Upload
others
View
2
Download
0
Embed Size (px)
Citation preview
Financials for Startups
MIT CLUB OF CYPRUS
ENTREPRENEURSHIP COMPETITION 2016
Nicosia
27 February, 2016
The Financial Model
Basic Accounting Principles
The Profit & Loss
The Balance Sheet
The Cash Flow Statement
Financial Modeling and Forecasting
Forecasting
The Break Even Analysis
Financial Planning and Implementation
Financial Planning
Cash Flow Management
Implementation through a Case Study
CONTENTS
The Business Model in numbers
Done last, after Business Model is finalized
tested & verified in the market (e.g. Lean Startup Methodology)
Financial projections are integral to the business planning
process
Need to be reviewed and revised regularly
Credible Financial Projections serve to:
Set goals for founders and employees
Monitor/control expenses and “burn rate”
Reflect the commitment of founders
Attract investors
“He who fails to plan, is planning to fail”
Winston Churchill
The Financial Model
Basic Accounting Principles
THE CORE FINANCIAL STATEMENTS
Three, related, statements:
I. The Profit & Loss (or Income Statement)
II. The Balance Sheet (or Statement of Financial Position)
III. The Cash Flow Statement
Basic Accounting Principles
It summarises a company’s earnings, costs and
expenses and measures Profitability over a
period of time (month, quarter, year).
It provides information on a company’s ability to
generate revenues and run its operations
efficiently.
I. The Profit & Loss
Basic Accounting Principles
Definitions:
1. Sales: The sales figure represents the amount of revenue
generated by the business.
2. Cost of goods sold (COGS): This number represents the costs
directly associated with making or acquiring your products.
3. Gross profit: Derived by subtracting COGS from net sales. It does
not include any operating expenses or income taxes.
4. Operating expenses: These are the daily expenses incurred in the
operation of your business. In this sample, they are divided into
three categories: A) Sales & Marketing (S&M), b) Research &
Development (R&D) and B) General and Administrative
Expenses(G&A)
I. The Profit & Loss
Basic Accounting Principles
Definitions:
A) S&M Sales salaries, bonuses and commissions paid to your sales staff.
Collateral fees and promotions.
Advertising costs.
Other sales costs include travel, trade shows, client entertainment, sales
meetings, equipment rental for presentations, printing costs etc.
B) R&D Payroll and benefits to employees involved in R&D activities;
Outside consulting services related to R&D activities;
Testing equipment related to R&D activities.
C) G&A Payroll and benefit costs for employees not included in S&M or R&D.
Rent or lease office or industrial space.
Utility costs for heating, air conditioning, electricity, water, phone/internet etc. in
connection with your business.
Other overhead costs that do not fall into other general categories e.g. insurance,
office supplies, or cleaning services.
I. The Profit & Loss
Basic Accounting Principles
Definitions:
5. Total Expenses: This is a tabulation of all expenses incurred in
running the business, exclusive of taxes, depreciation & amortization,
interest expense (or interest income).
6. Operating Profit/Loss (EBITDA): This number represents the
amount of income earned by a business prior to paying income
taxes. This figure is arrived at by subtracting total operating expenses
from gross profit.
7. Depreciation & Amortization: This is an annual non-cash expense
that takes into account the loss in value of tangible & intangible
assets used in your business.
8. Taxes: This is the amount of income taxes you owe to the
government and, if applicable, state and local government taxes.
9. Net income: This is the amount of money the business has earned
after paying income taxes.
I. The Profit & Loss
Profit & Loss (P&L) Statement
Also called Income Statement
• Revenue (after discounts)
• Cost of Goods Sold (COGS)
• Direct product cost
• Mfg but NOT R&D
• Gross Margin or Gross Profit
• Departmental Expenses
• Operating Profit / Loss
• Profit before taxes (PBT)
• EBITDA (Earnings before interest, taxes, depreciation, amortization)
Revenue 50.0$ 100%
Cost of Goods Sold 20.0$ 40%
Gross Margin 30.0$ 60%
Sales & Marketing 15.0$ 30%
R&D 5.0$ 10%
G&A 2.5$ 5%
Total Expenses 22.5$ 45%
Operating Profit 7.5$ 15%
Sample
It measures a company’s Financial Health at a
point in time (i.e. as at 31.12.XXXX)
Basic Accounting Equation:
Assets = Liabilities + Shareholders' Equity
Shareholders’ Equity = Assets – Liabilities
Basic Accounting PrinciplesII. The Balance Sheet
1. Assets are subdivided into current and long-term (fixed) assets to reflect the
ease of liquidating each asset category.
a. Current assets are any assets that can be easily converted into cash
within one calendar year.
