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Business Plan Finance Workshop Bhavan Suri

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Lunch (11:30 12:00 PM) Team Breakout Session Workshop (12 1:30 PM) ... You should be 'vanilla-flavored' Present your finances in the standardized ... – PowerPoint PPT presentation

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Title: Business Plan Finance Workshop Bhavan Suri


1
Business Plan Finance WorkshopBhavan Suri
2
Agenda
  • Introductions
  • Finance Overview (10 1010 AM)
  • Financial Statements
  • Income Statements
  • Examples and Discussion
  • Lunch (1130 1200 PM)
  • Team Breakout Session Workshop (12 130 PM)
  • Summary Presentations from Teams (130 230 PM)
  • Q A and feedback forms

3
Introduction
  • What is a business plan?
  • A Business Plan is the document you create that
    details your business history, current standing
    and future plans
  • The business plan is the first document that most
    investors will see about your company

4
Introduction
  • As an Entrepreneur at what stage should you
    write a business plan?
  • How does investing generally work?
  • Angel/Seed, Series A, Series B, etc
  • How does ownership work as an entrepreneur
  • Your idea
  • Investors stakes
  • Exit Strategy

5
Finance Overview
  • A business plan depends on both words and numbers
  • In this workshop, we go through the basics of how
    the numbers come together
  • The single most important analysis in a business
    plan is a cash flow plan, because cash is the
    most critical element in business
  • However, you can't do a cash flow plan without
    looking at the income statement and balance
    sheets as well
  • But you really can't do the income statement
    without looking at sales, cost of sales,
    personnel expenses and other expenses, so you
    need those too
  • And to do a sales forecast without understanding
    your market, so a market analysis is recommended.
  • And then you have the break-even as part of the
    initial assessment, and tables for business
    ratios, general assumptions, and other numbers
  • Step by step, the business plan becomes a
    collection of tables and charts around the text.

6
Finance Overview
  • We are trained to think of business as profits
    sales minus costs and expenses
  • We need to manage cash as well
  • When starting a new business, you think of what
    it costs to make the product, what you can sell
    it for, and what the profits might be
  • We are trained to think of business as sales
    minus costs and expenses, which is profits
  • Unfortunately, we spend cash in a business

7
Finance Overview
  • Profitable companies can go broke because they
    had all their money tied up in assets and
    couldnt pay their expenses
  • Working capital is critical to business health
  • Unfortunately, we dont see the cash implications
    as clearly as we should, which is one of the best
    reasons for proper business planning. We have to
    manage cash, as well as profits.

8
Finance Cash Flow
  • Cash flow refers to the amounts of cash being
    received and spent by a business during a defined
    period of time, sometimes tied to a specific
    project.
  • This is very important for describing the health
    of the business because although you may have
    made 1000 in sales, you still may have to wait
    to collect that cash (due to the terms you have
    with the customer).

9
Finance Income Statement
  • Income statements for companies indicate how
    Revenue (money received from the sale of products
    and services before expenses are taken out, also
    known as the "top line") is transformed into Net
    Income (the result after all revenues and
    expenses have been accounted for, also known as
    the "bottom line").
  • Also called Profit and Loss Account (PL)

10
Finance Balance Sheet
  • A balance sheet is a statement of the book value
    of a business at a particular date
  • A balance sheet is often described as a
    "snapshot" of the company's financial condition
    on a given date. Of the basic financial
    statements, the balance sheet is the only
    statement which applies to a single point in
    time, instead of a period of time

11
Financial Statements
  • Lets start with 100, which well call capital
  • At the beginning of this exercise, your balance
    sheet has assets of 100--the money--and capital
    of 100
  • Assets are equal to capital plus liabilities
  • A summary of the simple financial statement

12
Financial Statements
  • We have a business that sells widgets
  • We buy a widget for 100 and sell it for 150,
    and end up with 50 profit
  • This is what your income statement cover - Sales
    minus costs are profit
  • We have 150 in the bank
  • The balance sheet shows the 100 in original
    capital plus 50 in earnings, which are equal to
    the 150 in cash (an asset)

