finance workshop final

8/9/2019 Finance Workshop Final

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Bhavan Suri

Business Plan – Finance Workshop

Bhavan Suri

http://www.northwestern.edu/




Bhavan Suri

Agenda

• Introductions

• Finance Overview (10 – 10:10 AM)

• Financial Statements

• Income Statements

• Examples and Discussion• Lunch (11:30 – 12:00 PM)

• Team Breakout Session – Workshop (12 – 1:30PM)

• Summary Presentations from Teams (1:30 – 2:30PM)

• 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

– Investor’s 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 numberscome together

• The single most important analysis in a business plan is a cashflow plan, because cash is the most critical element in business

• However, you can't do a cash flow plan without looking at theincome statement and balance sheets as well

• But you really can't do the income statement without looking atsales, cost of sales, personnel expenses and other expenses, soyou need those too

• And to do a sales forecast without understanding your market, soa 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 andcharts around the text.





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Finance Overview

• We are trained to think of business as profits:

sales minus costs and expenses

• We need to manage cash as well

• When starting a new business, you think of whatit costs to make the product, what you can sell it

for, and what the profits might be

• We are trained to think of business as salesminus costs and expenses, which is profits

• Unfortunately, we spend cash in a business




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Finance Overview

• Profitable companies can go broke because they

had all their money tied up in assets and couldn’tpay their expenses

• Working capital is critical to business health

• Unfortunately, we don’t 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.




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 and

Loss 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





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





Financial Statements

• Lets start with $100, which we’ll 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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• 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• Below is the income statement and balance sheet





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• The business has sold 3 units and made $150

profit. In theory it has $250 in the bank

• Let’s 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 don’t 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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• 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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• 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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• 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

• 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 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 “budgeted” business 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

12

3

4

5

6

7

8

910

11

12

13

14

15

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1718

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20

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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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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 realisticestimates

• Divide projected monthly sales into "Categories“ which aredivisions 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 candelete 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

• 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) C 06






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Cash Flow (12 months) Enter Company Name Here Fiscal Year Begins: Jan-06

Pre-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 0Total 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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Workshop Project

• Consulting Company

– Basic Revenue Assumptions:

• Hours per week that you bill per consultant: 48

• Current (2006) Utilization Rate is 66%, assume this will go up to75%

•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 2006 out through 2011


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