1. Cash
2. Accounts receivable
3. Prepaid Expenses
4. Inventory
b. Fixed assets (tangible and intangible assets used for the business).
1. Land 6. Goodwill
2. Buildings 7. Trademarks
3. Furniture & Fittings
4. Machinery and equipment
5. Vehicles
Total fixed assets: Total fixed assets less accumulated depreciation.
Total assets represent the total value (€) of both the short-term and long-term
assets of your business
Basic Accounting PrinciplesII. The Balance Sheet
2. Liabilities are also divided into current and long-term liabilities.
a. Current Liabilities include all debts and obligations owed by the business
to outside creditors, vendors, or banks that are payable within one year.
1. Accounts payable 4. Lines of Credit
2. Accrued Expenses 5. Current Portion of Long-term Debt
3. Unearned Revenue
b. Long-term Liabilities:
1. Mortgage Payable 4. Deferred Tax
2. Notes Payable
3. Loans Payable
3. Owners’ (or Shareholders’) Equity
1. Share Capital
2. Retained earnings
Owner’s Equity is also known as the company’s “net worth” or “book value”
Total Liabilities and Owners’ equity: This represents all monies owed to outside
creditors, vendors, or banks and all remaining monies (including retained earnings
reinvested in the business) owed to the shareholders.
Basic Accounting PrinciplesII. The Balance Sheet
It reports the amount of cash generated and used
by the company during a period of time (month,
quarter, year).
It is used to assess the quality of a company's
income and its potential to remain solvent (key
survival parameter)
“Cash is King!”
Basic Accounting PrinciplesIII. The Cash Flow Statement
It reports the cash generated and used in 3 categories:
1. Operating activities:
Direct Method: Receipts received from Customers
Payments paid to Suppliers
Payments paid to Employees
Interest Payments
Income Tax Payments, etc.
Indirect Method
net income (from Income Statement), adjusted (add back or subtract) for
non-cash expenses/gains/losses: Depreciation expense
Amortization expense
Gains or losses from the sale of a non-current assets
Losses from accounts receivable
• Plus, adjust for changes in current assets and liabilities affecting cash: Changes in Assets (accounts receivable, Inventory, prepaid expenses)
Changes in Liabilities (Accounts payable, Accrued expenses)
Basic Accounting PrinciplesIII. The Cash Flow Statement
It reports the cash generated and used in 3 categories:
2. Investing activities:
Purchase of sale of long-term assets (e.g. land, building, equipment,
marketable securities, etc.)
3. Financing activities:
Proceeds from issuing short-term or long-term debt
Proceeds from issuing new share capital
Repayment of debt principal, including capital leases
Payments for repurchase of company shares
Payments of dividends
Basic Accounting PrinciplesIII. The Cash Flow Statement
Financial Modeling and Forecasting
Focus on Profit & Loss and Cash Flow Projections covering:
Sales forecast
Operational Expenses (fixed and variable)
Capital Expenditure (CAPEX)
Forecast for at least 3 years (investors want upto 5 years);
monthly for year 1, quarterly for years 2-3, annually for years 4-5
A. Sales forecast How many customers can you expect?
How many units will be sold?
How will you price your products?
What is the cost of goods sold?
