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Forecasting & Finance for Entrepreneurs

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Forecasting & Finance for Entrepreneurs

  1. 1. Forecasting & Finance for Entrepreneurs Graham McFarland
  2. 2. Year 1 Year 2 Year 3 Subscription Sales $196K $2.9M $12.1M Services $45K $901K $3.6M Total Revenue $241K $3.8M $15.6M Cost of Revenue $25K $241K $1.1M Gross Margin $216K $3.6M $14.5M Gross Margin % 90% 94% 93% Sales & Marketing $107K $1.5M $5.4M Research & Development $ 29K $255K $1.8M General & Administrative $73 K $629K $2.3M Total Operating Expenses $210K $2.4M $9.5M Operating Profit (EBITDA) $6K $1.2M $5.1M Operating Profit % 3% 32% 32%
  3. 3. Cash vs. Accrual Accounting Cash: Revenue = when Cash Received Expenses = when Cash Paid Accrual: Revenue = when Earned Expenses = when Incurred Financial Statements (GAAP): Income Statement, Balance Sheet & Cash Flow Statement
  4. 4. Year 1 Year 2 Year 3 Subscription Sales $196K $2.9M $12.1M Services $45K $901K $3.6M Total Revenue $241K $3.8M $15.6M Cost of Revenue $25K $241K $1.1M Gross Margin $216K $3.6M $14.5M Gross Margin % 90% 94% 93% Sales & Marketing $107K $1.5M $5.4M Research & Development $ 29K $255K $1.8M General & Administrative $73 K $629K $2.3M Total Operating Expenses $210K $2.4M $9.5M Operating Profit (EBITDA) $6K $1.2M $5.1M Operating Profit % 3% 32% 32%
  5. 5. Revenue The value of the items sold to a customer. • Sale of something (widgets, licenses, items, etc.) • Subscriptions (annual, monthly, retention rate) • Services (installation, support, consulting) • Shipping & handling
  6. 6. Cost of Sales (COS or COGS) The direct cost of the items or services you sold • Hard goods (raw materials) • Product packaging & delivery • Web site hosting costs • Direct cost of providing services
  7. 7. Year 1 Year 2 Year 3 Subscription Sales $196K $2.9M $12.1M Services $45K $901K $3.6M Total Revenue $241K $3.8M $15.6M Cost of Revenue $25K $241K $1.1M Gross Margin $216K $3.6M $14.5M Gross Margin % 90% 94% 93% Sales & Marketing $107K $1.5M $5.4M Research & Development $ 29K $255K $1.8M General & Administrative $73 K $629K $2.3M Total Operating Expenses $210K $2.4M $9.5M Operating Profit (EBITDA) $6K $1.2M $5.1M Operating Profit % 3% 32% 32%
  8. 8. Gross Margin The amount of money you have left over from a sale after subtracting the direct costs of making that product or service. Gross Margin = Sales – COS High tech usually 85%-95%
  9. 9. Margin vs. Mark-Up Sales Price = $125 Cost = $100 Margin: $25 Margin % of the selling price = Gross Margin/Sales Price = $25/$125 = 20% Mark-Up % of the cost = Gross Margin/Unit Cost = $25/$100 = 25% FYI: Mark-Up is always higher
  10. 10. Year 1 Year 2 Year 3 Subscription Sales $196K $2.9M $12.1M Services $45K $901K $3.6M Total Revenue $241K $3.8M $15.6M Cost of Revenue $25K $241K $1.1M Gross Margin $216K $3.6M $14.5M Gross Margin % 90% 94% 93% Sales & Marketing $107K $1.5M $5.4M Research & Development $ 29K $255K $1.8M General & Administrative $73 K $629K $2.3M Total Operating Expenses $210K $2.4M $9.5M Operating Profit (EBITDA) $6K $1.2M $5.1M Operating Profit % 3% 32% 32%
  11. 11. Operating Expenses Indirect costs required to operate your business. • Sales & Marketing • Research & Development • General & Administrative
  12. 12. Sales & Marketing Selling, marketing and promotional expenses. • Sales salaries • Commissions • Advertising (web, print, e-mail campaigns) • Sales travel, lodging, car rental and meals • Trade show costs
  13. 13. Research & Development Expenses related to maintaining existing technology and developing new technology • Contractors • Developers salaries • UI Design salaries • Testing costs • Engineering costs
