Financial Projections for Presentations October 24, 2013

Heather  Onsto,  

Today’s  Speakers  

•  Managing  Director,  Scalar  Analy<cs  (Business  Valua<ons)  

•  CPA,  CVA  

•  TuDs  Univ  &  Clark  Univ  Professor  (Accoun<ng  and  Business  Valua<on)  

•  Prior  CFO  •  BA,  Furman,  MSA,  

Bentley  

•  Venture  Partner,  former  Director  of  Small  Business  with  LaunchCapital  

•  Interim  CEO  of  the  Nanny  Caddy,  a  LaunchCapital  porPolio  company  

•  Over  20  years  experience  in  small  business  finance  

•  BA,  Wofford  College;  MBA,  Dartmouth  

Alicia  Amaral  

Financial  Projec<ons:  WIFM?  

Today’s  presenta<on  will  focus  on  the  how  and  why  of  building  and  pitching  financial  projec<ons  

• How:    Crea<ng  financial  projec<ons  using  a  spreadsheet  and  some  common  accoun<ng  knowledge  shows  you  where  to  focus  your  resources  

• Why:    Crea<ng  financial  projec<ons  shows  investors  that  you  have  carefully  considered  all  financial  implica<ons  

Financial  Projec<ons:  3  Objec<ves  

1.  Force  discipline  and  objec<vity  through  crea<ng  a  methodical  approach  

2.  Demonstrate  thorough  understanding  of  your  company’s  business  model  

3.    Provide  answers  to  “what  if?”  

Building  Projec<ons:  Yeah,  but…  I’ve  heard  that  I  don’t  really  have  to  build  a  business  plan  with  financial  projec8ons  because  no  one  actually  reads  it…  

•  Business  plans  with  financial  projec<ons  are  necessary…      

–  Bo,oms-­‐up  vs.  Top-­‐down  

–  HINT:  You're  trying  to  talk  yourself  out  of  this!  •  Financial  projec<ons  are  a  key  por<on  of  the  due  diligence  

most  investors  perform  

FOR  YOU  

Investors  are  more  interested  in  the  assump1ons  made  when  building  financial  projec1ons,  not  the  exact  bo;om  line  

Building  Projec<ons:  Pulp  fic<on?  Projec8ons  are  just  imaginary  anyway,  so  what  does  it  maCer  what  I  put  in?  

A  common  mistake  is  to  have  illogical  numbers  in  the  projec<ons  –  All  numbers  should  be  <ed  to  your  growth  assump<ons  

•  Ex  1:  If  sales  cycle  is  6  weeks,  should  there  be  sales  in  month  1?  

•  Ex  2:  If  business  is  seasonal,  should  growth  be  smooth  in  every  month?  

–  All  numbers  should  <e  with  a  rough  cash  flow  statement  •  Either  a  separate  tab  or  at  the  bo,om  of  the  P&L  

Projec1ons  that  have  not  been  planned  properly  make  investors  ques1on  your  understanding  of  your  business  model  

Building  Projec<ons:  What  if…  

Scenario  planning  is  just  worst-­‐case  (out  of  business),  expected  (what  I  really  think  will  happen),  and  best-­‐case  (Google  buys  us  for  a  bazillion  dollars),  right?  

Focus  on  YOUR  key  success  metrics  to  drive  scenario  planning  –  Sales  trac<on  –  Gross  margins  –  Incremental  headcount  

Fundraise  amount  range  should  encompass  most  likely  scenarios  to  avoid  expensive  “Bridge”  or  “A-­‐1”  rounds  

More  on  Scenario  Planning…  

Worst-­‐case  scenarios  should  answer  “What  happens  if  there  is  no  outside  capital?”  –  if  the  answer  isn't  'grow  slower',  is  this  a  pipe  dream?  

Best-­‐case  scenarios  should  answer  “What  does  this  business  look  like  if  everything  goes  right?”  –  if  the  answer  isn’t  a  huge  financial  win  for  your  investor,  is  this  a  pipe  

dream?  

Most-­‐likely  scenarios  should  answer  “What  does  this  business  look  like  following  comparable  companies’  growth  paths?”  –  if  the  answer  isn’t  able  to  be  funded  with  the  current  “ask”,  is  this  a  

pipe  dream?  

Goldilocks  got  it  right:  examine  all  op1ons!  