I. Forecasting
Financial Modeling and Forecasting I. Forecasting – Sales Plan
Financial Modeling and Forecasting
B. Operational Expenses
1. Staffing Plan
I. Forecasting
Staffing Plan Staffing Staffing Staffing Staffing Staffing Staffing Staffing Staffing Staffing Staffing Staffing Staffing
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1
Engineering
CTO Input 1 1 1 1 1 1 1 1 1 1 1 1
Programmer Input 2 2 2 3 4 5 6 7 8 9 10 11
Tech Writer Input - - - 1 1 1 2 2 2 2 2 2
Other Input - - - - - - - - - - - -
Total Eng 3 3 3 5 6 7 9 10 11 12 13 14
Marketing
VP Marketing Input 1 1 1 1 1 1 1 1 1 1 1 1
Product Manager Input 1 1 1 1 1 1 2 2 2 2 2 2
Other Input 1 1 1 2 2 2 3 3 3 4 4 4
Total Mktg 3 3 3 4 4 4 6 6 6 7 7 7
Sales
VP Sales Input 1 1 1 1 1 1 1 1 1 1 1 1
Regional Sales Input 1 1 1 2 2 2 2 2 2 3 3 3
Support Input - - - 1 1 1 1 1 1 2 2 2
Other Input 1 1 1 2 2 2 2 2 2 3 3 3
Total Sales 3 3 3 6 6 6 6 6 6 9 9 9
General & Admin
CEO Input 1 1 1 1 1 1 1 1 1 1 1 1
VP Finance Input 1 1 1 1 1 1 1 1 1 1 1 1
Accounting Input 1 1 1 2 2 2 2 2 2 3 3 3
Other Input 1 1 1 1 1 1 2 2 2 2 2 2
Total G&A 4 4 4 5 5 5 6 6 6 7 7 7
TOTAL EMP. 13 13 13 20 21 22 27 28 29 35 36 37
Financial Modeling and Forecasting
B. Operational Expenses
2. Departmental expenses(fixed & variable)
I. Forecasting
Departmental Expenses Source Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1
Engineering
Salaries & Benefits Staff ing Plan 28,750$ 28,750$ 28,750$ 41,688$ 48,875$ 56,063$ 69,000$ 76,188$ 83,375$ 90,563$ 97,750$ 104,938$
Tech Supplies input/formula 1,500$ 1,500$ 1,500$ 2,500$ 3,000$ 3,500$ 4,500$ 5,000$ 5,500$ 6,000$ 6,500$ 7,000$
Misc / Other input 14,000$ 14,000$ 14,000$ 20,000$ 20,000$ 20,000$ 30,000$ 30,000$ 30,000$ 40,000$ 40,000$ 40,000$
Total Engineering To P&L 44,250$ 44,250$ 44,250$ 64,188$ 71,875$ 79,563$ 103,500$ 111,188$ 118,875$ 136,563$ 144,250$ 151,938$
Marketing
Salaries & Benefits Staff ing Plan 28,750$ 28,750$ 28,750$ 36,417$ 36,417$ 36,417$ 53,188$ 53,188$ 53,188$ 60,854$ 60,854$ 60,854$
Literature / PR input 2,000$ 2,000$ 2,000$ 2,000$ 2,000$ 2,000$ 4,000$ 4,000$ 4,000$ 4,000$ 4,000$ 4,000$
Trade Show s input -$ -$ -$ -$ -$ -$ -$ -$ 25,000$ -$ -$ -$
Misc / Other input 15,000$ 15,000$ 15,000$ 20,000$ 20,000$ 20,000$ 30,000$ 30,000$ 30,000$ 35,000$ 35,000$ 35,000$
Total Marketing To P&L 45,750$ 45,750$ 45,750$ 58,417$ 58,417$ 58,417$ 87,188$ 87,188$ 112,188$ 99,854$ 99,854$ 99,854$
Sales
Salaries & Benefits Staff ing Plan 36,417$ 36,417$ 36,417$ 63,250$ 63,250$ 63,250$ 63,250$ 63,250$ 63,250$ 90,083$ 90,083$ 90,083$
Travel ($3k per rep) input/formula 3,000$ 3,000$ 3,000$ 6,000$ 6,000$ 6,000$ 6,000$ 6,000$ 6,000$ 9,000$ 9,000$ 9,000$
Commission (3% Rev) input/formula -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$
Misc / Other input 14,000$ 14,000$ 14,000$ 20,000$ 20,000$ 20,000$ 20,000$ 20,000$ 20,000$ 25,000$ 25,000$ 25,000$
Total Sales To P&L 53,417$ 53,417$ 53,417$ 89,250$ 89,250$ 89,250$ 89,250$ 89,250$ 89,250$ 124,083$ 124,083$ 124,083$
General & Admin
Salaries & Benefits Staff ing Plan 38,333$ 38,333$ 38,333$ 43,125$ 43,125$ 43,125$ 50,792$ 50,792$ 50,792$ 55,583$ 55,583$ 55,583$
Rent input 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$
Telephone & Postage input/formula 2,600$ 2,600$ 2,600$ 4,000$ 4,200$ 4,400$ 5,400$ 5,600$ 5,800$ 7,000$ 7,200$ 7,400$