  14. 14. Capitalized Software Development Costs FAS 86 Technological Feasibility End of Revenues Planning & Software Available Research Development For Sale (expense) (capitalize) (expense) Product Begin Released Project Amortize over 3 years Total Development Cost / 3 yrs = expense recognized each year Improves your Operating Profit but not your Cash Flow
  15. 15. General & Administrative Expenses related to items that benefit the entire company • Legal expenses • Rent / lease expense • Accounting / bookkeeping expenses / salaries • Insurance costs • Utilities cost • CEO salary & benefits
  16. 16. Year 1 Year 2 Year 3 Subscription Sales $196K $2.9M $12.1M Services $45K $901K $3.6M Total Revenue $241K $3.8M $15.6M Cost of Revenue $25K $241K $1.1M Gross Margin % 90% 94% 93% Sales & Marketing $107K $1.5M $5.4M Research & Development $ 29K $255K $1.8M General & Administrative $73 K $629K $2.3M Total Operating Expenses $210K $2.4M $9.5M Operating Profit (EBITDA) $6K $1.2M $5.1M Operating Profit % 3% 32% 32%
  17. 17. Summary Version Year 1 Year 2 Year 3 Revenue $241K $3.8M $15.6M Gross Margin $216K $3.6M $14.5M Gross Margin % 90% 94% 93% Total Operating Expenses $210K $2.4M $9.5M Operating Profit (EBITDA) $6K $1.2M $5.1M Operating Profit % 3% 32% 32%
  18. 18. Things to Remember (avoid the red flags) • High tech companies should have gross margin % of between 80% and 95% • G&A should not be more than 15% of total revenue (or sb good reason) • High tech costs initially, then S&M kick in to flip with R&D • EBITDA % should grow each year but not greater than 45% (unless your Google @37%)
  19. 19. Overhead The additional costs associated with employees other than salary. Taxes - (6.2% FICA – on the first $107K, Medicare 1.45% - on all, Fed UI .8% - on the first $7K, State UI 8.6% - on the first $9K) Benefits (health, dental, vision) 401K matching (optional) Add 23% to the cost of all salaries $50K salary x 1.23% = $62K salary + overhead
  20. 20. Top Down Forecast Pick and number and then justify it. Grow revenue by 20% next year $250K x 20% = $50K so new revenue is $300K Expenses to grow 10% next year Bottoms Up Forecast (always the best) Do the math – don’t be lazy Sell 1,000 widgets at $29 each per month x 12 months = $348K Salaries and expenses per employee, etc.
  21. 21. Cash Flow Forecast Future look at your checkbook. Monthly Burn Rate The total amount of money you are spending each month.
  22. 22. Key Performance Indicators (KPI’s) • The metrics that drive your business • Something that can look at to get a sense of how the business is doing • Set goals and benchmarks • Look at often • Share them with employees, potential investors, etc.
  23. 23. Be careful about your metrics… “CSOI” Listener Hours Adjusted Consolidated “Bookings” Segment Operating Income Virtual revenue if all Total listener hours recognized at time of sale for the period Excludes costs not indicative of future earnings Q1 - $81.6M vs. ($98M)
  24. 24. Timeline Slide (Milestones) 3.5K 28K 67K Subscribers Subscribers Subscribers Month 3 6 12 18 24 30 36 Funding & Launch Profitable Build team Avg. monthly burn rate Yr. 1: $72K
  25. 25. Ask Slide • $500K raise Use of Funds $309K marketing, promotion & sales $112K product development $79K working capital & debt repayment
  26. 26. Tech Company Valuations It’s simple. Forget the confusing math. By Revenue: 3-5 X trailing 12 mo. Revenue By Operating Profit: 9-11 X trailing 12 mo. operating profit Good “real world” high-tech start-up valuation tool: http://www.caycon.com/valuation.php
  27. 27. Additional Resources: Simple Forecasting Model (36 months) • Widgets (selling products) • Subscriptions (selling monthly subscriptions) Excel spreadsheets Available on the website
  28. 28. Thanks Graham McFarland gmcfarland@strictlytalent.com @grahamcfarland

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