Developing a Financial Plan for your Business. Speaker: Kerri Golden, CA, Primaxis Technology Ventures

2. If you fail to Plan: will your Plan fail?
Developing a Financial Plan
for your Business
Kerri Golden, CA
Partner – Primaxis Technology Ventures
CFO – Infobright Inc.
February 13, 2008

3. Presentation Overview
 Financial Plan: part of your Business Plan
 The Top Line – Sales, Cost of Sales and Margin
 Operating Expenses – R&D, Selling and Admin.
 Business Case Tool
 Balance Sheet - Working Capital, Equipment and
Debt/Equity Financing
 Cash Flow – Entrepreneur’s most important tool
 Closing Remarks
3 Financial Planning – February 2008

4. The Business Plan ~ 30 pages
 Executive Summary
 Company and Opportunity Summary
 Product and Technology
 Market Size and Growth
 Sales and Marketing Plan
 Competitive Overview
 Operations Plan
 Management Team
 Financials and Investment Requirements – focus for today
4 Financial Planning – February 2008

5. Before you start your Financial Plan…
 You need an outline of your Business Plan including:
Product and Technology
• R&D budget for development of technology and initial products
• Specification of products - bill of material and labor cost to build
• Product’s evolution over time - cost reduction projects/estimates
Market Information, including Competitive Overview
• Sales Unit Targets, Pricing, Sales Team and Partner Compensation
Sales and Marketing Plan
• Go to Market Plan, Distribution Strategy, Marketing activities
Operations Plan
• Details of support program, team, equipment required…
5 Financial Planning – February 2008

6. Income Statement – the Top Lines
Year One Year Two Year Three
Sales $0 $1.4M $5.7M
Cost of Sales $0 $0.3M $1.1M
Gross Margin $0 $1.1M $4.6M
R&D Expenses $1.5M $2.3M $3.0M
Selling Expenses $0.7M $2.2M $3.7M
Admin Expenses $0.6M $1.2M $1.5M
EBITDA ($2.8M) ($4.6M) ($3.6M)
ITDA* $200K $300K $400K
Net (Loss) Income ($3.0M) ($4.9M) ($4.0M)
*ITDA = Interest, Taxes, Depreciation and Amortization
6 Financial Planning – February 2008

7. Translating Market Share to Sales?
Target 1% of the projected $3 billion market by year five, work
backward to earlier year sales projections
Year five projected sales = $30 million
My Company
Tip:
It can be better to segment the
market and show your market
share in relation to segment –
investors like to back companies All Competitors
who will be significant players in
their market segment
7 Financial Planning – February 2008

8. Sales Forecast – bottom up more credible!
 Distribution Channel = Doctors
 Recruit Doctors as follows:
 150 in year one through trade shows (60 signed up already)
 2,400 doctors by year five of the plan, serving up to 30,000
patients
 Product pricing:
 Annual patient revenues of $1,000 per year
 Pricing starts at $1,200 per year, competition drives average
price down 20% over period of the plan
 Require 6 regional sales and support reps to
support Doctor Network
8 Financial Planning – February 2008

9. Other Sales Forecast Considerations
 Mixed Distribution Model may result in multiple selling
prices for products
 End User Selling Price for product sold directly to customers
 Wholesale Price for sales distribution partners
 Currency
 Most Canadian companies sell their products in US and other markets
– Develop pricing strategies for individual markets, validate and state
assumptions in your plan
 Service Revenues
 Dependent on salary/consulting rates which generally increase over
time
9 Financial Planning – February 2008

10. Always ask: Is Your Plan Realistic?
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11. Cost of Sales and Gross Margin
 The direct costs of producing your product
 Bill of Material, Labor, Warehousing, Shipping…for products
 Service Team Labor and Material Costs
 Costs will evolve over time
 Production volume will impact unit cost
 Labor costs will generally increase, although they often drop as a
percentage of costs over time
 Planning for cost reductions – it is common for technology companies
to get version of product to market & then re-engineer it for lowest cost
 Gross Margin
 Expressed in dollars and often a percentage – you should understand
margin targets for your industry/sector (Software – 80-90%, Product
Companies – 45-60%)
11 Financial Planning – February 2008

12. Expense Projections - Income Statement
Year One Year Two Year Three
Sales $0 $1.4M $5.7M
Cost of Sales $0 $0.3M $1.1M
Gross Margin $0 $1.1M $4.6M
R&D Expenses $1.5M $2.3M $3.0M
Selling Expenses $0.7M $2.2M $3.7M
Admin Expenses $0.6M $1.2M $1.5M
EBITDA ($2.8M) ($4.6M) ($3.6M)
ITDA* $200K $300K $400K
Net (Loss) Income ($3.0M) ($4.9M) ($4.0M)
*ITDA = Interest, Taxes, Depreciation and Amortization
12 Financial Planning – February 2008

13. R&D expenses may be your comfort zone
 Teams generally comfortable forecasting these costs
 Largest component is labor costs for the team - should
consider evolution of team over time from research to
product design/development, testing and QA
 Must address sustaining work on product line, field
support for customers and future product cost reductions
 Costs of patenting/protecting trade secrets
 Any licensing costs to use technologies from 3rd parties
 Tax credits/grants can help stretch your R&D budget
 Scientific Research and Experimental Development (SRED) – federal
 Ontario Innovation Tax Credit (OITC) and other provincial programs
 NRC-IRAP programs – advisory services and R&D funding (matching)
13 Financial Planning – February 2008

