Transcript PowerPoint - From Invention to Startup

CIE
From Invention to Start-Up
Cash Flow – More
Important Than Your Mother
Alan Dishlip
CFO – WildTangent, Inc.
February 13, 2007
3:30 P.M. – 5:00 P.M.
Agenda
 Introduction
 Financial Planning
 Financial Projections
 Cash Planning
 Raising Capital
 Summary
2
Financial Planning - Understanding Risk
 Finance - a way to think about cash, risk & value
● Creating value is a key responsibility
 Financial risk - uncertainty about future cash flows
● Uncertainty creates risk, but uncertainty can usually be
analyzed to understand risk
● Significant value can be created by managing risk
► Market,
Management, Technology, Competition
 Finance does not answer questions
● It does not make decisions
● Finance can help identify the right questions to ask and
narrow down the options
 When viewed from the finance perspective, some
decisions will turn out to be illogical or unfeasible.
3
Financial Planning
10 Must Answer Questions










How much cash will we really need?
What do the 5 year financials look like?
What’s the path to profitability?
What are the risks and rewards?
How can these be managed successfully?
How large is the addressable market?
How fast is the market growing?
Who’s the management team?
What is the value of my company?
What is the exit strategy?
4
Financial
FinancialProjections
Projections
One angel to others on a cloud
Don’t let this be you!
6
Financial Projections - Investor Quotes
 “Financial projections consistently are the weakest






part of business plans.”
“I rarely see a financial plan I can’t take apart quickly.”
“No consistent formats”
“Lack of detail – not bottoms up”
“Unrealistic and overly optimistic assumptions –
especially timing related (revenues, development
schedule, cash flow break even)”
“Model cannot be easily manipulated (too much hard
wiring and not enough assumptions-driven)”
“Omission of costs and balance sheet items”
● Understates capital requirements
7
Projections - Overview
 A reflection of your business plan quantified
● Consistent with the plan strategy
● Will help demonstrate whether your strategy is
financially feasible
● A key indicator of the amount of outside financing
necessary to support the execution of your strategy
 Understand the quantitative and financial
elements of your business plan
● Not doing so is the fastest way to lose credibility
 Include key financial ratios and compare to
competitors’/industry averages
8
Projections - Overview
 High level figures
● Underlying detail should be available
 Projections should answer
● How will the company perform financially?
►
P&L
● What will the company's cash position be?
►
Cash Flow
● What will the company's financial position be?
►
Balance Sheet
 Five-years - integrated
● Monthly for the first two years, quarterly for the remaining 3 years
● Well-thought out assumptions
● Include key financial ratios and compare to competitors & industry
● Include any historical financial information, if any
9
What’s Wrong With Most Financial Plans?
 Waste too much ink on numbers –
● Too little focus on information that really matters
● Numbers should support strategy and key
drivers of success
►Manufacturing
- yield on a production process
►Magazine publishing - the anticipated renewal rate
►Software - impact of using various distribution models
►At what level of sales is the business profitable?
►When does cash flow turn positive?
10
What’s Wrong With Most Financial Plans?
 No need for detailed, month-by-month
projections that stretch out for years
 Financials are typically wildly optimistic.
● Few entrepreneurs correctly anticipate how
much capital and time will be required to
accomplish objectives.
11
Projection Assumptions
 Organize input assumptions in an easily accessible separate
worksheet
● Helps identify key items in one place
● Can be used for sensitivity and breakeven analysis
 Don’t be afraid to make material assumptions – especially
uncertain ones (e.g. re-purchase rate, returns, collections
cycle)
● Individualize
►e.g., don't just show advertising costs as a % of sales.
