finance for start-ups

Finance for Start-upsNSRCEL, IIM Bangalore

1st August 2015

Anjana Vivek

[email protected]

VentureBean Consulting Private Limited

At the start: The Foundation

Strategic Financial Planning

Financial Forecasts

Select Areas: Costing&Pricing / Governance&MIS

Valuation and Value Creation

In Summary

Agenda

2 2


BEFORE YOU START: The Foundation

• WHAT is your Dream?

• Dreams get you started

Best.. LARGEST..

.. first.. .. contribute..

.. impact..

.. change.. 3


BEFORE YOU START: The Foundation

• WHAT is your motivation .. for this Dream?

NAME

FAMEMONEYIMPACT

….

OTHER

4


BEFORE YOU START: Reflections

• WHAT is the stage of your business/idea now?

• WHERE do you want to go from here?– Short Term: In the coming Year– Medium Term: 3-5 years from today– Long Term: 10-15 years

• Does the Long term map/connect to your Dream?

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Finance and Business Planning

• WHAT does the growth plan mean in financial terms

• Finance is the Language of Business • The dreams need to be communicated in this

language

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At the start


Financial Forecasts



In Summary

Agenda

7 7


Financial Planning

Four items to think about:

• Revenue

• Profits/Costs

• Cash / Cash Burn

• Value

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Three dimensions of time:

• Short term: Typically 1 year; month-wise; more easily available, fewer assumptions

• Medium term: Typically 3-5 years; Estimates and Guesstimates… trends

• Long term: Typically 10 – 15 years; less numbers

Action – minute to minute (Plan): Balancing Act between planned activities and unplanned sudden requirements..

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• Projections need to be achievable and realistic in the immediate term.. may get into dream zones in long term

• Periodically FLIP back and forth between time zones

• As you plan, keep an eye on the volatile business environment, changing patterns, disruption, expectation of the future in a few years and more

• As you work, check for patterns, consistency, thought process..

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Projections are just … projections

• Periodically compare: Projections vs. actuals

• Try to see where the difference between reality and projection is and the reason for this– Is the difference due to errors in assumptions made– due to ecosystem changes or..??

• This helps you– understand your business and yourself better– get a better sense of how well you can project – project better the next time around

• Update the projections to reflect reality, this is a continuous and iterative process

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• Forecasting is like a game of probability.. of scenarios and chance.. with a dose of reality thrown in

• “To Trigger Thinking” you may also like to prepare with different scenarios in mind– Pessimistic, realistic and optimistic– Boot-strap and funded– With alternate business models; impacting strategy

and cash flow– And more..

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At the start


Financial Forecasts



In Summary

Agenda

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FINANCIAL FORECAST: Overview

• This is based on and driven by your business model

• It helps to spend significant time thinking of your business strategy and business model

• A business model develops and evolves over time – it is not static


FINANCIAL STATEMENTS

BALANCE SHEET: The State of affairs of the organization:

• PROFIT AND LOSS ACCOUNT: Working results for a given period:

CASH FLOW STATEMENT: Cash receipts & payments during a period:

• If you do not understand the basics of financial statements please take time to learn basics.

• Reference http://www.slideshare.net/rajnishsingh92351/understanding-business-finance

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http://www.slideshare.net/rajnishsingh92351/understanding-business-finance





Where the entrepreneur did not track finance

• A services business took advance in cash. The founder, Tim Perry did not keep track of project-wise expenses, on a regular basis. At the time of finalization of accounts, 4 months after a project was completed, Tim found out that he had made a substantial loss in the project. He realised that if he had tracked expenses, he could have contained expenditure and perhaps even been profitable in this key project.

• If you had been the founder what would you have done differently, to avoid the situation above?

• How can Tim take corrective measures to address this loss?

FINANCIAL STATEMENTS: Caselet


Where the entrepreneur did not track finance

• Ram Kumar focused on sales and operations. He did not know how to read and interpret financial statements. After two years of business, there was a conflict between him and his co-founder Dinesh. Ram was given a statement showing loss in the business. Ram was shocked because he had expected the business to be profitable. He felt that it was his mistake in not keeping track of the finances on a periodic and regular basis.

• If you had been the founder what would you have done differently, to avoid the situation above?

• Is there any way in which Ram can address this issue?

