Document 6488660
Transcription
Document 6488660
If the Business Plan is the then the financials are the measurement of your expectations for the future. This document is a tool to help guide you through the basic understanding of how to build a great financial model. It will introduce the essential understanding of what to include; cover what the Balance Sheet and Cash Flow Statements are & how to create them, plus include some key principles to keep in mind. A lot of material exists out there for you to use and build really complex models; but start with these basic building blocks keeping it simple and you will be ok. b l u e p r i n t f o r t a k i n g a c t i o n , Barry Bisson, Shad’s President has made available an excellent excel template, I recommend you download this and try and use this model in the creation of your company’s financial projections. The following tutorial will help you understand the basic fundamentals behind this model. Hey! Numbers can be fun; the trick is to keep them realistic with plenty of backed-up assumptions. When it comes to numbers, investors aren’t always looking for the business plan with the best and most ambitious financial projections. Investors are smart; they know anyone with some basic excel skills can build financial models with 4th and 5th year sales projections of $30 to $60 million. What they are looking for here is your reasoning behind the projections and your understanding of how you plan on obtaining them. How you plan on scaling your business, which revenue model makes sense for your idea to determine how much capital ($) you need, and whether you have considered all your assumptions in the business plan carefully when it comes to mapping out a financial cost/reward analysis. → k g e e r o t ’ s v e r y i m p o r t a n t t h a t y o u e x p l a i n a l l o f y o u r a s s u m p t i o n s u s e d t o r e a c h y o u r f i n a n c i a l c o n c l u s i o n s , I p t w h y e o m u s r b i m u p s i l n e e b s u s - t t e h x e p s l e a i a n r y e o v u e r r p y l i a m n ; p t o r h e t a m a n t a r r k e e t a s s i t z e o , t e x h p e l p a i r n i c y o i n u g r , r g e r a o s s o s n m i a n g r g i n s , f u n d i n g n e e d e d t o . (I’ll talk about each of these as we go through the different elements) Typically you are required to think at least 5 years down the road, detail out a 12-18 month plan and yearly after that. Don’t over think the financials; spend your time in your groups coming up with the startup story, the technology, the market you want to jump into & why you think you have something of value to change the world and “ ”. Talk to people; don’t be afraid to ask questions, getting information is the most important thing when it comes to building great value propositions and financial models around them. Map out the strategy to execute your plan; the financials are just a reflection of what you need to get you there, and why it will be rewarding to make an impact in that area. m a k e a m e a n i n g f u l c o n t r i b u t i o n n p r e p a r i n g f o r b a t t l e h I a v e a l w a y s f o u n d t h a t p l a n s a r e u s e l e s s OCE Shad Valley Financial Tutorial 2008 – Dwight , b I u t p l a n n i n g i s i n d i s p e n s a b l e . D Eisenhower Eisenhower of course was the General of the US army during the Second World War. Planning is always important, and writing out this plan is absolutely a critical start. It ties everything together and prepares you for the first step, the action part. There are four basic financial statements; T h I n e B c o a l m a n e S c t e S a t e h e m e : Reporting a company’s assets, liabilities, and net equity at a point in time t e n : Also referred to as the , reports income, expenses and profits : Explains the changes in a company’s retained earning : Reports on a company’s cash flow activities, operating, investing and financing activities r t o f i t a n d L o s s S t a t e m e n t P * S t a t e m e n t o f R e C a s h F l o w S t a t e m e t n a i n e d E a r n i n g s t Let’s go over each now to get a basic understanding and visual: Assets Current Assets: Cash Accounts Receivable Inventories Liabilities and Owners' Equity Liabilities Notes Payable $ 30,000 Accounts Payable 0 Total Liabilities $ 30,000 Owners equity Capital Stock $7,800 Retained Earnings $0 Total owners' equity $7,800 A Balance sheet is the snapshot of the company’s financial