 Most advertising expenditures are made months before sales result
● Include financial obligations of bringing your product/service to market
►New employees
►Additional physical space
Deviations from historical trends
► Increases in inventory and A/R
►
 Support your assertions with valid data
● Identify what data you have and also be clear about what you don’t
know
12
Assumptions – Some to Consider
 Revenue by distribution channel
● Volume
● Pricing
● Sales per sales person
 Manpower plan
 COGS detail (labor, material, overhead)
 Expenses by department
● Dependent on manpower (payroll, space, benefits, supplies)
● Independent of manpower (insurance, prof. fees, advertising,
depreciation)




Fixed assets purchases and depreciation
Debt and related collateral calculations
Interest income and expense
Ratios & Metrics
● Compare to industry averages and specific competitors
 Sensitivity Analysis
13
Projections – Assumptions Linking












Assumption
Cost of Sales
Benefits & payroll taxes
Depreciation Exp
Headcount Driven Expenses
Interest Expense
Interest Income
Income Taxes
Net Profit
Accounts Receivable
Bad Debt Reserve
Inventories and Reserves
Balance Sheet Accruals
Linked to












Sales
Headcount & Salaries
Fixed Assets & Accum Dep
Manpower Plan
Specific Debt Instruments
Cash and Investments
Profit before Tax (w/ NOL)
Equity Section of Bal Sheet
Sales
Bad Debt Expense
COGS
Underlying Expenses
14
Bottoms Up Projections
 Build from low levels of detail
● Vs. Tops Down
►Revenues
extrapolated from market size & share
►Expenses are forecast as percentages of revenue
 Start with line items that are relevant to
describing the business model
15
Bottoms Up Projections

Revenues
●
●
By geographic market, customer or distribution channel
Expenses
●
$2,500
1,250
750
250
325
160
$5,235
Forecast sales at the lowest level of product or
service detail (channel, sales person, region)
Assumptions of volume and pricing
►

Revenues
Product A - U.S.
Product A - Europe
Product B - Direct
Product B - Partners
Service - U.S.
Service - Europe
Professional and Outside Services
Legal Fees - General Corporate
Legal Fees - Intellectual Property
Audit & Tax
Consulting - IT
$250
100
125
300
$775
Facilities
Rent
$1,000
Utilities
100
Maintenance
50
Insurance
75
$1,225
Break into relevant categories
►
Separate line items for most important and/or magnitude
16
Bottoms Up Projections
Create Line Items that are Activity Driven
 Don’t plan the dollars – plan the underlying
activities that drive profits and cash flow
Sales Target
Productivity
$12,000,000
$1,000,000 per
Sales Person
No.
Sales
People
Related Costs
12
Salaries, Commissions,
Taxes, Benefits, T&E,
Conferences
 Assumptions come from table above
● Don’t forget that productivity improves over time
● Sales ramp over time
● Understand the cost impacts
►
By linking between selling activities, productivity
assumptions and cost rates for the variable expenses
17
Projections Should be Integrated
 Enter assumptions and data and set up links
● The statements build themselves according to GAAP
 P&L
● Segregate revenues, COGS, Op Ex, Income Taxes
► Subtotals
for gross margin, operating profit, net income
 Balance Sheet
● Segregate short- and long-term assets and liabilities
● Account for retained earnings and equity capital
 Cash Flow
● Tie out to balance sheet
● Segregate operating, investing and financing activities
18
Projections - Alternative Scenario Analysis
 Changing many assumptions for
different strategy or business
environment
● Vs. Sensitivity where change an individual
assumption to reveal financial impact
 Examples
● Alternate distribution channels strategy
● Timing issues (sales or development delayed)
● Alternate volumes and pricing
 Use this to run your business!!
19
Projections - Plug Cash
 On the balance sheet
● Cash = [Total Liabilities + Equity] minus
[Total Assets other than Cash]
 If cash is negative, the company is
undercapitalized
● Need to raise equity capital or borrow or both
 If cash is positive and growing, the company is