13
Financial Statements
  • Replicate the sale - buy another widget for 100
    and sell it again for 150,
  • Now there is 200 in the bank. Do it again, and
    there is 250 in the bank
  • The Income Statement shows sales of 450, cost of
    sales of 300, and profit of 150
  • Below is the income statement and balance sheet

14
Financial Statements
  • The business has sold 3 units and made 150
    profit. In theory it has 250 in the bank
  • Lets add Some Realism
  • Most sales of products to businesses go on terms,
    with the money due in 30 days
  • So if the widget was sold on credit you dont
    have 150 in the bank - you still have 50 in
    your bottom line, but now you have nothing in the
    bank
  • Instead, a customer owes you 150 this is known
    as Accounts Receivable

15
Financial Statements
  • Sales and profits are the same as in, but you
    sold on credit, so now you have no money in the
    bank

16
Financial Statements
  • You now get your Widget supplier to sell to you
    on the same terms you sell, net 30, instead of
    for cash
  • Now you have 100 that you owe to suppliers -
    called Accounts Payable
  • You also have 100 worth of widget in inventory

17
Financial Statements
  • Business looked good, so you borrowed the money
    to buy another widget and continue
  • You have an extra 100 in assets (the widget in
    inventory) and an extra 100 as liabilities
    (Accounts Payable), so you are still in balance
  • And you still have no money

18
Financial Statements
  • So you have the same sales and profits as in the
    Sell 3 Widgets earlier example, but the balance
    sheet is more complex
  • Now the case is more like what you have with real
    business numbers
  • You have to manage your cash very carefully
  • The amounts sitting in inventory and accounts
    receivable are significant

19
Income Statement
  • The standard Income statement in accounting
    subtracts costs and expenses from sales and shows
    profits as the bottom line of the statement
  • Expenses start with personnel and include rent,
    utilities, equipment, advertising, sales
    commissions, public relations, and other expenses
  • The result is profits - Profits are what is left
    over after you start with sales, then subtract
    cost of sales, expenses, and taxes
  • The Income statement is the same as the Profit
    and Loss statement
  • Also known as "pro forma," meaning projected, as
    in "pro forma income" or "pro forma profit and
    loss"
  • The pro forma income is the same as a standard
    income statement except that it projects the
    future

20
Income Statements
  • COST OF GOODS SOLD (Cost of Sales or COGS) COGS
    are expenses directly related to producing or
    buying your products or services
  • E.g. purchases of raw materials, wages (and
    payroll taxes) of employees directly involved in
    producing your products/services. These expenses
    usually go up and down along with the volume of
    production or sales
  • Control of COGS is the key to profitability for
    most businesses
  • For each category of product/service, analyze the
    elements of COGS labor, materials, packing,
    shipping, sales commissions, etc
  • Underestimating COGS can lead to under pricing,
    which destroys profit
  • Analyze carefully and be realistic

21
Income Statements
  • GROSS PROFIT Gross Profit is Total Sales minus
    Total COGS
  • OPERATING EXPENSES (Overhead) These are
    necessary expenses which are not directly related
    to making or buying your products/services.
  • E.g. Rent, utilities, telephone, interest, and
    the salaries (and payroll taxes) of office and
    management employees
  • Most operating expenses remain reasonably fixed
    regardless of changes in sales volume
  • Some, like sales commissions, may vary with
    sales. Some, like utilities, may vary with the
    time of year. Your projections should reflect
    these fluctuations
  • NET PROFIT This is Gross Profit minus Total
    Operating Expenses

22
Income Statement
  • Subtract cost of sales from sales
  • This gives gross margin, an important ratio for
    comparisons and analysis
  • A more detailed Profit and Loss is shown in the
    next illustration.