condition. It is the sum of all the Assets, Liabilities and Owners Long-term Assets: Equity at any given point in Tools and equipment 25000 time. You can see how the Assets = Liabilities, this is Total $37,800 Total $37,800 always the case. Of all the basic financial statements, the balance sheet is the only statement which applies to a single point in time. At the startup stage you will be more driven to focusing your efforts on the Income & Cash Flow Statements because there we can evaluate the Revenues vs. Expenses more closely & keep an eye on the all important Cash balances. $6,600 6000 200 Assets - Liabilities = Owners Equity is the magic equalizer; basically all the Assets (cash, equipment, inventories, and accounts receivables) less all that you owe, your Expenses (Bank debt, Accounts Payable) equal the remaining capital is your company’s net worth. This net worth or “equity” then becomes the value to its owners “shareholders”. So you can see in a minute when we look at the Income Statement, when a company makes money: Revenue is greater > then Expenses = a net income occurs (which gets feed back into the Balance Sheet under Retained Earnings (this is the Retained Earnings Statement). O w n e r ’ s e q u i t y I’ll return to the importance of seeking Investment in my section on Raising Money: OCE Shad Valley Financial Tutorial 2008 - Income Statement :ABC Corp For year end December 31 2008 Revenues: Gross Profit “Top Line” $496,397 Expenses: Advertising Insurance Legal & Consulting Services Utilities Printing, Postage & Stationary Licenses Band & Credit Card fees Bookkeeping Employees Rental Mortagaes and Fees Total Expenses Cash outflows incurred during period for delivering product or service * The Income Statement: is where you will really have an opportunity to see the model in action. This example is a snapshot of the year end accumulation, but you can extrapolate this out on a month to month spreadsheet as well. This statement indicates how (Money received from the sale of a product or service before expenses) are shown, then transformed into which are (the results after all 12500 1500 25000 3000 35000 5000 1200 6500 120000 45000 R e n u N n e e s t c o m e revenue and expenses * are accounted for, also known as the bottom line). i -$ 254,700 Net Income v I n c u r r e d t o p r “Bottom Line” e $241,697 o d u c e t h a t r e v e n u e Because unlike in the Balance Sheet the Income Statement shows a period of time & not a single moment in time, we can build a projection model around this basic principle: Notes & Assumptions - 5 full time employees (owners) $2k/month - Mortgage small commercial building ($3500/month) - Legal work on 3 Int. patents & consulting fees - Licenses & Shipping costs to distribution partners Revenue – Expenses = Net Income *I mention that the expenses included here are only those incurred to produce the revenue ( ). Other larger expenditures are recorded on the Cash Flow and Balance Sheet statements, stuff like buying an office building, a car, or equipment. i o r s e r v i c e s o l . e . P r o d u c t d (Balance Sheet and Income Statement changes) Let’s say you need to buy a $50,000 pieces of assembly equipment, this amount does not show up in month 1 of your Income Statement, it does however have to be recorded. So back in the Balance Sheet you would indicate (let’s say bank debt is used, then liabilities ↑ by $50,000 (bank note) and assets also ↑ by $50,000, equipment – but all the costs associated with running that machine are included in expense here in the Income Statement; the rent paid to house it, the utility costs, all the materials, including let’s say the 7% bank fee on the $50K, so 7% annual over let’s say 20 years (so treat it like you would a mortgage) Cost $50,000, interest rate 7% annual, period 20 years – find a good mortgage calculator online and bingo- Annual payment $4,719.65 (its gets complicated when you start looking into it, annual vs. monthly payments- it all has to do with the interest periods) but don’t worry, the important thing here is to show what gets recorded in the Balance Sheet and what gets recorded in the Income statement. t E x o u g h e x a m p l e b u t y o u c a n h a n d l e i t ! a m p l r e e m e m b e r Income statements can get allot more complex, including things like Operating Profit, Dividends, Irregular items, and stuff like that- stick to the basics and you’ll have a great model that makes