Building  Projec<ons:  Common  terms  •  P&L  •  Retained  earnings  (best  source  of  funding!)  •  EBITDA  •  Gross  profit  margin  (GP  or  GPM)  

•  Working  capital  •  CapEx  •  Burn  rate  •  Accrual  vs.  cash  basis  •  Cash  flow  breakeven  (CFBE)  •  Capital  structure  

Building  Projec<ons:  How  it  works  

•  Have  an  assump8ons  page  and  reference  cells    (don’t  hard  code  anything)  – A  separate  assump<ons  page  allows  flexibility  –  change  them  for  different  growth  scenarios  

– Assump<ons  are  the  backbone  of  your  projec<ons,  so  you  should  know  them  COLD  

Excel  is  your  friend,  but  be  careful  with  cell  references  –  it’s  easy  to  make  a  mistake!  

Building  Projec<ons:  Proper  start…?  

Es<mate  1%  of  $100  million  market  share  

Building  Projec<ons:  Proper  start…?  

Es<mate  1%  of  $100  million  market  share  

JUST KIDDING!

Projec<ons:  Start  with  Revenue  

Take  a  “Bo,om  Up”  approach  

•  Ex:  We  have  tracked  X  unique  visitors  to  our  website  and  with  an  industry  averages  2%  conversion  rate,  sales  will  be  Y.  

•  Ex:  Survey  revealed  customers  are  willing  to  pay  $X  for  a  product  with  Y  features.  

•  Ex:  Q4  sales  were  $X.  With  a  customer  acquisi<on  cost  of  $Y,  we  expect  a  20%  growth  rate  as  a  result  of  marke<ng  efforts  

Econ  101:  revenue  =  price  *  volume.    Knowing  which  element  is  driving  your  company’s  revenue  is  a  key  metric.  

Projec<ons:  Add  in  expenses  This  also  has  a  “Bo,om-­‐up”  approach  

•  Include  details  of  all  categories  –  Ex.  Inventory  =  raw  materials,  WIP,  and  finished  goods  –  Ex.  Headcount  is  a  step-­‐func<on  (hard  to  find  .25  person)  –  Ex.  Income  taxes,  no;  Sales  tax,  use  tax,  payroll  tax…  yes!  

•  COGS  (gross  profit  margin)  –  Inventory,  shipping,  packaging,  direct  labor  

•  SG&A    –  Business  Development/Sales  – Marke<ng  

–  Overhead  

Projec<ons:  Understand  EBITDA  piPalls  

•  EBITDA  excludes  expenses  that  are  not  core  to  a  company’s  opera<ons;  allows  for  comparisons  without  regard  to  capital  structure  

•  Be  careful  about  using  EBITDA  as  proxy  for  cash  flow  even  though  most  investors  expect  it  

•  EBITDA  excludes  deprecia<on  because  it’s  noncash  but  CapEx  requires  cash  

“References  to  EBITDA  make  us  shudder  –  does  management  think  the  tooth  fairy  pays  for  capital  expenditures?”  –  Warren  Buffet    

Projec<ons:  final  checks  

•  Map  out  cash  inflows  and  ouPlows  to  determine  funding  needs  –  do  this  by  month!  

•  Revenue  collec<on  –  <ming  impacts  cash  projec<ons.  30  or  60  days?  2/10,  n30?  

•  Inventory  turn  –  becomes  COGS  when  you  sell  it  but  need  cash  up  front  

•  Deprecia<on  =  noncash  expense  (include?)  •  Don’t  forget  to  include  CapEx  in  cash  flow  (tooth  fairy  doesn’t  visit  adults)  

"The  GOAL”  is  to  make  money  –  Social  jus<ce,  triple  net  bo,om  line,  etc,  come  AFTER  

profitability  •  "You  can't  give  away  what  you  don't  have"    

–  You'll  need  space  one  day  that  isn't  free  –  It  is  illegal  to  hire  someone  and  not  pay  them  

–  Equity  +  cash  =  total  compensa<on  •  As  equity  values  increase,  cash  compensa<on  should  increase  as  the  less  expensive  long-­‐run  pay  op<on  (this  means  you  are  WINNING!)  

–  Research  financial  statements  to  get  an  idea  of  expenses  you  may  have  missed    

–  Research  how  much  things  cost  –  don’t  guess!  •  Call  your  iden<fied  suppliers  for  costs,  terms  of  materials  and  development  costs  

Projec<ons:  MORE  final  checks  

Pitching  projec<ons:  What’s  the  “ask”?  

