
Payroll expenses (taxes, etc.)
Outside services
Supplies (office & oper.)
Repairs & maintenance
Advertising
Car, delivery & travel
Accounting & legal
Rent
Telephone
Utilities
Insurance
Taxes (real estate, etc.)
Interest
Other expenses (specify)
Other (specify)
Other (specify)
Miscellaneous
SUBTOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Loan principal payment
Capital purchase (specify)
Other startup costs
Reserve and/or Escrow
Owners' WithdrawalTOTAL CASH PAID OUT 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Cash Position (end of month) 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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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 whichaccountants and investors are accustomed.
Provide past results (if applicable), and two tothree years of projections (pro forma).
When presenting to investors create threescenarios a worst case, expected, and bestcase.
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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).
Source: XXX
Worldwide Web Analytics Software Spend
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500
1,000
1,500
2,000
2,500
3,000
3,500
2006 2007 2008 2009 2010 2011
TotalSpend
in$millions
Software as a Service Enterprise Software Total
l S l k /C
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Example - Sample Market/Company
Profitable in 2008.
Revenue CAGR of 150% over 6 years.
2005A 2006A 2007A 2008E 2009E 2010E 2011E
($ in thousands) Revenue 195 1,170 4,680 13,104 23,587 35,381 53,071
Cost of revenue 432 1,346 3,136 6,342 7,784 11,286 16,611
Gross profit (237) (176) 1,544 6,762 15,803 24,094 36,460Gross profit margin -121.5% -15.0% 33.0% 51.6% 67.0% 68.1% 68.7%
Operating expenses
Sales and marketing 800 1,463 2,340 3,407 6,133 9,199 13,799Research and development 1,209 1,697 1,778 1,966 3,538 5,307 7,961General and Administrative 174 257 328 655 1,179 1,769 2,654
EBIT (2,419) (3,592) (2,902) 734 4,953 7,819 12,047
Operating Margin -1240.5% -307.0% -62.0% 5.6% 21.0% 22.1% 22.7%
Net Interest and Other (0) (1) (0) 2 4 4 9Pretax income / (loss) (2,419) (3,593) (2,902) 735 4,957 7,824 12,056
Tax Provision (Reported) 0 0 0 88 1,685 2,660 4,099Net income (2,419) (3,593) (2,902) 647 3,272 5,164 7,957
W k h P j
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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 generaterevenue starting at $20,000 but will never exceed 1% of consultingrevenue.
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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 growdoubling 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 R&D costs associated with product sales.
Create a Profit and Loss projection for 2008 out through 2013.
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