generating positive cash flow
 Identifies seasonality needs
20
XYZ Company
Projected Income Statements
Years 1 to 5
REVENUES
COST OF REVENUE
GROSS PROFIT
% of Revenues
OPERATING EXPENSES
Sales & Marketing
Research & Development
General and Administration
Total Operating Expenses
% of Revenues
EARNINGS FROM OPERATIONS
INTEREST INCOME / (EXPENSE)
NET EARNINGS BEFORE TAXES
TAXES
NET EARNINGS
% of Revenues
Income Statement
Year 1
$1,000,000
Year 2
$5,250,000
Year 3
$9,750,000
Year 4
$16,250,000
Year 5
$26,000,000
1,116,464
(116,464)
-11.6%
3,526,164
1,723,836
32.8%
5,683,429
4,066,571
41.7%
9,313,286
6,936,714
42.7%
13,997,143
12,002,857
46.2%
229,000
149,000
171,667
549,667
55%
997,750
413,000
465,150
1,875,900
36%
1,805,400
702,550
783,440
3,291,390
34%
2,911,500
1,241,500
1,191,933
5,344,933
33%
4,676,000
1,752,000
1,771,467
8,199,467
32%
(152,064)
775,181
1,591,781
3,803,390
(60,000)
(48,000)
(212,064)
727,181
(666,131)
0
(666,131)
0
($666,131)
-66.6%
0
($212,064)
-4.0%
0
$727,181
7.5%
(45,000)
1,546,781
(558,307)
$988,474
6.1%
(14,000)
3,789,390
(1,515,756)
$2,273,634
8.7%
21
XYZ Company
Projected Balance Sheets
Years 1 to 5
ASSETS
CURRENT ASSETS
Cash
Accounts Receivable
Inventories
Other Current Assets
Total Current Assets
PROPERTY & EQUIPMENT (net)
TOTAL ASSETS
LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable & Accrued Expen
Other Current Liab
Current portion of long term debt
Total Current Liabilities
LONG TERM DEBT
STOCKHOLDERS' EQUITY
CommonStock
Preferred Stock
Retained Earnings
Total Equity
TOTAL LIABILITIES & EQUITY
Balance Sheet
Year 1
Year 2
Year 3
Year 4
Year 5
$361,970
215,000
176,000
18,000
770,970
236,619
1,007,589
$99,620
945,000
630,000
75,600
1,750,220
604,905
2,355,125
$180,177
1,375,000
733,333
110,000
2,398,510
917,476
3,315,986
$54,936
2,375,000
1,266,667
190,000
3,886,603
1,193,857
5,080,460
$477,714
4,000,000
2,133,333
320,000
6,931,047
1,434,048
8,365,094
155,720
18,000
0
173,720
657,720
75,600
100,000
833,320
957,000
110,000
100,000
1,167,000
1,653,000
190,000
100,000
1,943,000
2,784,000
320,000
100,000
3,204,000
0
400,000
300,000
200,000
100,000
500,000
1,500,000
837,460
2,837,460
$4,980,460
500,000
1,500,000
3,061,094
5,061,094
$8,365,094
500,000
1,000,000
(666,131)
833,869
$1,007,589
500,000
1,500,000
(878,195)
1,121,805
$2,355,125
500,000
1,500,000
(151,014)
1,848,986
$3,315,986
22
Ratios and Metrics
 Ratios
● Gross margin %
● Days sales in A/R; days sales in inventory
● Current Ratio & quick ratio
● Debt to equity
● EBITDA
 Metrics
● Headcount
● Sales per employee
● Sales per sales person
● Customer acquisition cost
● Unique ratios to your business
 Show trends and compare to similar companies
23
Other Information
XYZ Company
Financial Summary & Other Information
Years 1 - 5
Year 1
Summary Financials ($)
Revenue
Gross Profit
Net Earnings
EBITDA
Net Cash from Operating Activities
Capital Expenditures
Interest Income (Expense)
Cash
Total Equity
Total Debt
Year 2
Year 3
Year 4
Year 5
$1,000,000 $5,250,000 $9,750,000 $16,250,000 $26,000,000
(116,464) 1,723,836
4,066,571
6,936,714
12,002,857
(666,131)
(212,064)
729,181
988,474
2,273,634
(622,750)
(20,350) 1,012,610
1,965,400
4,313,200
(858,030)
(762,350)
730,557
524,760
1,422,777
280,000
500,000
550,000
650,000
750,000
(60,000)
(48,000)
(45,000)
(14,000)
361,970
99,620
180,177
54,936
477,714
(166,131)
(378,195)
348,986
1,337,460
3,561,094
500,000
400,000
300,000
200,000
Growth
Revenue Growth Rate - CAGR
Net Earnings Growth Rate - CAGR
425%
N/A
86%
N/A
67%
35.9%
60%
130.0%
4.4
3.4
0.0
75.0
95.0
0.0
2.1
1.3
0.3
72.0
92.0
0.3
2.1
1.4
0.2
68.0
90.0
0.2
2.0
1.4
0.1
68.0
85.0
0.1
2.2
1.5
0.0
65.0
81.0
0.0
Profitability
Gross Profit %
Operating Expenses %
Net Earnings %
-11.6%
55.0%
-66.6%
32.8%
35.7%
-4.0%
41.7%
33.8%
7.5%
42.7%
32.9%
6.1%
46.2%
31.5%
8.7%
Returns
Return on Assets
Return on Equity
Return on Capital (LT Debt + Equity)
-66.1%
-79.9%
-79.9%
-9.0%
-18.9%
-13.1%
21.9%
39.3%
32.3%
19.5%
34.8%
31.5%
27.2%
44.9%
43.2%
Ratios
Current Ratio
Quick Ratio
Debt to Capital (LT Debt + Equity)