Fin  projec<ons  need  to  <e  to  the  amount  of  the  raise  –  Fundraising  takes  <me,  so  12-­‐18  months  of  cash  per  raise  –  Iden<fy  milestones  to  be  hit  and  cost  of  each  one  

–  The  sum  of  those  milestone  costs  is  the  raise  amount  –  The  "cushion"  in  the  raise  is  not  X%,  it's  the  cost  difference  in  the  most  likely  scenarios  

The  secret  to  life  is  “t”  –  “t”  is  the  variable  for  “<me”  in  mathema<cal  equa<ons…  and  <me  in  projec<ons  is  everything  

Pitching  Projec<ons:  Rookie  moves  

–  CTRL+C+P  en<re  excel  model  into  a  slide  

–  Using  anything  less  than  18-­‐point  font    –  Li,ering  clipart  from  1995…  or  2013  

–  Sta<ng  projec<ons  to  the  $.01  –  Failing  to  summarize  projec<ons  

–  Using  ANY  of  the  following  phrases:  •  “conserva<vely  es<mated…”  •  “at  only  X%  of  the  market…”  

•  “with  no  compe<<on…”  

–  Forgeyng  to  explain  what  the  amount  you  raise  achieves  

–  Expec<ng  a  short-­‐term  exit  at  a  high  mul<ple  

BAD  EXAMPLE  Revenue

Custom runners 120000.00 360000.00 1080000.00 2160000.00 4320000.00 Standard runners 52500.00 157500.00 472500.00 945000.00 1890000.00

Total Revenue 172500.00 517500.00 1552500.00 3105000.00 6210000.00

COGS Custom runners 30000.00 90000.00 270000.00 540000.00 1080000.00 Standard runners 23625.00 70875.00 212625.00 425250.00 850500.00

Total COGS 53625.00 160875.00 482625.00 965250.00 1930500.00

GROSS PROFIT 118875.00 356625.00 1069875.00 2139750.00 4279500.00 Expenses

Selling Expenses Commission 10500.00 31500.00 94500.00 189000.00 378000.00 Marketing/Advertising 50000.00 50000.00 100000.00 150000.00 200000.00

Research and Development 40000.00 50000.00 62500.00 78125.00 97656.25 General and Administrative Expenses

Office Rent 30000.00 30000.00 30000.00 30000.00 30000.00 Insurance 9600.00 9600.00 9600.00 9600.00 9600.00 Office Utilities 4800.00 4800.00 4800.00 4800.00 4800.00 Supplies 18000.00 18000.00 18000.00 18000.00 18000.00 Salaries 120000.00 120000.00 120000.00 120000.00 120000.00 Benefits 30000.00 30000.00 30000.00 30000.00 30000.00 Miscellaneous 21600.00 21600.00 21600.00 21600.00 21600.00

Total Expenses 334500.00 365500.00 491000.00 651125.00 909656.25

EBITDA -215625.00 -8875.00 578875.00 1488625.00 3369843.75

Interest Expense -4500.00 -3600.00 -2700.00 -1800.00 -900.00 Depreciation Expense -24761.90 -31904.76 -31904.76 -28571.43 -28571.43

Pretax Income -244886.90 -44379.76 544270.24 1458253.57 3340372.32

Income Tax Expense 0.00 0.00 217708.10 583301.43 1336148.93

NET INCOME -244886.90 -44379.76 326562.14 874952.14 2004223.39

Pitching  Projec<ons:  Expert  moves  

•  Know  your  audience  –  The  earlier  you  are,  the  more  interested  in  your  assump<ons  the  investors  are  –  so  know  you’ll  be  discussing  them  in  detail.    Painstaking  detail.    

•  Be  rich,  not  king  –  Does  a  new  hire  cut  costs  or  increase  revenue?    This  will  drive  the  <ming  of  a  new  hire.  

•  Don’t  forget  that  headcount  is  a  step-­‐func<on    •  What  is  B/E  expecta<on  for  a  new  hire?  

–  Good  metric  for  HC  is  sales/employee  –  these  numbers  are  benchmarked  and  available  with  some  research.  

Good  Example  -­‐  Financial  Projec<ons  

INCOME STATEMENT 2013   2014   2015   2016   2017  

Sales

Net Sales $110 $220 $330 $440 $550

COGS $75 $120 $175 $220 $275

Gross Margin $35 $100 $155 $220 $275

Gross margin % 32% 45% 47% 50% 50%

Expenses

Sales $80 $70 $70 $80 $100

Marketing $50 $75 $50 $75 $100

R&D Product Development $25 $35 $25 $15 $15

General & Administrative $20 $30 $40 $45 $50

Total Expenses $175 $210 $185 $215 $265

Net Income (Loss) ($140) ($110) ($30) $5 $10

Outside Capital $300 $0 $0 $0 $0

Annual Cash Balance $160 $50 $20 $25 $35