14. But selling expenses often drive growth!
Newbridge – sales results for the early years
 1987 - $1.3M
 1988 - $17.6M
 1989 - $67.4M
 1990 - $121.2M
 1991 - $149.1M
 1992 - $181.M
 1993 - $307.6M
Newbridge spent 50%+ on selling and only 33% on
R&D to generate spectacular sales growth
14 Financial Planning – February 2008

15. What’s in Selling Expenses?
 Labor costs for sales and marketing team members –
usually a team that is geographically remote
 Commissions – how does your plan compare with
industry to enable recruiting top resources?
 Marketing Costs – Public Relations, Advertising, Trade
Shows, Website, Lead Generation, Case Studies,
Customer Documentation, Partner recruiting costs
 Travel, Living and Entertainment – strategy to ensure
customer coverage and policy to control costs
 Performance measures to ensure the costs of pursuing
customers are matched with margin on sales
15 Financial Planning – February 2008

16. What’s in Admin Expenses?
 Labor costs for operations, customer support, finance,
HR, IT and admin teams, including CEO
 Rent and related costs (telephone, internet, supplies…)
associated with running the office and operation
 Recruiting and other HR costs – may be significant as
team is ramped up
 Professional Fees including legal, audit, tax, insurance
 Board/Investor Relations costs
 Travel expenses for CEO/CFO
 Misc. Costs – bank charges, courier, postage
16 Financial Planning – February 2008

17. The Business Case Tool
Year One Year Two Year Three
Incremental $0 $2,000K $6,000K
Revenue
Incr. Margin $0 $1,000K $3,000K
R&D Costs $1,000K $300K $200K
Selling Costs $150K $500K $1,200K
G&A Costs $100K $200K $300K
Total Costs $1,250K $1,000K $1,700
Total Margin ($1,250K) $0 $1,300
Business case discipline should be added to ensure that future
development projects contribute to financial success.
17 Financial Planning – February 2008

18. The Balance Sheet – an example
Year One Year Two Year Three
Cash $17K $4,738K $898K
Accounts Rec. $176K $929K $1,371K
Inventory/Prepaid $223K $190K $328K
Fixed Assets $203K $304K $343K
Total Assets $619K $6,101K $2,939K
AP & Liabilities $429K $1,020K $1,786K
Financing* $3,227K $13,008K $13,324K
Ret. (Loss) Income ($3,037K) ($8,006K) ($12,170K)
Total Liab/Equity $619K $6,101K $2,939K
*Financing could be Debt, Equity or combination thereof
18 Financial Planning – February 2008

19. Asset increase = use of cash
 Accounts Receivable (A/R)
 Amounts owing from customers, partners, tax credit, grant program,
GST input tax credits – assumptions regarding terms/collection
 As business grows, company may require cash or alternative financing
to fund A/R growth (e.g. customers pay 60 days after delivery)
 Inventory and Prepaid Expenses
 For product business, inventory build plan and management are critical
 Need product on hand to ensure sales targets can be met
 Some expenses (insurance, trade shows, rent) may be paid in advance
 Fixed Assets
 Equipment to be used in the business, expensed over longer-term
 Some businesses can be very capital-intensive
19 Financial Planning – February 2008

20. Liability/Equity increase = source of cash
 Accounts Payable and Liabilities (A/P)
 Need to reflect terms with suppliers, should be negotiated based on your
business cycle to minimize cash flow impact
 Other liabilities can include: Leases, Sales Tax Payable
 Debt Financing
 Small Business Loan for equipment
 Venture Debt, may be available along with equity funding
 Operating Line of Credit – usually secured against Accounts Receivable
and maybe Inventory assets
 Long-term Equipment Loan – may be available for capital-intensive
business
 Equity Financing
 Proceeds from sale of either common or preferred shares
20 Financial Planning – February 2008

21. Cash Flow Statement – key tool
 Often regarded as something accountant prepares for
monthly/quarterly/annual financial statements
 Should be used as a weekly or daily planning tool to
manage your business
 Opening Cash Balance
 + Cash Receipts from customers/other Receivable
 - Payroll Costs
 - Cash Payments to suppliers for Expenses/Inventory/Fixed Assets
 + Cash received from lenders or equity financing
 - Cash Payments, including interest for repayment of debt
 = Closing Cash Balance
 Understanding & managing cash flow is key to success
21 Financial Planning – February 2008

22. Some Final Thoughts
 Your business plan is quantified in your financial plan
 The assumptions/content must be consistent between the two plans
 The key aspects of the business plan need to be researched and
thought through before starting the financial plan
 Your financial plan can be a work in progress
 Not all elements of the plan need to be finalized before seeking funding
 Be honest about where there is higher degree of confidence in the plan
and where more work is required to complete
 Monitoring your business’ progress against your financial
plan is as important as developing the plan
 “Cash is king” in start-ups and the balance should be
monitored on a regular basis (daily or weekly)
22 Financial Planning – February 2008