Swifton - The Capital Network - Financial Projections

ABC Company, Inc.

Estimated Statement of Operations

For The Years Ended December 31, 2010. 2011, 2012, and 2013

2010 2011 2012 2013 2010 2011 2012 2013

Revenue:

Installation Revenue 450$ 3,825$ 21,038$ 73,633$ 77.1% 84.3% 82.3% 80.6%

Non-Installation Revenue

Service Fees 89$ 623$ 4,361$ 17,444$ 15.2% 13.7% 17.1% 19.1%

Other Non-Installation Revenue 45$ 90$ 158$ 237$ 7.7% 2.0% 0.6% 0.3%

Total Revenue: 584$ 4,538$ 25,557$ 91,314$ 100.0% 100.0% 100.0% 100.0%

Direct Costs:

Installation Costs 338$ 2,678$ 12,623$ 36,817$ 57.9% 59.0% 49.4% 40.3%

Non-Installation Costs 38$ 193$ 1,175$ 4,420$ 6.5% 4.3% 4.6% 4.8%

Direct Costs: 376$ 2,871$ 13,798$ 41,237$ 64.4% 63.3% 54.0% 45.2%

Other Cost of Services 88$ 567$ 2,556$ 6,849$ 15.1% 12.5% 10.0% 7.5%

Gross Margin ($) 120$ 1,100$ 9,203$ 43,228$ 20.5% 24.2% 36.0% 47.3%

Gross Margin (%) 20.5% 24.2% 36.0% 47.3%

Operating Expenses:

Sales 292$ 1,588$ 6,389$ 18,263$ 50.0% 35.0% 25.0% 20.0%

Marketing 263$ 1,361$ 5,111$ 13,697$ 45.0% 30.0% 20.0% 15.0%

Research & Development 175$ 998$ 2,811$ 8,218$ 30.0% 22.0% 11.0% 9.0%

General & Administration 44$ 295$ 1,533$ 4,566$ 7.5% 6.5% 6.0% 5.0%

Total Operating Expenses: 774$ 4,242$ 15,844$ 44,744$ 132.5% 93.5% 62.0% 49.0%

EBITDA (654)$ (3,142)$ (6,641)$ (1,516)$ -112.0% -69.2% -26.0% -1.7%

Other (Revenue) & Expenses:

Interest 80$ 156$ 32$ 80$ 13.7% 3.4% 0.1% 0.1%

Taxes 8$ 9$ 11$ 15$ 1.4% 0.2% 0.0% 0.0%

Depreciation & Amortization 13$ 67$ 268$ 874$ 2.2% 1.5% 1.0% 1.0%

Total Other (Revenue) & Expenses 101$ 232$ 311$ 969$ 17.3% 5.1% 1.2% 1.1%

Net Income (Loss) (755)$ (3,374)$ (6,952)$ (2,485)$ -129.3% -74.3% -27.2% -2.7%

Statement Notes:

Revenue

Market 1 43$ 2,320$ 12,205$ 46,232$ 7.4% 51.1% 47.8% 50.6%

Market 2 230$ 1,201$ 7,652$ 26,450$ 39.4% 26.5% 29.9% 29.0%

Market 3 256$ 932$ 3,250$ 12,658$ 43.8% 20.5% 12.7% 13.9%

Market 4 55$ 85$ 2,450$ 5,974$ 9.4% 1.9% 9.6% 6.5%

Total Revenue 584$ 4,538$ 25,557$ 91,314$

Headcount

Existing 13.00$ 18.00$ 61.00$ 298.00$

New Hires 5.00$ 43.00$ 237.00$ 830.00$

Total Headcount 18.00$ 61.00$ 298.00$ 1,128.00$

Capital Expenditures 126.00$ 424.00$ 1,584.00$ 4,474.00$

Dollars (000's omitted) Percent (%) of Revenue

COPYRIGHT © 2010 COPYRIGHT © 2011

Rule #1:

If you cannot read the

financial statement from two

feet away the font is too small

(i.e. there are too many details)

COPYRIGHT © 2011

ABC Company, Inc.