Misc / Other input 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 15,000$ 20,000$ 20,000$ 20,000$ 20,000$ 20,000$ 20,000$
Total G&A To P&L 70,933$ 70,933$ 70,933$ 77,125$ 77,325$ 77,525$ 91,192$ 91,392$ 91,592$ 97,583$ 97,783$ 97,983$
Total Operating Expense 214,350$ 214,350$ 214,350$ 288,979$ 296,867$ 304,754$ 371,129$ 379,017$ 411,904$ 458,083$ 465,971$ 473,858$
Financial Modeling and Forecasting I. Forecasting – Profit & Loss
P & L by Month Source Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1 Year 1
Sales
Model 1 Sales Plan -$ -$ -$ 30,000$ 30,000$ 30,000$ 60,000$ 90,000$ 120,000$ 150,000$ 180,000$ 225,000$
Model 2 Sales Plan -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$
Model 3 Sales Plan -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$
Total Sales -$ -$ -$ 30,000$ 30,000$ 30,000$ 60,000$ 90,000$ 120,000$ 150,000$ 180,000$ 225,000$
COGS Sales Plan -$ -$ -$ 6,000$ 6,000$ 6,000$ 12,000$ 18,000$ 24,000$ 30,000$ 36,000$ 45,000$
Gross Margin -$ -$ -$ 24,000$ 24,000$ 24,000$ 48,000$ 72,000$ 96,000$ 120,000$ 144,000$ 180,000$
Expenses
Engineering Expenses 44,250$ 44,250$ 44,250$ 64,188$ 71,875$ 79,563$ 103,500$ 111,188$ 118,875$ 136,563$ 144,250$ 151,938$
Marketing Expenses 45,750$ 45,750$ 45,750$ 58,417$ 58,417$ 58,417$ 87,188$ 87,188$ 112,188$ 99,854$ 99,854$ 99,854$
Sales Expenses 53,417$ 53,417$ 53,417$ 89,250$ 89,250$ 89,250$ 89,250$ 89,250$ 89,250$ 124,083$ 124,083$ 124,083$
G&A Expenses 70,933$ 70,933$ 70,933$ 77,125$ 77,325$ 77,525$ 91,192$ 91,392$ 91,592$ 97,583$ 97,783$ 97,983$
Operating Exp. 214,350$ 214,350$ 214,350$ 288,979$ 296,867$ 304,754$ 371,129$ 379,017$ 411,904$ 458,083$ 465,971$ 473,858$
Operating Profit (214,350)$ (214,350)$ (214,350)$ (264,979)$ (272,867)$ (280,754)$ (323,129)$ (307,017)$ (315,904)$ (338,083)$ (321,971)$ (293,858)$
Financial Modeling and Forecasting I. Forecasting – Profit & Loss
P & L by Quarter Source Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4
Year 1 Year 1 Year 1 Year 1 Year 2 Year 2 Year 2 Year 2 Year 3 Year 3 Year 3 Year 3
Sales
Model 1 P&L By Month -$ 90,000$ 270,000$ 555,000$ 750,000$ 937,500$ 1,125,000$ 1,500,000$ 1,912,500$ 2,700,000$ 2,025,000$ 2,025,000$
Model 2 P&L By Month -$ -$ -$ -$ 225,000$ 375,000$ 450,000$ 600,000$ 855,000$ 1,140,000$ 1,350,000$ 1,950,000$
Model 3 P&L By Month -$ -$ -$ -$ -$ -$ -$ -$ 525,000$ 1,125,000$ 2,025,000$ 2,437,500$
Total Sales -$ 90,000$ 270,000$ 555,000$ 975,000$ 1,312,500$ 1,575,000$ 2,100,000$ 3,292,500$ 4,965,000$ 5,400,000$ 6,412,500$
COGS P&L By Month -$ 18,000$ 54,000$ 111,000$ 210,000$ 281,250$ 337,500$ 450,000$ 715,250$ 1,068,000$ 1,177,500$ 1,425,000$
Gross Margin -$ 72,000$ 216,000$ 444,000$ 765,000$ 1,031,250$ 1,237,500$ 1,650,000$ 2,577,250$ 3,897,000$ 4,222,500$ 4,987,500$
Expenses
Engineering P&L By Month 132,750$ 215,625$ 333,563$ 432,750$ 549,150$ 652,275$ 775,200$ 853,950$ 994,500$ 1,076,250$ 1,188,000$ 1,239,750$
Marketing P&L By Month 137,250$ 175,250$ 286,563$ 299,563$ 391,050$ 465,450$ 514,225$ 614,225$ 642,500$ 767,500$ 785,375$ 880,375$
Sales P&L By Month 160,250$ 267,750$ 267,750$ 372,250$ 489,850$ 580,875$ 606,000$ 734,900$ 953,775$ 1,343,575$ 1,474,250$ 1,742,875$
G&A P&L By Month 212,800$ 231,975$ 274,175$ 293,350$ 394,150$ 405,250$ 458,400$ 461,400$ 595,750$ 602,950$ 642,450$ 646,650$
