Building Financial Projections

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Building Financial Projections

• January 31, 2006
• Charlie Tillett
• SM 91
• 781-276-8448
• charlie.tillett_at_revealimaging.com

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Agenda

• Business Plan Financials
• The Business Model
• Building Financial Projections
• Sharing the Pie

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Background

• 1991 Sloan SM Entrepreneurial Finance
• Third Place 1990 10K Contest
• Summer Intern - Boston Capital Ventures
• 91 to 00 CFO - NetScout Systems (NTCT)
• - VC financings of 6MM and 45MM
• - IPO in August 1999
• Current CFO Reveal Imaging
• Bomb Detection for checked baggage
• Completed 10MM VC funding in July 03

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EntrepreneurshipIf not now, WHEN?

• Workload
• Expenses
• Experience the Teaching Moment
• Alternatives
• Identify industry you want
• Identify best company
• Convince them to hire you

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Business Plan FinancialsCharlies
Rules-of-Thumb Disclaimer

• Focused on making attractive to investors
• Most relevant for technology companies
• May not apply to your industry
• Most common Business Plan errors
• Revenue too high in year 4
• Profit too high in year 4

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Business Model Examples

• Subscription business model Magazines, Software
• Razor and blades business model Gillette
• Multi-level marketing business model Amway
• Network effects business model AOL - IM
• Cutting out the middleman model Pets.com
• Bricks and clicks business model Barnes Noble
• Loyalty business models Nordstrom
• Servitization model IT Services
• Low-cost carrier business model Jet Blue
• Source Wikipedia.com

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Broadcast Radio Model

• Costs
• Transmission Equipment
• Receivers
• Providing Content
• Alternatives
• Pay-by-the-message (e.g. telegraph)
• One-time Fee on Receivers
• Tax on receivers (subscription)
• Advertising

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What is The Business Model

• Explanation of how business will MAKE MONEY
• A Profit Loss Statement
• Financial performance in percentage terms
• In assessing YOUR business model
• Determine critical mass

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Profit Loss (PL) StatementAlso called Income
Statement
Sample

• Revenue (after discounts)
• Cost of Goods Sold (COGS)
• Direct product cost
• Mfg but NOT RD
• Gross Margin or Gross Profit
• Departmental Expenses
• Operating Profit / Loss
• Profit before taxes (PBT)
• EBITDA (Earnings before interest, taxes,
  depreciation, amortization)

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Business Model ExampleTypical Data-Com Company
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Actual Business ModelsQ3 98 vs. Q3 00 vs. Q3
03
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Actual Business ModelsQ3 98 vs. Q3 00 vs. Q3
03
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Building YOUR Model

• Start with what you know
• Your Cost of Goods Sold
• RD should end up at 10 to 20
• GA should end up at 5 to 15
• Target an operating profit of 15 to 20
• Only remaining variable is S M
• Verify by looking at comparable companies

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First Major DecisionHow will you sell your
product?
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First Major DecisionHow will you sell your
product?
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Building Financial ProjectionsRules-of-Thumb

• Average employee salary will be 70K to 80K
• Employee benefits will add just 15
• Salaries will be 60 to 75 of non-COGS
• Remainder will be rent, utilities,phones, travel
  
• UNLESS you have extraordinary marketing!!!
• Will reduce to 50 to 55 over time
• Staffing DRIVES departmental expenses

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Building Financial ProjectionsRules-of-Thumb

• Sales Projections
• 50MM to 100MM in year 5
• Market Size
• Between 5 and 25
• Revenue per Employee
• Between 125K and 300K
• Revenue per Salesperson
• Between 1MM and 3MM

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Cash Flow Projections Happiness is a positive
cash flow

• Burn Rate
• Monthly operating loss plus capital expenditures
• Cash Flow Projection
• Cumulative operating losses excluding
  depreciation
• Plus cumulative capital expenses
• To determine the total cash required
• Cumulative operating losses PLUS
• Cumulative capital expenses
• On the month that you turn cash positive

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VC Observations

• Dont expect you to spend you own money
• BUT
• Expect you to spend it as though it were your
  own
• VCs dont want their entrepreneurs to starve
• BUT
• They want them to be hungry

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End Result 4 year Profit and Loss Statement
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Profit and Loss Statement Quarterly
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Sales and COGS Forecast
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Staffing Plan
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Salary Expenses
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Non-Salary Expenses
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Non-Salary Expenses
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Profit and Loss Statement Quarterly
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CAPEX Cash Flow
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Real World Expenses

• See 50K Web Site for more detail
• //50K.mit.edu

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Financial DataPresentation Suggestions

• Steady, consistent evolution of your model
• Revenue growth in
• Expenses over time in
• Show next to quarterly yearly columns
• Show pre-tax only
• Dont allocate GA expenses
• Show depreciation expenses on a separate line

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Executive SummaryPresentation Suggestions

• Annual PL for 4 or 5 years (with )
• Data to justify revenue projections
• Unit sales
• Average selling price (ASP)
• What quarter you will be profitable
• Your total cash requirement

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Full Business PlanPresentation Suggestions

• Page 1 Annual PL for 4 years
• Page 2 3 Quarterly PL for all 4 years
• Page 4 Quarterly Staffing plan for 4 years
• Page 5 Quarterly cash flow for 4 years

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Philosophy on Team Building

• Work to be Completed Work Completed
• Compensate for both risk and sacrifice
• Reward for getting to the End Zone
• Maintain internal equity
• EVERYONE should vest Typically 4 years
• BUT - every situation is different and rules are
  made to be broken

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Three Main Groups

• Founding Team
• Investors
• Employees

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Founding TeamKey Factors

• Value of past contributions
• Value of future contributions
• Over next 12 months
• Over next 4 years
• Sacrifice Commitment
• Ownership of IP
• Individuals external or Market value
• Internal Equity everyone finds out

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EmployeesKey Factors

• Companys stage
• Funding
• Revenue
• Liquidity
• Employees value to company
• Employees market value
• Internal equity

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Employee Specifics

• Ownership after 2 rounds of financing
• CEO 5
• VP 1 to 2 ½
• Sr Manager .25 (1/4 of 1)
• Sr Ind Contributor .1 (1/10 of 1)
• YOU CAN ALWAYS GRANT MORE LATER

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Equity Distribution Example
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Equity Distribution Example
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Equity Distribution Example
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Equity Distribution Example
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Equity Distribution Example