Projected Statement of Operations


2010 2011 2012 2013

Revenue:

Market 1 43.00$ 2,320.00$ 12,205.00$ 46,232.00$

Market 2 230.00$ 1,201.00$ 7,652.00$ 26,450.00$

Market 3 256.00$ 932.00$ 3,250.00$ 12,658.00$

Market 4 55.00$ 85.00$ 2,450.00$ 5,974.00$

Total Revenue 584.00$ 4,538.00$ 25,557.00$ 91,314.00$

Gross Margin ($) 120.00$ 1,100.00$ 9,203.00$ 43,228.00$

Gross Margin (%) 20.5% 24.2% 36.0% 47.3%

Operating Expenses:

Sales & Marketing 555.00$ 2,949.00$ 11,500.00$ 31,960.00$

Research & Development 175.00$ 998.00$ 2,811.00$ 8,218.00$

General & Administration 44.00$ 295.00$ 1,533.00$ 4,566.00$

Total Operating Expenses: 774.00$ 4,242.00$ 15,844.00$ 44,744.00$

Other Expense/(Income) 101.00$ 232.00$ 311.00$ 969.00$

Net Income (Loss) (755.00)$ (3,374.00)$ (6,952.00)$ (2,485.00)$

Statement Notes:

Headcount

Existing 13.00$ 18.00$ 61.00$ 298.00$

New Hires 5.00$ 43.00$ 237.00$ 830.00$

Total Headcount 18.00$ 61.00$ 298.00$ 1,128.00$

Capital Expenditures 126.00$ 424.00$ 1,584.00$ 4,474.00$

Dollars (000's omitted)

COPYRIGHT © 2011

Rule #2:

Pennies are only for

accounting auditors

COPYRIGHT © 2011

“Before you can sprint you

must learn how to crawl”

Usain Bolt(Olympic Gold Medalist 100 meters)

COPYRIGHT © 2011

ABC Company, Inc.

Estimated Statement of Operations


2010 2011 2012 2013

Revenue:

Market 1 43$ 2,320$ 12,205$ 46,232$

Market 2 230$ 1,201$ 7,652$ 26,450$

Market 3 256$ 932$ 3,250$ 12,658$

Market 4 55$ 85$ 2,450$ 5,974$

Total Revenue 584$ 4,538$ 25,557$ 91,314$

Gross Margin ($) 120$ 1,100$ 9,203$ 43,228$

Gross Margin (%) 20.5% 24.2% 36.0% 47.3%

Operating Expenses:

Sales & Marketing 555$ 2,949$ 11,500$ 31,960$

Research & Development 175$ 998$ 2,811$ 8,218$

General & Administration 44$ 295$ 1,533$ 4,566$

Total Operating Expenses: 774$ 4,242$ 15,844$ 44,744$

Other Expense/(Income) 101$ 232$ 311$ 969$

Net Income (Loss) (755)$ (3,374)$ (6,952)$ (2,485)$

Statement Notes:

Headcount

Existing 13$ 18$ 61$ 298$

New Hires 5$ 43$ 237$ 830$

Total Headcount 18$ 61$ 298$ 1,128$

Capital Expenditures 126$ 424$ 1,584$ 4,474$

Dollars (000's omitted)

COPYRIGHT © 2011

Rule #3:

Use $ (dollar signs) on the

first and last row only.

Unless, of course, you are

mixing rows of $ and %, etc.

COPYRIGHT © 2011

FORMAT CREDIBILITY

The presentation format does

not interfere with (or create

noise for) the reader

COPYRIGHT © 2011

ABC Company, Inc.


For The Years Ended December 31, 2010 through 2013

Revenue:

Market 1 43$ 2,320$ 12,205$ 46,232$

Market 2 230 1201 7652 26450

Market 3 256 932 3250 12658

Market 4 55 85 2450 5974

Total Revenue 584 4538 25557 91314

Gross Margin ($) 120 1100 9203 43228

Gross Margin (%) 20.5% 24.2% 36.0% 47.3%

Operating Expenses:

Sales & Marketing 555 2949 11500 31960

Research & Development 175 998 2811 8218

General & Administration 44 295 1533 4566

Total Operating Expenses: 774 4242 15844 44744

Other Expense/(Income) 101 232 311 969

Net Income (Loss) (755)$ (3,374)$ (6,952)$ (2,485)$

Statement Notes:

Headcount

Existing 13 18 61 298

New Hires 5 43 237 830

Total Headcount 18 61 298 1,128


Dollars

COPYRIGHT © 2011

Rule #4:

Use column headings that

make sense

(and there are violators of this in the room)

COPYRIGHT © 2011

Rule #5:

Numbers with thousands or

millions must have commas

This: 54,556

Not this: 54556

COPYRIGHT © 2011

ABC Company, Inc.