Operating Exp. 643,050$ 890,600$ 1,162,050$ 1,397,913$ 1,824,200$ 2,103,850$ 2,353,825$ 2,664,475$ 3,186,525$ 3,790,275$ 4,090,075$ 4,509,650$
Operating Profit (643,050)$ (818,600)$ (946,050)$ (953,913)$ (1,059,200)$ (1,072,600)$ (1,116,325)$ (1,014,475)$ (609,275)$ 106,725$ 132,425$ 477,850$
Financial Modeling and Forecasting I. Forecasting – Profit & Loss
P & L by Year
Source Year 1 Year 2 Year 3 Year 4 Year 5
Sales
Model 1 P&L By Month 915,000$ 100% 4,312,500$ 72% 8,662,500$ 43% 7,650,000$ 22% 5,250,000$ 10%
Model 2 P&L By Month -$ 0% 1,650,000$ 28% 5,295,000$ 26% 12,900,000$ 37% 11,812,500$ 23%
Model 3 P&L By Month -$ 0% -$ 0% 6,112,500$ 30% 14,662,500$ 42% 34,050,000$ 67%
Total Sales 915,000$ 100% 5,962,500$ 100% 20,070,000$ 100% 35,212,500$ 100% 51,112,500$ 100%
COGS P&L By Month 183,000$ 20% 1,278,750$ 21% 4,385,750$ 22% 8,227,500$ 23% 12,667,500$ 25%
Gross Margin 732,000$ 80% 4,683,750$ 79% 15,684,250$ 78% 26,985,000$ 77% 38,445,000$ 75%
Expenses
Engineering P&L By Month 1,114,688$ 122% 2,830,575$ 47% 4,498,500$ 22% 6,225,675$ 18% 7,663,950$ 15%
Marketing P&L By Month 898,625$ 98% 1,984,950$ 33% 3,075,750$ 15% 4,206,750$ 12% 5,847,400$ 11%
Sales P&L By Month 1,068,000$ 117% 2,411,625$ 40% 5,514,475$ 27% 9,364,575$ 27% 11,938,250$ 23%
G&A P&L By Month 1,012,300$ 111% 1,719,200$ 29% 2,487,800$ 12% 3,147,150$ 9% 4,258,500$ 8%
Operating Exp. 4,093,613$ 447% 8,946,350$ 150% 15,576,525$ 78% 22,944,150$ 65% 29,708,100$ 58%
Operating Profit (3,361,613)$ -367% (4,262,600)$ -71% 107,725$ 1% 4,040,850$ 11% 8,736,900$ 17%
Financial Modeling and Forecasting
Cash Flow Projection
Cash flows from Operations: Operating profit (losses) from P&L
PLUS Investment activities: Capital expenditure (CAPEX)
PLUS Financing activities: Investment required
To determine the total investment required
Cumulative operating losses PLUS
Cumulative capital expenses
On the month that you turn cash positive
Burn Rate: Monthly operating loss plus capital expenditures
I. Forecasting – Cash Flows
“Happiness is
a positive cash flow”
Financial Modeling and Forecasting I. Forecasting – Cash Flows
Cash Flow Source Q1 Q2 Q3 Q4
Year 1 Year 1 Year 1 Year 1
Beginning Cash Input (Beginning only) -$ 4,281,488$ 3,273,300$ 1,849,038$
Gross Margin From P&L Quarterly -$ -$ 100,000$ 250,000$
Expenses From P&L Quarterly (600,513)$ (876,188)$ (1,226,263)$ (1,513,238)$
Investment Input 5,000,000$ -$ -$ -$
Capital Expense From P&L CAPEX (118,000)$ (132,000)$ (298,000)$ (274,000)$
Change in Cash 4,281,488$ (1,008,188)$ (1,424,263)$ (1,537,238)$
Ending Balance 4,281,488$ 3,273,300$ 1,849,038$ 311,800$
Capital Expenses Q1 Q2 Q3 Q4
Year 1 Year 1 Year 1 Year 1
Employee Workstations (PP) 4,000$ 68,000$ 32,000$ 48,000$ 24,000$
Prototype Expenses Input 50,000$ 100,000$ 250,000$ 250,000$
118,000$ 132,000$ 298,000$ 274,000$
Cumulative CAPEX 118,000$ 250,000$ 548,000$ 822,000$
Depreciation
Depreciation Charge 9,833$ 20,833$ 45,667$ 68,500$
Financial Modeling and Forecasting
Total operating costs (variable and fixed) are compared with sales revenue in order to determine the level of sales volume at which the business makes neither a profit or a loss “the break-even point”
Line OA = Variation of income at varying levels of production activity
Line OB = Total Fixed Costs of the business
Point P = Costs are exactly equal to income,
and hence no profit or loss is made.