Days Sales in A/R
Days Sales in Inventory
Debt to Capital (LT Debt + Equity)
Metrics
Employees
Sales per employee
Sales per sales person
Customer acquisition cost
8
$125,000
$500,000
$150
35
$150,000
$656,250
$100
60
$162,500
$975,000
$75
75
$216,667
$1,083,333
$60
100
$260,000
$1,300,000
$40
24
Financial
Cash Projections
Planning
Understanding Cash
 First rule : Cash is the most important resource
● More cash is better than less cash
● Cash now is better than cash later
 Focus on cash flow versus accounting income
 Growth often absorbs cash flow because of a higher
need for working capital and fixed investments
● Entrepreneurial firms with negative income and high
growth can have a very fast cash burn rate
● Today’s investments are tomorrow’s growth opportunities
 Focus on the dynamic picture of cash flow
● Cash cycles (A/R collections, A/P payments), seasonality
 Last rule: CFIMITYM !!!
● Cash Flow is More Important Than Your Mother!!
DON’T RUN OUT of CASH!!
26
How Does Cash Planning Work?
 One part of financial statement forecasting
● Falls out of developing the Income Statement and Balance
Sheet
 Goal: Provide well-balanced cash flow (ins & outs)
 Understand the Operating Cycle (“OC”)
● The OC is the system through which cash flows (purchase
inventory, collect A/R, expenses, loan borrowing & payments).
►
Measures flow of assets into cash.
● Need to finance a continuous OC
 Cash flow analysis shows whether daily operations
generate enough cash to meet obligations.
 Compare actual cash flow to plan
● Analysis allows opportunity to prepare for growth and fine tune
plan
27
The Cash Flow Projection
 How cash flows in & out of your business
● Indicates capital investment requirements
 Components
● From operations
► Net
income or loss (revenues, expenses)
► Changes in operating assets and liabilities (A/R, A/P, Prepaid
Expenses, Accrued Expenses) other than cash
● From Investing
► Property & equipment
● From Financing
► Long and short-term debt
► Issuance of equity
28
Control Your Cash Flow
 Prepare realistic projections
 Compare actual results to the plan
● Identify patterns and constantly refine projections
● Investigate variances and make operating
changes, if necessary
● Spend most time in areas you can make quick
and large impact
►A/R, A/P,
Inventory, Discretionary Expenses
29
Increasing Cash Flows
 Collect receivables
● Actively manage and quickly collect past dues
● Shortens operating cycle
● However, increasing sales (on credit), actually decreases cash
flow (timing of collection and purchase of inventory)
 Tightening credit requirements
● More cash sooner
● But may cost in less sales
● Need the proper balance
 Pricing
● Proper pricing is critical to achieving a profit and maintaining
positive cash flow
● Must understand market, competition and distribution channels
structure
 Manage your expenses – necessary and reasonable
30
Cash Reserve
 Always keep enough cash on hand to cover expenses
for at least 3 months and, preferably more.
● Provides cushion against “unknown unknowns”
 But don’t keep too much in cash
● Invest excess in interest bearing instruments with priority:
Safety (gov’t securities, CDs, etc.)
► Liquidity
► Return
►
31
Cash Flow and Accounting Punch List
 Prepare monthly financial statements.
● Compare with prior periods.
 Frequently update your projections and cash flow plan.
 Keep track of key income statement percentages.
● If you're in manufacturing, your COGS % should be relatively the same or
better as competitors in your industry.
 Maintain good internal controls to prevent dishonesty and shrinkage.
 Do not delegate the authority to sign checks or purchase orders.
 Don't use money that you have withheld for payroll taxes or sales
taxes for other purposes.
● A "payroll service provider" can be used to manage these responsibilities.
 Liquidity is not the same as making money.
● You can be making a profit and still go broke by running out of cash.
Learn and practice cash flow control.
 Arrange for financing well before the need arises.