sense. Next you may want to start extracting some breakdowns from this information. For example the expenses represent your COGS “ ”, so you can capture a per unit value on this by C o s t o f G o o d s S o l d OCE Shad Valley Financial Tutorial 2008 dividing the total expenses by the number of units produced, this will give you an idea on how to price your product/service. Show some charts on your expense curves as you change prices (which will affect your revenues and bottom-line numbers), include more people on your payroll, or reduce costs by purchasing more equipment, or even form key partnerships and distribution deals down the road- all will influence your model and various financial statements. In the building of your model you will begin to realize certain items are linked to key drives, like the number of units you sell over time, the price/sales factor, all tie into your company’s growth story here and all are reflected in your Income & Cash Flow Statements. So as mentioned previously; the statement of retained earnings is simply the link between the Income Statement and the Balance Sheet. Retained earnings are part of the balance sheet as you recall under the Section, (sometimes also referred to as the Stockholders Equity- I’ll get to this later.) The retained earnings account on the balance sheet is said to represent an “ ” since net profit and losses are added/subtracted from this section over time. The General equation can be expressed as the following: w n e r E s q u i t y O a c c u m u l a t i o n o f e a r n i n g s Ending Retained Earnings= Beginning Retained Earnings – Investments – Dividends Paid + Net Income The basic principle if you recall is that the balance sheet always balances. So let’s merge the two statements previously presented (the Income and Balance Sheet Statements): After 1 year in business the company’s net income was at the end of 2008. But we are missing one important deduction on this, anyone recognize what it is? Well Brad Pitt put it best in the movie Meeting Joe Black- “ ” don’t forget the Canadian government is a partner in this business to. Check out the local tax laws in the province you want to incorporate. It looks like the Canadian Government will be lowering tax rates in 2008, to 19.5% and the small business tax rate falls to 11% based on Federal tax applying to the first $400,000 of active business income. Ontario looks to be taxing small businesses at 5.5% - but do your own homework, check out the info KPMG has posted or just Google it, you will find the tax rates posted for the next couple of years & this should be incorporated into your models, it’s not that difficult- hopefully you have earnings to be taxed ☺. So after tax net income then becomes; ($241,697-(241,697*16.5%)) $ n t h i s w o r l d , n o t h i n g i s 2 c 4 e 1 r t , a 6 i 9 7 n b u t d e a t h a n d t a x e s I $ 2 0 1 , 8 1 7 Assuming that the company decides to do nothing else with that money earned (i.e. not to Pay out to shareholders in the form of a dividend ( , or pay debt back ( & if the company wishes to invest it will ) with these earnings. Remember always keeping it balanced. p w h i c w h i l ↓ l C a s h a n ↓ d R e t a i n e d e a r n i g n s t k o e e t h b e a l a n c ) e p t ↓ d b e t ) h u s i n t h e c a s e o f n o t h e i g n d b e t s h i f t i r g n ; ( p a y a e q u i $ m f o r v i R g n e $ a t r a o i u n e n E d d o a n r n t h i e g n A & s s s C e t a s s i d h a e f s r s o e m t s t o n ↓ o e A L s i s b a e t i ( l C i t i a e s s h i . ) e t o p m e n t o r l a n d f o r e x a m l e a l s o ↓ r e t a i n e d e a r Balance Sheet ABC Inc. Dec 31st 2008 Assets Liabilities and Owners' Equity Current Assets: Liabilities Cash $208,417 Notes Payable $ 30,000 Accounts Receivable 6000 Accounts Payable 0 Inventories 200 Total Liabilities $ 30,000 Owners equity Long-term Assets: Capital Stock $7,800 Tools and equipment 25000 Retained Earnings $201,817 Total owners' equity $209,617 Total m o $239,617 Total $239,617 n i n g s So we would see the following happen on the Balance Sheet: Keep in mind that that money earned (Net income) less the taxes and other expenses not only shows up in our Retained Earning portion in the Balance Sheet, but also our Cash, because we like the cash right! That takes us to our next Financial Model: The Cash Flow OCE Shad Valley Financial Tutorial 2008 Period Ending Opening Cash ABC Inc. Cash Flow Statement