II. Break Even Analysis
The break-even analysis lets you determine what you need to
sell, monthly or annually, to cover your costs of doing business
Financial Modeling and Forecasting
So why is it so important to know your break-even point?
If you don’t know your break-even point you may be working below it
each month without even realizing it.
Example: A cooling company had 2 technicians that did billable work and 2
office staff.
So that left only $240 per day for all other expenses including rent, utilities, vehicle
payments, fuel, supplies, etc, which was not enough.
The real problem here was that the company should have had 2 or 3 techs per 1
office staff in order to make the maths work.
II. Break Even Analysis
Staff costs:Cost of technicians = $30 x 8 h per day x 2 = $480
Cost of office staff = $15 x 8 h per day x 2 = $240
Total staff costs per day = $720
RevenueThe technicians could bill a max. of 6 hours
per day (2 h for prep., traveling etc.) at a rate
of $80 per hour
Max. Revenue per day = 6 h x 2 x $80
= $960 per day.
Financial Modeling and Forecasting
a) Breakeven Calculation for a Product Business
1. Price of product per unit = €100
2. Cost of Goods sold per unit (including labor and material cost) = €30
3. Gross Profit per unit = €70
4. Other monthly operational costs = €10,000
5. Number of units per month you need to sell to breakeven = €10,000 divided
by €70 = 143 units
b) Breakeven Calculation for a Service Business
1. Rate per Hour charged for your service = €50
2. Cost per hour of Staff providing the service = €25
3. Gross Profit per Billable Hour = €50 – €25 = €25
4. Other monthly operational costs= €5,000
5. Number of billable hours needed per month to breakeven =
€5,000 divided by € 25 = 200 hours
6. Minimum number of persons providing the service = 200 divided by billable
hours per person per month
II. Break Even Analysis - Examples
Financial Modeling and Forecasting II. Break Even Analysis
The Break-even point is Not a Static Number
Along the way, expenses tend to creep up in both the direct and indirect
categories, and you may fall below the break-even volume without
realizing it.
Take your profit and loss statement every six months or so and refigure
your break-even target number.
Ways to Lower Break-even volume
There are three ways, two of them involving cost controls (an ongoing
goal!).
1.Lower direct costs, which will raise the gross margin.
2.Exercise strict cost controls on your fixed expenses and total costs.
3.Raise prices!
Financial Planning and Implementation I. Financial Planning
Business planning should not be confused with the preparation of financial
projections.
Business planning must provide the foundation for the financial projections
which can be derived arithmetically by a model.
The accuracy and usefulness of these projections will be completely
determined by the quality and reliability of the underlying assumptions.
An impressive set of financial projections is of little benefit if unsupported by
research or only based on speculation or wishful thinking.
Perform ‘reality checks’ on key ratios of your financial projections to make
sure they are sound.
Beware of unrealistic increases in ratios such as Gross margin, Operating
profit margin, Revenue per employee etc.
Compare with other similar companies
Financial Planning and Implementation
“You can’t manage what you can’t measure”
By comparing your actual financial performance to your projections, you’ll be able
to see if your business is consistently falling short of your projections or
surpassing them.
If your performance is falling behind projections, then you’ll need to make some
changes by raising prices, cutting costs or rethinking your business model.
Conversely, if your income surpasses your projections, then you may need
to hire employees, expand your facility or seek financing sooner than you
expected
I. Financial Planning – A Process
Plan
Measure Forecast
Execute
Financial Planning and Implementation II. Cash Flow Management
Cash flow, not profits, is the lifeblood of your business.
