Biotechnology Yes Finance
Who? Jane Nolan MBE Entrepreneur and Enterprise Educator supporting the work of Newcastle University Careers Service MD Venture Coaching and Consulting Ltd 2nd Year PGR
Your Business What is the Market? How will you Approach it? What is the Unique Selling Proposition? What is the competition and what advantage does your product or service offer? Who are you targeting? What are the Risks and Rewards? What Knowledge or intellectual property is involved? Patents, Trademarks? Is it legal, Ethical, Sustainable? What skills and abilities will be needed in your team? How much money is needed, from where?
Finance Every decision has financial implications Must be resourced Need to be aware of the financial impacts of decisions before you act on them How might changes in the business environment affect you? Use financial forecasts P&L, Balance Sheet and Cash Flow Forecast
Financial Planning and Modelling Create forecasts of what you think your business can achieve Can try out different pricing structures, sales forecasts, costs By working out your cash flow, you can understand what your finance needs are Helps work out the consequences of our business decisions and helps us control our business
Need for Finance Money is a measure of success and performance Businesses need money to operate sufficient resources to enable start up, day to day operations and growth Main reason for business failures inadequate capital in the business Someone in the team needs to understand the finances
Need for Finance Start up costs Raw materials Product development Intellectual Property Premises Marketing People - Team vitally important Costs identified through the business plan
Business Plan Main Elements Executive Summary Details of the Business Description of the product/service/technology Marketing Strategy and Plan Management and Organisation Financial Projections Appendices
Financial Reporting Need to measure performance of the business - profitability What are you earning, what do you owe, are you making any money? Demonstrate viability to business owners, bankers, investors Legal requirement for historic accounts HMRC and Companies House
Finance Understand the main business and finance concepts and speak confidently and knowledgeably about your business model You need to know what you will charge for your product or service To understand your cashflow To know what finance you need to start and operate the business and to justify that To understand your costs and demonstrated an ability to contain them
Finance Realistic Cash Flow and Profit and Loss Clear linkages between level and timing of investment required and achieving commercial milestones How do you value your business? What is the clear exit route for investors?
Pricing Main source of finance sales revenues Pricing is key need to be profitable What does your product or service cost to produce? Direct costs and indirect costs? What are the competitors doing? Do you have something unique can you charge a premium?
Break-even Point The break-even point is where sales are equal to costs 2 types of costs Fixed costs don t change with sales (eg overheads like rent) Variable costs do change with sales (eg amount of raw materials bought in) Break-even point (units) = Fixed Costs Selling price less unit variable cost
Break-even Point Fixed costs 10,000 Selling price per unit 5 Raw materials (variable costs) per unit 3 10,000/ 5-3 = 5000 units Need to sell 5000 units to break even Need to sell 10000 units to make 10,000 profit
Main Accounting Components Profit and Loss Account Balance Sheet Cash Flow Statement Used both as powerful forecasting and modelling tools and as historic records of performance
Profit and Loss Account Measures the profits or losses earned by the business over a period of time (month, quarter or year) by deducting running costs from sales income Includes non cash items such as depreciation on fixed assets
Profit and Loss Account Gross Profit Sales revenues less direct costs materials, production wages/costs Net Profit Gross profit less indirect costs/overheads Management costs, energy, marketing, premises, finance and loan costs
P&L Account Sales 40,000 Less direct cost of goods sold (20,000) Gross profit 20,000 Less Operating Expenses (10,000) Operating Profit 10,000 Less bank interest, finance costs (1000) NET PROFIT before tax 9,000
Depreciation Writing off the value of an asset over its working life value in accounts must be the lowest of cost or net realisable value reduces profit Non cash item because it is notional it doesn t involve any movement of cash unless the actual item is sold, therefore doesn t appear on the cashflow
Profit vs Cash Profit and Cash different! Cash is immediate the money in the bank Profit takes into account other factors which affect value Eg depreciation
Balance Sheet A snapshot of the assets and liabilities of the business on a given date Assets machinery, stock, money owed by customers, cash in hand Liabilities money owed to suppliers, loans, bank overdraft Shows the sources of funding owners equity, profits earned and retained, borrowings, investments
Balance Sheet The way money is used in the business: Assets, liabilities, working capital BALANCED by The capital invested by owners and shareholders Retained earnings and profits
Balance Sheet Fixed Assets (equipment) 20,000 Current Assets stock 4000 owed by customers 12000 cash at bank 1000 Sub Total17,000 Less Current Liabilities owed to suppliers 4000 Sub Total (4,000) Net Current Assets (working capital) 13,000 13,000 Total Assets less total current liabilities 33,000 Less Creditors falling due after 1 yr bank loan (10,000) Net Total Assets 23,000 Capital Owners capital introduced 13,000 Retained Profits 10,000 Total Capital and Reserves 23,000
Balance Sheet Net Total Assets also called Net worth or Equity Ownership of the Business 2 main sources of Shareholder s Equity Original investment in company and any additional investments Retained earnings or profits made over time
Cash Flow Statement Shows the movement of cash into and out of the business at the time it occurs Money in sales, finance, interest, loans, investments Money out direct costs, indirect costs (overheads), capital investment, dividends on equity investment, bank interest, loan repayments Predict then update with actuals
BUSINESSES FAIL BECAUSE THEY RUN OUT OF CASH Cash is King!
The Cash Flow Forecast Time Intervals Cash In Cash Out Item Item Item Item Item item Balance brought forward Cash flow Balance carried forward
GROUP TASK 1 John plans to start a business on 1 st January manufacturing and selling a new range of compressor. His plans include the following: Equipment: 20,000 (purchased and paid on Jan 1 st ) Rent: 500 per month (payable start of each month) Estimated overheads (o/h) of 1,000 (payable monthly) Sales estimated at 6,000 for 3 months, then 7,500 from April onward John realistically budgets to give all customers 2 months credit (therefore receipts for January sales will register in March) Materials estimated at one third of sales volume, friendly suppliers have agreed to give 1 month credit Loan from bank: 10,000 from 1 st January interest will be charged at 20% per annum. Therefore 5% is charged at the end of each quarter (Mar, Jun, Sept, Dec) Prepare a monthly cash flow forecast for the 6 months to 30 June at first ignoring capital John may have to introduce. How much money (capital) will John have to introduce in order to avoid a cash deficit during the 1 st 6 months of trading?
Key Questions How much money do you need and what for? What type of finance do you need? How will you repay the money?
Your Costs and Cash Flow What are the likely costs and outgoings Materials, production costs, overheads Patents and IP Think about the timing when will you pay out costs, make purchases What are your sources of revenue (income) When will you make sales? When will you invoice your products and what payment terms will you offer?
Business Model Canvas Your business model is your rationale of how your organization creates, delivers, and captures value Value can be economic, social, or other forms Business Model Canvas = Framework to help consider your business model http://www.businessmodelgeneration.com /canvas
Business Model Canvas Use the canvas list everything that you would need to do to get the business up and running When you would have expenditure and when you could expect sales income Creates the basis for your cash flow forecast so you know how much money you need
http://www.businesslink.gov.uk http://www.ncl.ac.uk/careers/assets/documents/business_plan_guide.pdf http://www.ncl.ac.uk/careers/riseup/startup/links.php www.businessballs.com/freebusinessplansandmarketingtemplates.htm
Rise Up Careers Service, Kings Gate Elevator market research and other resources General discussion for the competition: Jane.nolan@newcastle.ac.uk To take forward your business idea in the future: make appointment with Development Officer