Sep-08 Oct-08 0 $ 1,412,910 Cash Flow From Operations Net Income -$ Plus Depreciation $ (Increase)/Decrease in Accounts Recivable -$ (Increase)/Decrease in Inventory -$ (Increase)/Decrease Accounts Payable $ (Increase)/Decrease in Income Taxes Payable -$ Total Cash Flow from Operations -$ 10,825 5,166 109,500 5,700 72,000 1,031 49,890 $ -4300 5000 -20000 -7000 30000 -950 2,750 --------------- 0 0 0 0 0 ------------- 0 -37350 0 0 37,350 ------------- This statement shows a company’s incoming and outgoing money (sources and uses of cash) during a period of time (often monthly for startups.) This is where changes in the Balance Sheet and Income Statement affected cash and in particularly the three ; areas cash is utilized: and . Simply put, this is where the rubber hits the road for a startup, can the company survive and grow, how long can the company afford to pay bills, and cover liabilities, while growing its top-line Net Income. a O Cash Flow from Financing Activities Increase in Borrowed Funds (Loan Principlal Payments) (Increase)/Decrease in Share Capital (Dividend Payments) Total Cash Flow from Financing Activities -$ -$ -$ $ -$ 100,000 250,000 150,000 500,000 $ 1,500,000 -37200 500000 $ $ 1,962,800 -$ e r I t i n g n v e s t i n g a F Cash Flow from Investing Activities (Increase)/Decrease in Land (Increase)/Decrease in Buildings (Increase)/Decrease Equipment (Increase)/Decrease Vehicles Total Cash Flow from Investing Activities p i n n c i n g This example has been based on Barry Bisson’s Excel file, which is a great tool you can use to build your financial projections. Test it out and you can begin to see how Net Cash Flow $ 1,412,910 -$ 34,600 --these financial statements interact with Closing Cash $ 1,412,910 $ 1,378,310 --each other, each providing a different Notes & Assumptions perspective on the company’s status. - Net Income from Income Statement Barry’s model includes some complex - large upfront Accounts Payable (due to payment cycle) - Bank Loan $1.5 Million at x% rate systems to record and display various - Capital investments into Land Building and Equipment financial metrics. These include the interest expenses on capital equipment, the costs associated with borrowing money, setting up mortgages, account payable and receivable systems for collections, and pricing and basic costing models. He has also included detailed descriptions of each input, plus charts that show you the growth of your projections. I highly recommend you use this model, play with it and take some of the basic lessons learned in this tutorial and apply them to this terrific excel file, see how these statements link into each other and interact. You can see this page once you begin, (with red descriptive tabs detailing each field) fill out as much information as possible (Year 1-3) that fits with your strategy. Scroll through the different pages to fill in each section, the financial statements will be created around these inputs. Have fun! OCE Shad Valley Financial Tutorial 2008 First let’s start with the story you have in your mind, this great new technology that will change the world, but all you need is that million dollar investment, right! So remember there are many ways to get to market, some far better than others, depending on your situation. Let’s look back at the Balance Sheet again, in particular the section on Owners Equity; that magical equalizer in this “balance” between assets and liabilities. This is your Share, Stock, Shareholders Equity whatever you call it, this is the stake the original founders have. Right now its 100% yours. The trick is if you really have that amazing new product, you want to keep as much of this ownership as possible. So when your Net Income flips positive and keep growing as you build the business you get to expand your wealth through that participation we call shares. So how can we get the money we need, at the best risk/reward ratio; raising money: S o u r c - - - e s o f f u n d s : (I’m sure there are more ways; these are just off the top of my head) Investors (the ones who take equity in your company in exchange for lots of cash: you share your pie with more people) – Venture Capitalists – basically in the Balance Sheet Cash goes up and Owners Equity (Capital Stock) goes up the same amount- Barry Bisson puts this best in his financial model- once you have all your info put into the model take the month with the largest accumulated negative