Forecast it, monitor it, and manage it well before serious trouble starts to brew.
Fat profits Vs. Positive cash flow.
Crucial in controlling cash is having a detailed cash-flow projections, updated at
least every month. But don't just add up the numbers - manage the
numbers.
The following are candidates for cash savings:
Inventory
Payables (extended terms, financing or on consignment)
Product Mix
Manage your Receivables (turn your sales into cash fast!)
Focus on the Growing Your Business!
Financial Planning and Implementation III. Implementation through a Case Study
Facts:
SmartTech is a technology start-up which aims to sell gadgets it designs
and manufactures through retail stores in Cyprus and Greece with future
growth aimed for Romania and Bulgaria.
SmartTech designs the gadgets with its own Engineers in Cyprus but has
outsourced the manufacturing to a factory in China specialized in high-
tech gadgets.
SmartTech has projected Sales Revenue per store through focus groups,
market research and market studies of the target group.
The Company will be in Cyprus for tax reasons, and for potential shops
outside Cyprus they will be opened as branches.
The founders are willing to invest EUR 250k of their own equity to start
the business.
Financial Planning and Implementation III. Implementation through a Case Study
Assumptions on One Page – Basic Rule of Modeling Assumptions 2010
Per Store Breakdown
Net Sales Per Store Excluding VAT € 250,000.00
COGS Per Store € 112,500.00
Rent Per Store € 24,000.00
Fit Out cost Per Store € 30,000.00
Life Cycle of Fit Out cost 10
Utilities Per Store € 3,000.00
POS and computer h/w s/w maintenance fee Per Store € 1,000.00
Advertising Per Store € 10,000.00
General Admin Per Store € 6,000.00
Sales people (2 per store) € 24,000.00
Branch store supervisor € 20,000.00
Employee Benefits Per Store € 3,000.00
General Assumptions
CEO € 60,000.00
COO/CFO € 45,000.00
Employee Corp Tax, Social Security etc 11.7%
Investment from Owners € 250,000.00
Sales Growth Rate Years 2010-2015 13.0%
Inflation 3.0%
Tax Rate 10.0%
Receivables Days 0
Payables Days (Average Trade Creditors/COGS)*365 45
Inventory Turns (COGS/ Average Inventory) 12
Bank Interest Annual 5.0%
Bank Interest Monthly 0.4%
Days paying Bank interest 360
COGS Breakdown
Chief Engineer € 40,000.00
Assistant Engineers (4 of them) € 80,000.00
Delivery 4.0%
Manufacturing 40.0%
Insurance 1.0%
Total COGS as % of Sales (excluding Design Costs) 45.0%
On Sales Price
On Sales Price and includes Engineering Salaries
Responsible for oversight, pipeline and leading projects
Out of Engineering school
Includes all other payments for employees
Gadget Stores have no receivables
Marketing Budget based on Marketing Plan
Comments
See COGS breakdown
Financial Planning and Implementation III. Implementation through a Case Study
Link Assumptions to Income Statement Income Projections (EUR) 2010 2011 2012 2013 2014
Sales retail 500,000 847,500 1,596,125 2,885,794 4,076,184
Cost of Goods Sold 359,040 519,436 856,317 1,436,669 1,972,344
Gross Profit 140,960 328,064 739,808 1,449,126 2,103,840
Operating Expenses
Salary & Wages 215,581 272,671 385,133 557,803 685,170
Employee Benefits 6,000 9,270 15,914 26,225 33,765
Rent and PPE 48,000 74,160 127,308 209,804 270,122
General and Administrative 20,000 30,900 53,045 87,418 112,551
Marketing 20,000 30,900 53,045 87,418 112,551
EBITDA (168,621) (89,837) 105,363 480,457 889,681
Depreciation 6,000 9,000 15,000 24,000 30,000
EBIT (174,621) (98,837) 90,363 456,457 859,681
Interest 2,946 4,363 7,337 11,908 14,802
Pretax Income (177,567) (103,200) 83,026 444,549 844,879
Tax Loss Carryforward
Less Taxes 0 0 8,303 44,455 84,488
Net Income (177,567) (103,200) 74,724 400,094 760,391
Sales per day 1,389 2,354 4,434 8,016 11,323
Sales per month 41,667 141,250 133,010 240,483 339,682
Sales per store 250,000 282,500 319,225 360,724 407,618