For The Years Ended December 31, 2010 through 2013

2010 2011 2012 2013

Revenue:

Market 1 43$ 2,320$ 12,205$ 46,232$

Market 2 230 1,201 7,652 26,450

Market 3 256 932 3,250 12,658

Market 4 55 85 2,450 5,974

Total Revenue 584 4,538 25,557 91,314

Gross Margin ($) 120 1,100 9,203 43,228

Gross Margin (%) 20.5% 24.2% 36.0% 47.3%

Operating Expenses:

Sales & Marketing 555 2,949 11,500 31,960

Research & Development 175 998 2,811 8,218

General & Administration 44 295 1,533 4,566

Total Operating Expenses: 774 4,242 15,844 44,744

Other Expense/(Income) 101 232 311 969

Net Income (Loss) (755)$ (3,374)$ (6,952)$ (2,485)$

S t at ement Not es:

Headcount

Exis t ing 13 18 61 298

New Hires 5 43 237 830

Tot al Headcount 18 61 298 1,128


Dollars

COPYRIGHT © 2011

Rule #6:

Don’t mix fonts

Or font size……

And do not use a silly font

COPYRIGHT © 2011

Rule #7:

Text is left justified

Numbers are right justified

Violators confuse the reader

COPYRIGHT © 2011

Rule #8:

Do not overdo color

and

Do not highlight in

COPYRIGHT © 2011

Use Spot color!

Rule #9:

Round your numbers to the

nearest thousand for

presentations

COPYRIGHT © 2011

Thank you Joe Caruso for this suggestion

Rule #10:

Spelle Check

COPYRIGHT © 2011

And do not tell me you relied

on Microsoft…….

Financial Forecast in

your Slide deck is a

Marketing Effort!

(Huh)?

COPYRIGHT © 2011

• Provide cost-effective outsourced (part-time)

CFO support

• Clients range from pre-revenue startups to later

stage privately held companies

• Goal = provide strategic financial advice and

handle all accounting/ financial matters so the

entrepreneurs can focus on driving the business

COPYRIGHT © 2011

David Fogel, CPA� Serial entrepreneurial CFO

� Principal of Swifton CFOs LLC (circa 2009)

� Experience with high tech companies ranging from biotech

to telecom services to healthcare IT to social media to…

� Adjunct Instructor of Finance and Accounting – WPI

� Judge & Mentor:

� Sponsor:

� Associations:

COPYRIGHT © 2011

Developing The Financial Forecast

1. Defined

2. What about the assumptions?

3. Creating the sales forecast

4. Spreading the numbers

5. Creating the statements

COPYRIGHT © 2011

Ty DancoMember, Mass Medical AngelsMember, North Country Angels

"I'll never believe your revenue numbers

anyway, but I sure want to scrutinize your

assumptions and expenses!"

COPYRIGHT © 2011


1.What are financial projections?

Collection of statements that present

your business in numbers (IS, BS, CF, Cap)

“Does the story make sense?”

“Does the story add up?”

COPYRIGHT © 2011

Set your goals from top down

but…..

Prepare the model from the bottom up

then….start over

with your top down goals

COPYRIGHT © 2011


2. What about the assumptions?

Document the source of each number you produce - Why?

- Knowledge of the assumptions proves that the

entrepreneur understands the business

- Prove it to yourself

Sources of assumptions

- Estimated or best guess (really try not to SWAG)

- Desired goal to be obtained

- Primary market research – surveys, vendor quotes

- Second market research – purchased or gov’t information

COPYRIGHT © 2011


2. What about the assumptions? (part 2)

Start-up costs (uses of $)

Financing (sources of $)

Capital expenditures (costs with >1 yr life)

Fixed expense (cost of being in business)

Variable expense (cost of doing business)

Projected sales (anticipated revenue earned)

Cash flow (anticipated $ received and spent)

COPYRIGHT © 2011

• Expenses up to the point when you are open

for business…….which is when?