FINANCIAL STATEMENTS: Caselet


Look at• Various revenue streams• Capital expenditure (land, computers,

vehicles, furniture etc.)• Revenue expenditure (Salary, raw material

cost, maintenance and repair costs etc.)

You may be able to convert a capital expenditure into a revenue and vise-versa .. HOW?



Think through • Requirements of cash infusions at different

stages of the business• Resource constraints • Possible valuations at these stages



FINANCIAL FORECAST: Preparation

• Uncertainties and unknowns can be captured through:– Scenario and sensitivity analysis– Templates that allow for different scenarios – i.e.

optimistic, pessimistic, expected. For example making the changes in the input, the output financials should show the impact

• Use tools available – i.e. spreadsheets• Link and create templates, suitable to your

requirement


Financial Forecasts

• Key elements in a forecast– Revenue– Costs: operational, sales and general administration – Capital expenses– Working capital expenses– Earnings– Tax, interest and other costs– Sources of funding– Uses of funding

• Reference http://www.financialexpress.com/news/forecast-financials-in-a-business-plan/83853/0

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http://www.financialexpress.com/news/forecast-financials-in-a-business-plan/83853/0





At the start


Financial Forecasts



In Summary

Agenda

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Costs: Some terms

• Direct • Indirect

• Committed• Flexible

• Fixed • Variable• Semi variable


Life cycle costing

Cost of product from start to finish, for example, • if a mobile phone is built, if the R&D costs are

high for the company, the repairs and maintenance cost to the customer may be low

• Buildings of stone instead of brick and mortar require less lifetime painting and maintenance costs

VentureBean Consulting Private Limited 25

Life cycle costs

• Upstream costs– R&D, design, prototyping, testing, quality

development

• Manufacturing/Operations costs– Purchasing, manufacture/service

• Downstream costs– marketing, sales and distribution, customer

service and warranty


Implementation of LCC• Identify stages in product life cycle• Identify target customer• Understand target customers perspective and

estimate need • Understand costs over multiple users• Analyse cost and pricing in detail


Pricing

• Intuitive• Rule of thumb• Trial and error• Discount• Premium• Cost based• Mark up


Pricing decisions

Influenced by • Costs • Competitors • Customers• Time horizon – short run or long run decisions• Strategic reasons


Pricing for long run• Important to consider long term pricing for

long term sustainability and growth of business

• Initial pricing and short term pricing should keep long term pricing in mind

• Image and brand of business to be considered in pricing

• Costs to be understood and allocated• Consistency in pricing in long term• Target segments to be considered


A cup of coffee

• A cup of coffee costs Rs. 15 to make

• HOW will you plan to price this?

……….. continued..


A cup of coffee

• Will you charge based on the price of coffee in similar coffee shops and restaurants?



A cup of coffee

• Will you charge cost plus a margin?



A cup of coffee

• OR will you think differently?



A cup of coffee

For example ..• You could charge differently during the rush

hour• You could have special rates in non rush hours

• i.e. you could differentiate between your customers, and charge different rates … just like the airlines do!


Some thoughts…

You can … if you want

• Think differently about your pricing• Think differently about your negotiations for pricing and selling• Experiment with pricing..

• For example in e-commerce: a seller experimented with the same total sales price; in one case shipping and handling was shown as included, in the other cases the two were shown separately. The sales pattern showed a difference.

• Pricing can therefore sometimes be a matter of trial and error


Measure, review, correct.. measure..

• Have you prepared a business plan with financial forecasts?

• Is this business plan an implementable one or is it just on paper?

• Have you compared the actual numbers with the business plan numbers?

• What are the signals you get when you compare actuals with forecasts?

• Regular capturing, monitoring and analysis of data is an important and critical part of planning.

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• Capture data periodically; monthly/fortnightly/weekly …

• Design a reporting Management Information System (MIS) to evaluate– the Key Performance Indices (KPIs) – Key Value Drivers and – Key Value Depleters

• Reference:• http://

bangalore.citizenmatters.in/blogs/entrepreneur-s-corner/blog_posts/135-business-plan 37

http://bangalore.citizenmatters.in/blogs/entrepreneur-s-corner/blog_posts/135-business-plan






• An individual measures height, weight, BP, sugar levels etc.. as key parameters for wellness

• What are the Wellness and Value measures for your business/idea?– Top Line: Revenue– Bottom Line: earnings/profits– Cash Flow– Number of employees– Key costs– More illustrative parameters to follow in next few

slides..