# Stores as at 2 3 5 8 10
Financial Planning and Implementation III. Implementation through a Case Study
Link your Assumptions page & Income Statement to your Cash Flow
Statement of Cash Flows (EUR) 2010 2011 2012 2013 2014
Cash Flow from Operating Activities:
Net Income/(Loss) (177,567) (103,200) 74,724 400,094 760,391
Adjustment for Depretiation 6,000 9,000 15,000 24,000 30,000
Changes in Operating Assets & Liabilities
Receivables - - - - -
Inventories (29,920) (13,366) (28,073) (48,363) (44,640)
Accounts Payable 44,265 19,775 41,533 71,550 66,042
Net Cash from Operating Activities (157,222) (87,791) 103,183 447,282 811,794
Net Cash from Investing Activities - - - - -
Capex (60,000) (30,900) (63,654) (98,345) (67,531)
Cash Flow from Financing Activities
Investment from Owners 250,000 - - - -
Loan Borrowing 60,000 30,900 63,654 98,345 67,531
Loan Repayment 919 1,493 2,619 4,384 5,840
Net Cash from Financing Activities 249,081 (1,493) (2,619) (4,384) (5,840)
Increase/(Decrease) in Cash 91,859 (89,284) 100,564 442,898 805,954
Cash - Beginning of Period - 91,859 2,575 103,139 546,037
Cash - End of Period 91,859 2,575 103,139 546,037 1,351,990
Financial Planning and Implementation III. Implementation through a Case Study
Financials & Ratios
Profitable from third year – 2012, usual for start-ups
Increasing stores on a yearly basis to enable economies of scale
Note how salaries are higher in the early years due to fixed costs being split over less stores…
Select Financial Ratios 2010 2011 2012 2013 2014
% of Revenue
Salaries 43.12% 32.17% 24.13% 19.33% 16.81%
Employee Benefits 1.20% 1.09% 1.00% 0.91% 0.83%
Rent and PPE 9.60% 8.75% 7.98% 7.27% 6.63%
General and Administrative 4.00% 3.65% 3.32% 3.03% 2.76%
Operating Margins
Gross Margin 28.19% 38.71% 46.35% 50.22% 51.61%
Net Margin -35.51% -12.18% 4.68% 13.86% 18.65%
Select Financial Projections (EUR) 2010 2011 2012 2013 2014
Sales retail 500,000 847,500 1,596,125 2,885,794 4,076,184
Gross Profit 140,960 328,064 739,808 1,449,126 2,103,840
EBITDA (168,621) (89,837) 105,363 480,457 889,681
EBIT (174,621) (98,837) 90,363 456,457 859,681
Net Income (177,567) (103,200) 74,724 400,094 760,391
# Stores 2 3 5 8 10
Final Tips for Credible Startup Financials1. Project the financials as the last step of your business plan preparation.
2. Set the projections as goals for yourselves first and then to show commitment
to investors.
3. Give particular attention to your Gross Margin. Gross Margin is everything. Use
at least 50% mark up to your manufacturing costs.
4. Estimate sales volume by channel using a “bottoms-up” approach.
5. Don’t forget your overhead costs. Check industry average statistics to make
sure you are in the right range.
6. Cash flow is king.
Your “burn rate” is usually your single most important survival parameter.
The ‘holy grail” is break-even, when revenues first catch up with the outflow.
Projecting, tracking, and controlling cash flow is the single most important job of the CEO
7. Add a buffer to your required investment. Calculate your need from projected
cash flows and add a 25% buffer.
8. Plan to re-forecast every quarter. Cost projections should never be missed.
9. Target aggressive but rational projections.
Sources
1. “Building Financial Projections”, Charlie Tillett, MIT Sloan Management,
2004
2. “Mastering Financial Planning”, Demetris Tsingis, CyEC2014
3. “Budgeting for startups”, Akira Hirai, Cayenne Consulting
4. http://www.myaccountingcourse.com/financial-statements/
5. http://www.virginstartup.org/news/create-realistic-financial-projections-first-
year-business/
6. http://earlygrowthfinancialservices.com/key-building-startup-revenue-
model-forecasting/
7. http://blog.projectionhub.com/are-you-sure-your-business-is-breaking-
even/
8. http://blog.projectionhub.com/are-you-sure-your-business-is-breaking-
even/
Dr. Lida Mardapitta-Hadjipandeli
email: [email protected]
Cyprus Entrepreneurship Competition
http://www.cyec.org.cy