32
XYZ Company
Projected Statements of Cash Flow
Years 1 to 5
Cash Flow
Year 1
OPERATING ACTIVITIES
Net Earnings
Depreciation
Working Capital Changes
(Increase)/Decrease Accounts Rec
(Increase)/Decrease Inventories
(Increase)/Decrease Other Current Assets
Increase/(Decrease) Accts Pay & Accrd Expenses
Increase/(Decrease) Other Current Liab
Net Cash Provided/(Used) by Operating Activities
INVESTING ACTIVITIES
Property & Equipment
Other
Net Cash Used in Investing Activities
FINANCING ACTIVITIES
Increase/(Decrease) Short Term Debt
Increase/(Decrease) Curr. Portion LTD
Increase/(Decrease) Long Term Debt
Increase/(Decrease) Common Stock
Increase/(Decrease) Preferred Stock
Dividends Declared
Net Cash Provided / (Used) by Financing
INCREASE/(DECREASE) IN CASH
CASH AT BEGINNING OF YEAR
CASH AT END OF YEAR
Year 2
Year 3
Year 4
Year 5
($666,131)
43,381
($212,064)
131,714
$727,181
237,429
$988,474
373,619
$2,273,634
509,810
(215,000)
(176,000)
(18,000)
155,720
18,000
(858,030)
(730,000)
(454,000)
(57,600)
502,000
57,600
(762,350)
(430,000)
(103,333)
(34,400)
299,280
34,400
730,557
(1,000,000)
(533,333)
(80,000)
696,000
80,000
524,760
(1,625,000)
(866,667)
(130,000)
1,131,000
130,000
1,422,777
(280,000)
(500,000)
(550,000)
(650,000)
(750,000)
(280,000)
(500,000)
(550,000)
(650,000)
(750,000)
0
0
(100,000)
0
0
0
(100,000)
100,000
0
(100,000)
0
0
0
0
(100,000)
0
(100,000)
0
0
(50,000)
(250,000)
80,557
(125,240)
422,777
180,177
$54,936
54,936
$477,714
0
0
0
0
0
0
0
0
100,000
400,000
0
500,000
0
1,000,000
(1,138,030)
(262,350)
1,500,000
$361,970
361,970
$99,620
99,620
$180,177
33
Thoughts on Raising Capital
 Be prepared to concisely link the strategy &
financial elements of your plan
● Milestone-based
 Raising capital is a long, hard and challenging
process that requires a substantial time & effort
 Who you raise capital from is much more
important than how much capital you raise
 Listen, learn & improve your plan along the way
 Have realistic expectations about how much
money you can raise and have a “plan B”
 Friends, family & personal funds are usually the
only source of capital available for new ventures
34
Milestones
 Milestones and expected cost
● Shows business understanding and intention to track
performance closely against the business plan
 Milestone Examples
● Hiring of a full management team
● Completing product specifications
● Completing prototype
● Product testing
● First customer shipment
● First full quarter of profitability
● Achieving $X million in revenue
35
The “Fully Funded” Folly
Idea is
Feasible
Technology
Works
A Customer
Buys
Valuation
Risk (ß)
Capital
Fully
Fund
(……….pray……………….)
IPO
36
Funding to Milestones
aka “Old-Fashioned Venture Capital”
Idea is
Feasible
Technology
Works
A Customer
Buys
P(success) = 80%
Req’d IRR = 30%
Valuation
P(success) = 50%
Req’d IRR = 50%
P(success) = 30%
Req’d IRR = 100%
P(success) = 40%
Req’d IRR = 70%
Risk (ß)
Capital
Seed
Funding
R&D
Capital
Go-to-Market
Capital
Expansion
Capital
37
What is the planned "Use of Proceeds"?
 Investors want to know how their
money is being deployed
● Capital to invest in sales/market growth
►What will it allow you to accomplish?
● When will your company break even in
terms of profitability and cash flow?
 The ultimate goal is to reach an exit
scenario
● Profitable businesses are more attractive
to potential buyers or public markets
38
Summary
 Create value by managing risk
 Communicate the business strategy in easily
understandable and believable financial terms
● Strategy & Financials - complementary and consistent
 Projections need to be realistic and believable
● Focus on information that really matters
►
Numbers should support strategy and key drivers of success
● Integrate assumptions and statements
● Bottoms Up approach
● Funding milestones within cash and revenue projections
● Reduce risks of the business
►
Funding milestones
►
Especially mng’t quality and experience
 Understand the Operating Cycle
 Don’t run out of Cash!!
39