Financial Control & Managementwith James Barlow

Introduction

• Why Financial planning is important• Managing the cash in a start up• Building a financial forecast• Gross Profit and Breakeven• Financing a start up

Why Financial Planning and Control important

• Ensure the business is likely to be viable• Most of important ensure Cash managed – Cash

is king. • By planning know in advance if cash flow

problem – its too late when bank account empty.

• Growing business can very often have cash flow problems

• Support your investment case.

Managing the cash in a start up

• Cash is always tight in the start up phase– Initial start up capital is expensive so rarely have

lots of surplus cash– Launch delayed– Unexpected costs– Customers pay late– Suppliers wont give credit

Managing the cash in a start up

• How can the cash be stretched out– Defer salaries – founders work for free– Try and get things for free – use your network – Credit from suppliers– Find a way of generating revenue quickly – proof

of concept, test customers, discounts for early adoption or early payment.

BUILDING A FORECAST

How to build a Forecast

• Investors typically want a 3-5 yr forecast but concentrate on year 1

• Start with setting up template (See Spreadsheet)• What are the projected sales – no of units, price,

when – is the business seasonal?• When will the cash be received – cash sales ,

credit sales typically paid 30-60 days after supply• Set up costs – product development, factory fit

out , website development etc.

How to Build a Forecast

• Cost of sales – what does it cost to make/buy in the units.

• What are the overheads – staff, rent etc• Having identified Income + expenditure set

out in a spreadsheet by month• Show net cash flow for mth + cash c/f at mth

end.• Assume cash and profit are the same

Mth 1 Mth 2 Mth 3 Mth 4 Mth 5 Mth 6 Mth 7 Mth 8 Mth 9 Mth 10 Mth 11 Mth 12 TotalINCOME ASSUMPTIONSNumber of Customers/No of Units sold 0Average Spend per Customer/Average selling price per unitTotal Sales Income £0 £0 £0 £0 £0 £0 £0 £0 £0 £0 £0 £0 £0

INCOMESales Income 0 0 0 0 0 0 0 0 0 0 0 0 0Other Income 0

TOTAL INCOME 0 0 0 0 0 0 0 0 0 0 0 0 0EXPENDITURECost of SalesRaw Materials (Calculate as % of sales ?/£X per unit ) -(example = 33%) 0Stock for retail outlet (calculate as % of sales ?) 0Total Cost of Sales 0 0 0 0 0 0 0 0 0 0 0 0 0

Operating CostsOffi ce Costs - rent, rates, utilities, cleaning etc 0Legal & Professional - Accountancy, Tax, Payroll 0Insurance - Employers &Public Liability 0Travel 0Sundry Costs - Bank charges, Stationery, 0Total Operating Costs 0 0 0 0 0 0 0 0 0 0 0 0 0

SalariesEmployee 1 0Employee 2 0

0Total Salary Cost 0 0 0 0 0 0 0 0 0 0 0 0 0Employers National Insurance at 13.8% 0 0 0 0 0 0 0 0 0 0 0 0 0Total Employee Cost 0 0 0 0 0 0 0 0 0 0 0 0 0

Capital CostsComputers 0Offi ce Furniture 0Retail unit fit out 0Website design 0Website Hosting 0Building a Prototype 0Plant and Machinery 0Total Capital Costs 0 0 0 0 0 0 0 0 0 0 0 0 0

TOTAL COSTS 0 0 0 0 0 0 0 0 0 0 0 0 0

Net Cash Flow 0 0 0 0 0 0 0 0 0 0 0 0 0Cash at start of mth 0 0 0 0 0 0 0 0 0 0 0 0 0Cash at end of mth 0 0 0 0 0 0 0 0 0 0 0 0 0

Cumulative Profit/(Loss) 0 0 0 0 0 0 0 0 0 0 0 0

Where does info come from for a start up forecast

• Personal knowledge• Competitors eg what do competitors charge• Competitor accounts• Suppliers ask them what they will charge to supply when do

volume discounts kick in.• Property – ask an estate agent• Work with someone who has industry knowledge• Sales Volumes – competitors, size of likely market, how many

customers are you likely to have what will they by from you.• How are going to acquire customers – salesman ,advertising,

what is the cost of acquiring customers likely to be.• Resulting forecast is a best estimate • state assumptions.

What Costs does a business typically incur

Most companies• Office costs - rent, rates Electricity, gas, cleaning,

security, coffee, postage etc • Marketing • Professional Fees eg Accountancy , Tax, Payroll

Legal• Insurance - Employers Liability legally required

Employee salaries • Capital Expenditure - computers , office furniture

What Costs does a business typically incur

• Manufacturing business• Capital Expenditure - Plant and machinery• Production salaries • Raw Materials • Factory building - Lease or Buy - keep it

flexible, may not be possible if high set up costs

What Costs does a business typically incur

• Retail business – Shop Lease or buy – Shop fittings– Stock – eg clothes, food, drink– Employees

What Costs does a business typically incur

• Web Business – Web site design and maintenance - in house or

outsource – Hosting – Domain registration– Office Space– Employees

What Costs does a business typically incur

• Software/ other intellectual Property • Development Staff - Biggest cost• Patent fees/Royalties and legal costs – can be

big – (Smart phone patent claims – royalties – ARM)

• Computer hardware/software

Financial Summary slide for presentations

Year 1 Year 2 Year 3

Sales 1000 1500 3000

Cost of Sales 200 300 500

Gross Profit 800 1200 2500

Other Costs 700 1000 1500

Net Profit 100 200 1000

Cash Balance 50 100 1050

Gross Profit % 80% 80% 83.33%

Breakeven Units

100 120 140

GROSS PROFIT & BREAK-EVEN

Gross Profit and Break Even

• Gross Profit – Selling price – Cost Price• Gross Profit % - above expressed as a %

Bar sells drink for £10Cost of drink £4Gross Profit £6Gross Profit % 60%

• Break Even- How many £/units to sell each day/week/month to cover your costs

Why is this important

• Gross Profit drives the amount you need to sell to breakeven – increased margin means you need to sell less to breakeven – e.g. a bar

Selling Price £10 £10

Cost Price £6 £5

Gross Profit £4 £5

Gross Profit % 40% 50%

Daily Costs £500 £500

No of drinks to sell to break even each day

125 drinks 100 drinks

FINANCING A STARTUP

Sources of Funding for a Start Up

• Your savings• Family and Friends• Bank loans• Crowdfunding e.g. Kickstarter• Business plan competitions – The Big Pitch• Government grants – eg R&D grants• Business Angels• Venture Capital – rare for start ups

Making the best use of a small amount of Money

• How to use £10K Big Pitch Prize to increase chances of further investment• Company Valuations and attractiveness to potential investors are related to the risk

of the investment.

• In early stage companies some of the key risks areo Will the technology/product/service work o How much will the product cost to develop/service launcho Can the business overcome some regulatory issues eg planning permissiono Will anyone buy the product/serviceo What will the sales price be

• Use the £10K to mitigate some/all of the above risks will make raising further funding easier. o Build a Proof of concepto Generate a small amount of revenue

Some Terminology

• Pre Money Valuation = Todays value• Post Money Valuation = Todays Value plus new Money• Eg Pre Money £500,000New Money £250,000Post Money £750,000• New money shareholders own 250/750 = 33.33% of the

company• In early stage a £50-£100K investment will equate to 25%-50%

of the business.