Creating, Managing, & Understanding Startup Financials

Presented by Dan Vishny, CPA, MBAPrincipal – Promised Land Consulting

Chief Primate – Red Ape Cinnamon

Financial Statement Projections - PurposesReality check on Financial Goals & Objectives

Makes you define/quantify your goals & objectives

Demonstrates team is knowledgeable, realistic, committed and on top of the business plan You’ve done your homework You understand the costs involved You understand the market and its potential

Value estimate of the company and the ROI

Financial Projections

Define Your Financial Goals and ObjectivesSufficient funds to launch and execute your plan

Plan and track your cash flow requirements

Establish profitable operations by (date)

Re-invest profits in future growth (increase value of biz)

Provide shareholders liquidity/exit by (date) – align expectations of investors and owners

Provide “what if” scenario analyses

Projections- Minimum Requirements5 year Profit & Loss Statement5 year Balance Sheet5 year Statement of Cash FlowsValuation Statement and ROI AnalysisBreakeven AnalysisWhat if AnalysisDetails in appendices

Monthly 1st yearQuarterly years 2-3; annual for years 4-5Provide Assumptions that drive your figures

Dan’s Financial Projections TemplateCAUTION: This may not be the perfect one

for youDon’t use it blindly (use as a start and build on

it)

Be careful when making changes (it’s excel)Save often and different versions (so you can

go back)Dig into the formulas and how they flow

Make sure that the financials “foot”The balance sheet balancesThe cash account flows from the cash flow

statement

Sample Financial AssumptionsDiscount Rate of at least 12% (for most new

ventures)Sales that can be closed per monthSales cycle-produce/sell/get paidRevenue by month/quarter/yearRevenue growth rateCosts as function of timeEmployee growth/cost ratesMarketing and administrative expensesAccounts payable/receivable termsU.S. Custom duty rates:

http://www.usitc.gov/tata/hts/Inflation estimate…..[others specific to Your business]

Assumptions- Anticipate the QuestionsWhat will you charge for your product and

why?How do your marketing costs support your

sales growth?How do you scale up your business?

How long does it take? How much capital is required?What is the effect on cash flow?

Compare to industry & competition (if possible)Ratios, margin percentages, cost

comparisons…..10Q reports for public companiesValueLine Investment Survey, Standard &

Poor’s Netadvantage Stock Reports, Bloomberg, Etrade….Make sure that your assumptions are

REASONABLE

Estimating Startup CostsOffice set up, computers, building

improvements, etc.Professional services (lawyers, accountants,

etc.)Web site developmentFiling fees, licenses, patent expensesInitial inventory levelsInitial marketing expenses (if necessary)Others specific to your businessDon’t forget that you’ll need adequate

working capital to take you to your next infusion of cash typically ~ 20% of the amount you raise

Keep 20% of each funding round in the bank account as a cash reserve

Financial Elements – Income Statements

Purpose: to manage the company to profitability

Some key elementsRevenues Projected 5 yearsCost of Goods Sold

Sufficient back up for your unit costs (do your homework)

Make sure margins are sufficient Why go into a low profit business? There’s a reason that there’s a Starbuck’s on every

cornerOperating Expenses

Compare to other companies Use realistic estimates Allow a miscellaneous cushion (shows your

conservative)

Income Statement- (continued)Allow for taxes (40%) AND tax loss

carryforwardsDepreciation Expense

Noncash expense, but reduces your income tax expense

Net IncomeCalculate ratios appropriate to your

industry If your ratios vary significantly, explain why

Balance Sheet

Purpose: Indicates financial position of the Company

Some key elements

CASH CASH CASH If you run out of cash-game over

Equity or Net Worth (Assets minus Liabilities) Bank financing will never be available if you do not

have sufficient positive equity… you have no collateral! Liquidity issues

Make sure the balance sheet balances

Statement of Cash FlowsCash Flow helps you determine how much you need

to reach milestones, and when you need cash infusions.

Cash Inflows Revenue Collections Loans Capital Investments Grants & Other Public Funding

Cash Outflows Purchases of Inventory Purchases of Fixed Assets Operating Expenses Interest/Dividends to Investors Income Taxes

Perform Cash Flow analyses on various “what if’s”Raise $ before you are desperate!

Cash is KingTreat it with Respect--- Invest & Spend it Wisely

It’s a finite resource and has a way of running out

Operational Breakeven AnalysisPuts your business in perspectiveWorst case scenario pictureCan you achieve break even and when?

Compare to competitorsCompare to last year

Do you have enough production capacity?Do this analysis as often as possible

What If Analysis-BreakevenWhat is the monthly breakeven in units based on various margins and increases in Marketing Costs?

[---------------------- Margin Per Unit -----------------------]10 $3,000 $3,500 $4,000 $2,500$0 46 40 35 55

Marketing Costs $200,000 52 44 39 62$400,000 57 49 43 69$600,000 63 54 47 75

What is the monthly breakeven in dollars based on various margin %s and increases in Marketing Costs?

[---------------------- Margin Per Unit -----------------------]51,111 60% 65% 70% 40%

$0 $230,813 $213,452 $197,839 $346,239Marketing Costs $200,000 $258,890 $239,140 $221,649 $387,885

$400,000 $286,368 $264,829 $245,458 $429,552$600,000 $314,146 $290,517 $269,268 $471,219

Accumulated Costs Break-even Analysis(When do we get our money back?)

Total Accumulated Revenues = Total Accumulated Costs

Comes directly from Income Analysis

Cash Flow Positive occurs ahead of B/E

B/E Analysis Chart must be in your Plan

0

2

4

68

10

12

14

1 2 3 4 5

Revenue

Cost$

Time

Company ValuationReturn on Investment (ROI)

Terminal Value and ROIDiscounted Cash FlowSales MultiplierEBITDA MultiplierSales of Comparable CompaniesAll the above

Whatever you chooseMake sure the ROI is adequate and reasonable

Successful BootstrappingDefine your goalSet the milestonesSprint to the milestones (it’s not a marathon)Invest in things that your customers seeDiscipline- set the rules and live by themBudget Shmudge it- spend as little as

possibleDon’t stop digging for the hidden treasureGet Financial Advice from people you trust

And not people who tell you what you want to hear

Financial Advice♫ You gotta know when to hold em... ♫Focus on getting the product to marketThe “Language” of accounting & financeProfit, Profit, Profit