• List all the uses of money – describe exactly

how spent

• Two types: Fixed assets & Working Capital

• Examples?

� Fixed Assets = Equipment, Furniture

� Working Capital = Rental deposits, Insurance

Start-up cost assumptions

COPYRIGHT © 2011

• Sources where $ will come from

• Where?

� Entrepreneur and team

� F&F

� Bank loan (though not likely for start-ups)

� Debt from owner or outside creditor

� Non-dilutive financing (maybe )

� Equity capital

• For loan – know amount, terms of repayment (mos), and rate of interest or return

Financing assumptions

COPYRIGHT © 2011

• Costs that have a “lifetime” greater than one year

AND an individual or collective cost greater than $2k

• Predict some fixed assets by headcount, some by

significant changes in sales volume, some by

changes in product lines, etc.

• Examples: Leasehold improvements, Furniture &

fixtures, Machinery

• Note: Probably expense the PCs & Macs & iPads(but try to keep track of them anyway)

Capital Expenditures(aka Fixed Assets)

COPYRIGHT © 2011

• Costs of being in business

• Do not vary by sales volume (i.e. day-to-day)

• But DO increase as the business scales

• Create fixed cost projections on monthly basis

• Research through correspondence with outside vendors

• Record the source & amount from each vendor……..

• Examples: Rent, Utilities, Salaries, Benefits, Marketing expenses, Administrative expenses

Fixed cost assumptions

COPYRIGHT © 2011

• Costs of doing business

• May vary directly with sales volume

• DO increase as the business scales

• Expenses incurred with the next “unit” of product or service

• Research through correspondence with outside vendors

• Examples: Materials, direct/indirect labor, and shipping costs

Variable cost assumptions

COPYRIGHT © 2011

� What product(s) and/or service(s)

� Quantities

� Price

� When (seasonality/cyclicality)?

� T&C’s

Projected sales assumptions

COPYRIGHT © 2011

• Convert your business activity to cash activity

• When will cash be collected from customers?

� May vary by product line and by customer

� Generally assume 45 days---though currently customers are extending to 60 days

• When do you pay your vendor’s invoices?

� May vary by product line and by vendor

� Generally assume 30-45 days

� Need to create “referenceable” vendors

Cash flow assumptions

COPYRIGHT © 2011

INTERMISSION


3. Creating the sales forecast

BEST - Predict by customer as detailed as

possible

….but include customer turnover

BETTER – Predict by market

COPYRIGHT © 2011


3. Creating the sales forecast (part 2)

How do I start? Market research

• Gov’t resources

�US Census Bureau

�IRS Statistical Data

• Trade association

• Primary & secondary research

Select your geography

COPYRIGHT © 2011



Small

Client

Medium

Client

Large

Client

Average Hours Per

Week

4 Hours 8 Hours 16 Hours

Average Contract $

Per Week

$500 $1,250 $2,500

Predict by client (customer) types

• By market

• By size

Then ID certain characteristics

COPYRIGHT © 2011



Predict using Sales staff• Assume lag time (3-6 mos.)

• Estimate the pipeline

• # of calls / meetings per staff

• # of sales per staff

• Remember: Not all staff start same date

• Spread out the volume by month – with

realistic goals

• ….Consider turnover of sales staff

COPYRIGHT © 2011

Forecast Trap:

Why they call them “Gross Sales”

• Returns

• Discounts

• Rebates

• Chargebacks

• Markdowns

COPYRIGHT © 2011

Forecast Trap:

Do not over-estimate

first year revenue(what, we can’t sell millions in first month?)

COPYRIGHT © 2011


4. Spreading the Numbers

• Yes, you need to do it monthly -- for the entire period

• No flat numbers – consider the meaning – use %

increases or $ per some indice

• Think: As headcount increases rent increases (just

not variably)

• Start with revenue, then cost of services

COPYRIGHT © 2011

Multiple Model Trap:

One investor model,

Multiple options (triggers)

But…why not?