cash number and that is the basic amount of cash you need- plus a nice cushion- many 2x this amount to be safe. Friends, Family, Fools, & Angels, the friendlier of the bunch, they provide the seed capital to many dreams regrettably 90%+ of all small business fail but let’s not go thereBanks – well basically they will lend you a million if you have a million, but many banks do have small business loans and can provide the gateway to many funds that might help you out. Partnerships & Licenses, basically you have a great idea so you go find the business partner to bring it to reality. In exchange you might be transferring full rights to your intellectual property for a piece of the action if successful. Key is to protect then seek partnership *Protect your IP* Government programs, there are lots of support organizations out there, if all you need is a few thousand and some supportive networked connections this is a great place to start. Customers, yes what about the customer? This is perhaps the most overlooked by many startup dreamers; why not focus on your first sale, an excellent place to start – probably the best. Gain validation, leverage potential sales orders when you‘re looking for support money. Lookup the term Bootstrapping Keep in mind there is a balance between debt and equity you should maintain. The more you borrow, the higher the debt/equity ratio – debt has the power to shut you down if you can’t pay, equity is a little more flexible, remember selling shares of ownership (equity) means “selling claims on future cash flows” which is ok as long as you are comfortable with the investor and what you are giving up & gain from the deal $ – this is the risk/rewarded paradigm you need to figure out. OCE Shad Valley Financial Tutorial 2008 T i p s f o r B a r r y ’ s f i n a n c i a l M o d e l : Objectives of this model • Most important part of this model is the segmentation of the market. You need to learn how to segment your market. Know how you will target and grow your business, expanding into new markets, timelines and volumes. • The end result is the share capital requirement. How much equity financing will you need, equal to or greater than the month with the highest negative closing cash balance s s u m p t i o n s s h e e t A Price goes down as manufacturing becomes more efficient. COGS “ ” input can be several things such as raw material, labor, etc. o s t o f o G o d s S o l d C a S l e s h S e e t 1. This is where you determine your target market strategy. Careful not to double count when calculating your market estimate! For example, when expanding to Canada, don’t count in Ontario and Québec, which were your initial markets when you started. 2. Then go to estimate your market size, market share and growth. 3. Calculate unit sales forecast 4. Estimate dollars generated by sales 5. Apply a seasonality factor. It is normal to start with zero sales when you first open. For business, product/service specific G s S h e e t O C The number indicates the gross of the sum of all inputs. These are the direct costs attributable to the production of the goods sold by a company. Includes the materials costs used in creating the goods, and direct labour costs, it does not include the indirect expenses such as distribution costs and sales force costs. COGS appears on the Income Statement and can be deducted from revenue to calculate the company’s gross margin. r o m o t i o n s h e e t P Depends on how you are paying your sales force. Some people’s compensation is part salary (which is expressed in the staffing plan sheet) and part commission (expressed in the promotion sheet) something to consider. t S a f f i n g p l a n Here you have to identify key positions. Research their salary ask around what the salary ranges are. Are you going to have any part-time employees? If not, make it zero on the assumptions sheet. Note: that when your target market increases, you need to increase the number of employees in your sales force. Your sales force has to increase as you grow. n v e n t o r y I The needs here are driven by sales. The bigger the sales are, the more raw materials you will need. Note that this planning model is a guessing game. Sales are just a forecast. What you’re doing is your inventory needs are being driven by sales. So if I'm selling chairs the more chairs I sell the more raw materials I need to bring into inventory so I can make them into chairs. It is a bit