23
  • Operating expenses divided into categories,
    including Sales and Marketing expenses and
    General and Administrative expenses (SGA)
  • The sum of expenses ultimately determines the
    company's profitability
  • This is the budgeted business plan

24
Balance Sheet
  • Projecting your balance sheet can be quite
    complex
  • The result should be a plan detailing what
    additional resources will be needed by the
    company, and how they will be financed
  • Use your historical balance sheet as a starting
    point for your projections
  • Balance sheet is composed of ASSETS and
    LIABILITIES and these MUST balance

25
Balance Sheet - Assets
  • How will the year's operations affect assets,
    debts, and equity assuming significant sales
    growth in the coming year
  • ASSETS Inventory and Accounts Receivable will
    have to grow. New equipment may be needed for
    increased production. You may draw down on cash
    to finance some of this

26
Balance Sheet - Liabilities
  • The balance sheet must balance, so on the other
    side we have liabilities
  • LIABILITIES EQUITY Some of the growth may be
    financed by profits retained in the business as
    Retained Earnings.
  • Your Profit Loss Projection shows how much
    might be available from that source.
  • Funds may also be contributed by the owners
    through contributions of more Invested Capital or
    loans to the company (Notes Payable to
    Stockholders).
  • Suppliers may provide some of the financing via
    increased Accounts Payable.
  • The rest will have to be financed by borrowing,
    which can be Short term loans (due within 12
    months) such as a line of credit. Or by Long Term
    Debt (maturity greater than 12 months)

27
Balance Sheet
28
Examples and Discussion
  • Starting from scratch
  • Forecasting sales is the starting point for the
    financial projection
  • The sales forecast is key, so it is important to
    use realistic estimates
  • Divide projected monthly sales into "Categories
    which are divisions that make sense for your type
    of business. Example categories are product
    lines, departments, branch locations, customer
    groups, geographical territories, or contracts.
  • Enter annual sales, by category, in the four
    "Sales History" columns on the right side of the
    sheet. (Startup businesses can delete this
    section)
  • Analyze past sales and note seasonal/periodic
    fluctuations determine what caused them and when
    they are expected to recur
  • Build these fluctuations into your projections
    for the coming year

29
Examples and Discussion
30
Examples and Discussion
  • Cash Flow
  • On the Profit Loss Projection, check line by
    line when cash should come and go. This is to
    determine when you will actually collect from
    customers
  • On the expense side, predict when you will
    actually have to write the check to pay those
    bills
  • Most items will be the same as on the PL. Rent
    and utility bills, for example, are paid in the
    month they are incurred
  • Insurance, taxes, for example, may be payable
    quarterly or semiannually, even though you
    recognize them as monthly expenses
  • The payoff for an accurate cash flow is the
    ability to manage and forecast working capital
    needs

31
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32
Finances - Summary
  • This is where you present your company's
    financial history and projections
  • Do not be overly creative in this section of your
    plan
  • You should be "vanilla-flavored Present your
    finances in the standardized manner to which
    accountants and investors are accustomed
  • Provide past results (if applicable), and two to
    three years of projections (pro forma)

33
Workshop Project
  • Consulting Company
  • Basic Revenue Assumptions
  • Hours per week that you bill per consultant 48
  • Current (2006) Utilization Rate is 66, assume
    this will go up to 75
  • Average Billable Rate is 150/hr, assume this
    goes up to 180/hr
  • Currently (2006) 8 consultants, assume this will
    go up
  • Assume you will have software products in 1 year,
    that will generate revenue starting at 20,000
    but will never exceed 1 of consulting revenue

34
  • Consulting Company
  • Basic Expense Assumptions
  • Fully loaded cost per consultant is 75 of
    revenue that the consultant brings in
  • Product Development is 40 of the revenue that
    product sales brings in
  • You have infrastructure costs that are 75,000
    (2006), assume these will grow doubling for the
    next few years before slowing down
  • You have General and Administrative costs that
    are 75,000 (2006), assume these will grow
    doubling for the next few years before slowing
    down
  • You have RD costs associated with product sales
  • Create a Profit and Loss projection for 2006 out
    through 2011
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