You will make fundamental changes in the

base model and then forget to make similar

changes on the “other scenario models”

COPYRIGHT © 2011

Tip:

Integration

Must use an integrated model

Headcount added

Payroll and benefits calculation

Summarized employee costs

Income Statement

Cash Flow

COPYRIGHT © 2011

Tip:

Use Rounding

Use the MS Excel “rounding

function” --- otherwise your

numbers may not add up

COPYRIGHT © 2011

Question?

Is the methodology

Accrual or Cash?

COPYRIGHT © 2011

Tip:

If you want to be taken seriously do

not use round numbers

This: 53,567

Not this: 50,000

COPYRIGHT © 2011

Tip:

Project payroll & benefits in detail

• Payroll & benefits are often the most costly

expense yet they are often neglected.

• Project monthly to handle start dates correctly

• Match additions of people with milestones

COPYRIGHT © 2011

Tip:Projection Numbers are not separate from

the Company Plans

Company Plans

Milestone Projects Responsible Revenue/

Cost

Dates

COPYRIGHT © 2011

Tip:

Be careful with Depreciation and

Interest expense

• Depreciation is a non-cash expense – do

not include in cash flow(we’ll worry about how to calculate this when you come see me)

• Interest expense does not include the

principal portion of your payment

COPYRIGHT © 2011

Ben LittauerMember, Boston Harbor Angels

"I like to see a business model spreadsheet with

the assumptions clearly called out as variables.

Then I can twiddle the knobs and see how

sensitive profits are to the assumptions."

COPYRIGHT © 2011

Tip:

Don’t forget the…..

Sales commissions – Direct connect them to your

sales staff’s (or sales rep) sales

Bonuses – Include with payroll

Recruiting expenses – Peg them to change in new

employees

Debt - Many forget to include Interest Expense on

the income statement even though the Company

has incurred Debt

COPYRIGHT © 2011

Presentation Suggestions

Steady, consistent evolution of the model

� Revenue growth in $

� Expenses over time in %

Know the % change for major components

Do not allocate G&A/Facilities expenses

Show depreciation separately (non-cash)

COPYRIGHT © 2011

Tip:

Reasonableness

1. Once you think you are done take the

smell test --- Do the numbers really make

sense (i.e. can you really increase revenue

w/o an increase in costs)?

2. Do the Like-Kind test. Compare your

“metrics” versus your competition

COPYRIGHT © 2011

Creating the Statements

1. Consider it a Marketing Effort

2. Present the Pro-Forma Financial

Statement

3. Graph the Revenues, Income, and Cash

4. Present the Headcount

COPYRIGHT © 2011

ABC Co.($ 000's omitted)

2010 2011 2012 2013 2014

Pro Forma Financial StatementRevenue -$ 1,875$ 44,953$ 108,238$ 180,161$

Cost of Service - 1,162 12,739 5,369 -

Gross Margin - 712 32,214 102,868 180,161

38% 72% 95% 100%

Operating Expenses

Employee Costs 1,303 2,972 3,587 4,198 4,379

Professional Fees 253 637 1,780 1,230 1,135

Marketing & Travel 61 525 2,340 293 658

Administrative Expenses 60 55 232 41 47

Development & Pilot Manufacturing 409 819 262 965 1,733

Facility & Other 195 801 1,206 1,612 2,023

Total Expenses 2,282 5,807 9,407 8,340 9,976

Depreciation & Amortization 42 98 301 590 791

EBIT (2,324) (5,193) 22,507 93,939 169,394

Net Income (2,639) (5,411) 16,893 55,530 100,603

0% -289% 38% 51% 56%

Pro Forma Cash FlowCash from Operations (2,597) (5,313) 17,193 56,120 101,393

Cash from Working Capital (31) (936) (2,879) (2,754) (3,437)

Cash from Investments (57) (297) (1,052) (607) (600)

Cash from Financing 7,000 - 42,000 - -

Net Cash Flow 4,315 (6,545) 55,262 52,759 97,357

Ending Cash 6,644$ 99$ 55,360$ 108,119$ 205,476$

Income

Statement

Cash Flow

Statement

COPYRIGHT © 2011

ABC Company – Financials by Year

($ 000’s omitted)

COPYRIGHT © 2011

($25,000)