of a guessing game when deciding how much to buy…don't go too far and don't make not enough. Closing inventory must be greater than zero. OCE Shad Valley Financial Tutorial 2008 Watch out for sales. Don’t over-buy or under-buy. Don’t build an inventory that is too big. It takes out cash to pay suppliers and you don’t get cash back until you actually sell this inventory. Thus, this will negatively affect your cash flow. Inventory accounting formula: Opening inventory + purchases – COGS = Ending Inventory a p i t a E l x p e n d i t u r e C Decide what you are buying. Depreciation is spreading the cost of using an asset. i n a n c i n g F You look at the capital investment for each year. You can’t finance 100% of the cost of the asset. Guy Kawasaki puts it best in his terrific book called The Art of the Start, pg 122. e G n e r a l l y , i n v e s t o r s a r e l o o k i n g f o r a p r o v e n t e a m , p r o v e n t e c h n o l o g y , a n d p r o v S h e – a o n w r T s a l e c s i t n . o v n e s t o r s r a n k I t h e r s a e c f t i a o c t n o c r o s i u n n t d s i t h f f e r e e m n t o o s r t b d e e c r a , b u u s e t t y o h e u o ’ v n e e d f e a m c o t n o r s t t r h a a t t e c d u t t h s t a t h r p o e u o g p h l e a a l r l e t h w e h i l l y i n p g e r t o b o o l p e i e n s r t a h c e k i i r n g w u a l p l e s t s a l e s - , T t a k e o u t m o n e y , a n d p u t i t i n y o u r p o c k e t . Startups face one primary challenge: To never run out of cash! That is basic Financials 101 Best of Luck! S o r u c e s : (1992) Harvard Business School; Note on the financial Perspective: What Should Entrepreneurs Know? Professor William A Sahlman: 9-293-045 (2004) Confronting Reality: Doing What Matters to Get Things Right: Larry Bossidy and Ram Charan; Publisher: Crown Business (2004) The Art of the Start: Guy Kawasaki; Publisher: The Penguin Group : KPMG Corporate Tax rates 2008: http://www.kpmg.ca/en/services/tax/documents/FPT_2008_09_CCPC.pdf Wikipedia: Income Statements; Balance Sheets, Statement of retained earnings; Statement of Cash flows About.com: Small Busienss Canada: Writing the Business Plan http://sbinfocanada.about.com/od/businessplans W e l b i n s k : Guy Kawasaki : Blog- How to Change the World (A Practical Blog for impractical people) http://blog.guykawasaki.com/ StartupNorth: Great Canadian technology/software blog http://www.startupnorth.ca/ Business 2.0: Great source for ideas & new trends: http://money.cnn.com/magazines/business2/ G a r e t B l o g s OCE Shad Valley Financial Tutorial 2008 Extra Material for you to consider: The Private Equity Continuum Venture funds in Canada typically have ten year lifespans. Most have five year active investment windows. These fundamentals drive VC behaviour, in part. Angel Later Stage VC Early Stage VC Mezzanine Buyout Value Creation M&A or IPO Preferred Stock “C” Round (>$10-15 million) This is a great chart presented by Tom Sweeney, General Partner & Managing Director of Garage Canada – a Technology Ventures Capital firm based in Montreal- it shows the lifecycle investment pattern of a company from startup to maturity over a typical 10 year horizon. You can see the typical stages of investment rounds and when each occurs in a company’s lifecycle 4-7 Years Preferred Stock “A” Round ($2-5 million) Convertible Debt or Common Stock (<$500 K) 2-4 Years ~1 Year Pre-Seed Research Seed Start-Up Signed License Prototype Early Stage Customer Traction Later Stage Mezzanine Market Adoption Cash Flow IPO Revenue >$100M Company Stage of Development First Pitch VC Due Diligence Process Family & Angels Grants SR&ED Receiver’s Wall Closing ($$) Director’s Wall Under-funded company r T Properly funded company Bootstrap and Seed Syndicate 6-12 months Traction Milestone Due Diligence Milestone Similar to the above chart, you can breakdown each key area a startup needs to overcome if they wish to attract and close an investment round. Again we see this term being used to show your investors comfort that you are doing something important with what you have created & envisioned. New Money Deposited • Traction Milestone: achieve this key milestone before starting a financing round (gives investor confidence you’ve done something “important” already) • Due Diligence Milestone: achieve this second key milestone during financing (tell VC about it in “First Pitch”, hit the milestone, tell VC you did it) a c t i o n