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Quality parameters - Example• QUALITY CAN IMPACT VALUATION MULTIPLE• Illustrative parameters, for sales

– Sales Quantity – Quality of revenue - in terms of

product/service/vertical/location etc.– Average revenue per employee– Number of customers, number of high value customers– Number of customers who are above a certain revenue

or category, eg. MNC’s, listed companies ..– New customers added– Customers lost– Pipeline customers– Etc.

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• More illustrative indicative parameters – Key expenses – Number of employees– Average cost per employee – Receivables and payables– Cash balance– Key assets– Loans outstanding– Equity capital

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• Design MIS with care:– too little information is not helpful– too much data can be counter productive

• Analyse data, look for patterns and trends, recast– Check for variances over time, with underlying causes– Compare with benchmark companies– Factor learnings into business strategy and action plan– Recast and redo projections and plan if required

• Periodically revisit the MIS framework and add or update parameters

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At the start


Financial Forecasts



In Summary

Agenda

42 42


Strategic Planning – Creating value

• Alliances and partnerships, whether relating to advisors/mentors or to operations or to investment should lead to value creation not value depletion

• Understand financial and non-financial aspects of business and transactions and impact on growth and sustainability

• Most importantly, is it adding to your brand perception in the market or depleting from this

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Strategic Planning – Creating value

• Preparing for alliances and partnerships across the life cycle, this includes– Partner identification– Due diligence review– Forecasts and valuation (with and without deal)– Negotiation, acceptable and non-acceptable terms

(deal breaker and deal maker issues)– Other deal terms and conditions– Deal closure– Post deal integration– Exit plan if required for eg. for VC

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Valuation• Based on

– Tangibles and intangibles– Data and assumptions– Subjectivity and objectivity

• Many methods of computation including but not limited to– Multiples of revenue, earning, user base etc– Cash flow based, discounted– Exit valuation– Cost based

• Must factor statutory, accounting, tax implications

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Valuation• Driven by markets including flavor of season,

competitive scenario, team at helm etc.• Driven by percentage of stake offered, negotiation

etc.• Driven by demand vs. supply• Deals can sometimes be structured to

accommodate valuation perceptions; by linking to future performance etc.

• For more on valuation: detailed notes are at http://www.slideshare.net/anjanavivek/valuation-basics (from the popular set of the TOP 4% and 5% viewed on SlideShare in 2013, 2014)

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http://www.slideshare.net/anjanavivek/valuation-basics

http://www.slideshare.net/anjanavivek/valuation-basics


At the start


Financial Forecasts



In Summary: Beyond Finance

Agenda

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MOST IMPORTANTLYEntrepreneurship needs an understanding of• People• Business• Environment• Deal issues• Synergies

In addition to finance..

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Financial Planning• Finance involves

– Financial planning– Resource allocation– Funding strategy– Managing working capital needs – Managing cash– Monitoring, measuring, governance systems– Understanding impact of business model on

finance/strategy/cash flow– Value creation– And more

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MOST IMPORTANTLY

• Finance is important to survival, sustainability and success; however finance is not everything

• As …

All the entrepreneurs who have money are not successful

&

All those with no money or limited money are not unsuccessful

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MOST IMPORTANTLY

• Finance is important to survival, sustainability and success; however finance is not everything

• As…

All VC funded companies do not succeed

&

All non-funded companies do not fail

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In Summary

• Take care and plan well ..

• Execute .. Monitor.. Evaluate.. Adjust.. Update.. Execute..

• And Success will come your way

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In Summary

• Wishing you all the Very Best in your Entrepreneurial Journey

• Delighted to invite you to view/follow for periodic insights, class notes & more, from thought leaders, academicians…

@ The VentureBean K.Hub: (Knowledge Hub)

http://www.linkedin.com/company/venturebean-consulting-private-limited

https://twitter.com/VentureBean

www.slideshare.net/anjanavivek;

https://twitter.com/anjana_vivek

• Contact for more information and inputs: [email protected]

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http://www.slideshare.net/anjanavivek

https://twitter.com/anjana_vivek

mailto:[email protected]

finance for start-ups

Small Business & Entrepreneurship

business planning

short term

immediate term

financial terms finance

guesstimates trends

coming year medium term

fewer assumptions medium

language of business