$25,000

$75,000

$125,000

$175,000

$225,000

2010 2011 2012 2013 2014

Revenue

Income

Cash

Milestone #1

Prototype

Milestone #2

Pilots

Milestone #3

Commercialization

Seeking $250k Investment

ABC Co.2010 2011 2012 2013 2014

Manufacturing - 1 1 1 1

Sales & Marketing - - 1 4 4

Research 7 19 19 19 19

Executive/Admin 3 8 9 9 9

International - 1 2 3 4

Total 10 29 32 36 37

Headcount Summary

COPYRIGHT © 2011

ABC Co.2010 2011 2012 2013 2014

Manufacturing - 1 1 1 1

Sales & Marketing - - 1 4 4

Research 7 19 19 19 19

Executive/Admin 3 8 9 9 9

International - 1 2 3 4

Total 10 29 32 36 37

2010 Jan, 10 Feb, 10 Mar, 10 Apr, 10 May, 10 Jun, 10 Jul, 10 Aug, 10 Sep, 10 Oct, 10 Nov, 10 Dec, 10

Manufacturing - - - - - - - - - - - -

Sales & Marketing - - - - - - - - - - - -

Research 7 7 7 7 7 7 7 7 7 7 7 7

Executive/Admin 2 2 3 3 3 3 3 3 3 3 3 3

International - - - - - - - - - - - -

Total 9 9 10 10 10 10 10 10 10 10 10 10


Manufacturing 1 1 1 1 1 1 1 1 1 1 1 1

Sales & Marketing - - - - - - - - - - - -

Research 19 19 19 19 19 19 19 19 19 19 19 19

Executive/Admin 4 4 4 4 4 5 7 7 7 8 8 8

International - - - - - 1 1 1 1 1 1 1

Total 24 24 24 24 24 26 28 28 28 29 29 29


Manufacturing 1 1 1 1 1 1 1 1 1 1 1 1

Sales & Marketing - - - - - - - - - - 1 1

Research 19 19 19 19 19 19 19 19 19 19 19 19

Executive/Admin 9 9 9 9 9 9 9 9 9 9 9 9

International 1 1 1 1 1 2 2 2 2 2 2 2

Total 30 30 30 30 30 31 31 31 31 31 32 32


Manufacturing 1 1 1 1 1 1 1 1 1 1 1 1

Sales & Marketing 1 1 2 2 3 3 4 4 4 4 4 4

Research 19 19 19 19 19 19 19 19 19 19 19 19

Executive/Admin 9 9 9 9 9 9 9 9 9 9 9 9

International 2 2 3 3 3 3 3 3 3 3 3 3

Total 32 32 34 34 35 35 36 36 36 36 36 36


Manufacturing 1 1 1 1 1 1 1 1 1 1 1 1

Sales & Marketing 4 4 4 4 4 4 4 4 4 4 4 4

Research 19 19 19 19 19 19 19 19 19 19 19 19

Executive/Admin 9 9 9 9 9 9 9 9 9 9 9 9

International 4 4 4 4 4 4 4 4 4 4 4 4

Total 37 37 37 37 37 37 37 37 37 37 37 37

Headcount SummaryFor your review

only. Not for

presentation

Looking at the

monthly

headcount helps

you find obvious

discrepancies

COPYRIGHT © 2011

More on charts and tables……

1. Highlight revenue especially as

compared with your competition

2. Explain the sales & distribution model

(…so about those 90% margins)

3. Key events to next funding round

4. Cash flow cycle

COPYRIGHT © 2011

Universal Truths:

1. Project monthly, Present annually

2. Projections constantly change,

let them. Not an annual exercise.

Develop as a monthly exercise.

3. Financials must be consistent with rest

of presentation

4. Do not need to be hung up with GAAP,

but….don’t go rogue

COPYRIGHT © 2011

Even More Universal Truths:

5. Be consistent – Don’t portray cost

categories (or individuals)

differently by year

6. Have “Checks”

7. P&L Income ≠ Cash Flow (we know this right?)

COPYRIGHT © 2011


Contact Information:

Email:

Website:

Twitter:

Phone:

Cell:

COPYRIGHT © 2010

COPYRIGHT © 2010

Economy & Finance

Swifton - The Capital Network - Financial Projections