Financing Entrepreneurial Ventures Part 1 Financial Plan & Statements

Transcription

1 Financing Entrepreneurial Ventures Part 1 Financial Plan & Statements Barbara Peitsch Program Director, Univ. of Michigan Peter Scott Professor of Entrepreneurship/Consultant August 2015 Economic Empowerment of Women through Entrepreneurship

2 Discussion Overview Audience for financial plan What is the financial plan Estimating costs The plan Income Statement Cash Flow Balance Sheet

3 Audience Necessary sources of company information for wide variety of stakeholders Users include: Company management teams Investors Creditors

4 The Financial Plan (pro formas) The plan should include 1-5 years of Income Statements 1-5 years of Cash Flow Statements 1-5 years of Balance Sheets Statements should have reporting periods Monthly Year 1 Quarterly Year 2 / 3 Annually Year 4 & 5

5 The Financial Plan (pro formas) Financials are driven by business model and milestones Describes revenues, profits, cash flows Describes investments necessary to achieve goals Demonstrates overall economic potential of venture

6 The Financial Plan (pro formas) Used as decision making tool to help guide company Budgeting & goal setting Actual vs. forecast comparison Shows breakeven Required when seeking any form of funding Indicates investment return to investors Indicates exit potential

7 Financial Plan & Milestones Reasons for investment Operating Expenses Research & development Hire employees Marketing / sales Intellectual property Regulatory certification Capital Expenditures Finance purchase of property, plant and equipment Working Capital Finance inventory and receivables net of payables

8 Financial Plan & Milestones Investors Finance to milestones Reduces risk (technology, market, team, financing) Valuation changes at each new milestone Raise enough capital to exceed the milestone

9 Financial Plan & Milestones Milestones Build team Build prototype Complete product design Manufacture first unit Sign a development contract with a customer Sign partnership agreement Sign 1st customer / 1 st Dollar of revenue Breakeven

10 Common Mistakes Optimistic revenue projections Underestimating costs Lack of industry or competitor comparisons Ignoring bottom-up forecasting Optimistic time to financing projections Does not match Schedule

11 Estimating Costs More than just your salary You will need help People You will need space Rent You will need to tell people how good your product Sales & Marketing

12 Estimating Costs - example

13 The Income Statement The Income Statement shows a firm's revenues and expenses, and taxes associated with those expenses for a defined financial period. Remember that an Income Statement does not reveal hidden problems like insufficient cash flow.

14 Income Statement - analysis Analysts use the statement of earnings to examine a company's profitability trends in revenue operating income gross profit rates (or margins) return on assets return on equity or return on investment (ROI).

15 Income Statement - common mistakes Revenues Optimistic sales projections Method of forecasting revenue Seasonality in sales projections COGS: Do these fluctuate with sales? Salaries & Wages Do they account for Federal and State payroll taxes? Do they account for fringe benefits?

16 Income Statement - common mistakes Seasonality Marketing & Advertising: Do these fluctuate prior to increase in sales? Utilities: Do these fluctuate in seasons of heavy use? Start-up Costs Are these appropriately amortized? Are these appropriately depreciated?

17 Cash Flow Statement Cash - company's lifeblood Includes currency checks on hand and deposits in banks short-term, temporary investments, that can be quickly and easily converted to cash. Reports company's sources and uses of cash beginning and ending values of cash & equivalents for period change in cash and equivalents from all sources and uses of cash

18 Cash Flow Statement: Inflows Beginning Cash Balance Cash Inflows (Income): Accounts Receivable Collections Loan Proceeds Sales & Receipts Equity Proceeds =Total Cash Inflows

19 Cash Flow: Outflows Examples Advertising Bank Service Charges Credit Card Fees Delivery Health Insurance Insurance Interest Purchases Office Payroll Payroll Taxes Professional Fees Rent or Lease Subscriptions & Dues Supplies Taxes & Licenses Utilities & Telephone Inventory

20 Cash Outflows - continued Other Cash Out Flows: Capital Purchases Loan Principal Owner's Draw Other = Total Cash Outflows Ending Cash Balance

21 Cash Flow Statement common mistakes Ending Cash Is it always positive? regardless of the period (i.e. month, quarter, and year) Is ending cash enough to finance future growth and expansion for the business? Cash Flows from Investing Accounted for in the proper period?

22 The Balance Sheet The Balance Sheet a statement detailing What a company owns (assets) Claims against the company (liabilities) Owners' equity On a given date Snapshot illustrating company's financial health.

23 Balance Sheet common mistakes Assumption for Accounts Receivable 30, 60, or 90 day payment period? Does the plan account for delinquent payments? Assumption for Accounts Payable 30, 60, or 90 day payment period? Does the balance sheet balance?

24 Benchmark Ratios Helps investors determine how money is being used Net Profit Margin Gross Profit Margin Operating Expenses as % of Revenue Current Ratio Current Assets / Current Liabilities ROI - Net Income / Investment ROE Net Income / Shareholder Equity

25 Presenting the Financials Example Manufacturer of electric bikes in product development for 1 year beginning to sell 1 st product Raised seed capital Raising $1M Milestones achieved Patents applied for Team partly assembled (need VP Sales & Mkt) 1 st product developed

26 Presenting the Financials in 1000s Units Sold ,225 Revenue 140 1,903 11,350 CoGS 120 1,355 7,771 Gross Profit ,579 Gross Margin 29% 32% Operating Exp ,409 2,733 Operating Income (361) (861) 845 Cash end of year 449 1,966 1,699 Head Count Assumes $1M funding round in Q3 of 2011 and $3 million funding round Q

27 Presenting the Financials e-bikes seeks a total of $4-6 million in two rounds of preferred equity financings.

28 Remember Cash is king Conserve cash at every corner What assumptions effect cash consumption? How realistic are your forecasts? Don t say these are conservative You MUST do the financial statements before the talking to investors!

29 Thank you Barbara Peitsch Peter Scott