Building an Investor- Worthy Financial Model Cleantech Open Northeast Conference Suzanne C. Oakley,...

Building an Investor-Worthy Financial Model

Cleantech Open

Northeast Conference

Suzanne C. Oakley, CPABusiness Planning/Interim CFONew England CFO Strategies

Joseph McKneelyManagerDeloitte Financial Advisory Services LLP

June 28, 2011

The information expressed herein does not necessarily reflect the views and opinions of Deloitte Touche Tohmatsu, its member firms and their respective subsidiaries, and affiliates (“Deloitte”) or New England CFO Strategies. This publication contains general information only. Deloitte and New England CFO Strategies is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Deloitte, its affiliates, its related entities and New England CFO Strategies shall not be responsible for any loss sustained by any person who relies on this publication.

What are financial statements? 2

Designing a financial plan 9

Developing your assumptions 13

Cleantech Open team activity 20

Conclusions 21

Contact information 24

Questions? 25

Agenda


What are Financial Statements?


Financial Statements: Key to the Business Plan

• Demonstrates “proof” that the B-plan will make $$$$ — puts numbers to your business model theory

• Makes your B-plan come alive for the investor — translates technology and market to a financial story

• Demonstrates YOU know your milestones, YOU know your market, and YOU know how to make $$$$


Financial Statements: 3 Main Statements

• Result of a company’s operations over a specified period of time

• Measures revenues less expenses

• Snapshot of a company’s financial condition at a specific point in time

• Measures assets and liabilities

• Description of how a company generated or used cash over a period of time

• Measures CASH

Income Statement Balance Sheet Cash Flow


Financial Statements: Basic Elements

RevenueCost of Goods Sold (COGS)

Operating Expenses

(OPEX)

Capital Expenditures

(CAPEX)

Product Materials Research & Development

Buildings

All of these items drive the

most important item

which is…

CASH

Service Labor Sales Machinery

Maintenance Contracts

Overhead Marketing Equipment

General & Administrative

Furniture & Fixtures

Land


Financial Statements: P&L Format

Revenue- Cost of Goods Sold (Raw materials, Direct labor, Energy, Facilities, Equipment)

= Gross Margin

- Research and Development- Sales and Marketing- General and Administration (Management overhead)

= Earnings Before Interest & Taxes (“EBIT”)- Interest & Taxes

= Net Income

+ Taxes and Depreciation

= “EBITDA” or “Cash Flow”


Financial Statements: Cash flow Format

Beginning Cash

Operating activities Net Income or loss, from P&LDepreciation and amortizationChanges in current assets and current liabilities

Cash generated or consumed by

the business

Net Cash Provided for (used by) Operations

Investing activities Purchase new property and equipmentSale of property and equipment

Cash to or from the PPE

Net Cash Provided for (used by) Investing

Financing activities Proceeds from new equityProceeds from debt (payment of debt)Government grant

Cash to or from debt and equity

sales

Net Cash Provided for (used by) Financing

Ending Cash


Financial Statements: Balance Sheet Format

Assets Liabilities

Current Assets•Cash•Accounts Receivable•InventoryPlant Property and EquipmentOther

Current Liabilities•Accounts Payable•Current Portion of DebtLine of CreditLong Term DebtOther Liabilities

Equity

• Common Stock• Paid in Capital• Shareholder Equity or Deficit

A = L + E


Designing a Financial Plan


• What business are you in?–Manufacturing–Software–Services–Distribution–Development–Other

• What are the industry or traditional margins in that business?

• What is the industry sales cycle (long lead time?)

• How capital intensive is your business?

• Why will your business do better or worse than incumbents?

Designing a Financial Plan: Focus on Context


Designing a Financial Plan: Financing Milestones

Time

Units

ProductDevelopment

Introduction Growth Maturity Decline

+$-$

Product(Units)

Profits

Expenditures

Courtesy of Paul Sullivan University of Michigan

Prod DevAlphaBeta IBeta IIPilots

IPFundable Team

FriendsFamilyAngel

Early Stage

AngelEarly Stage

PilotsReg. LaunchNat. Launch

Fundable TeamIP

Early StageLater Stage

Repeatable Biz ModelEnhancementsNew Products

Later StageM&AIPO

OperatingEfficiencies

M&A


• Detailed, bottoms up approach (build the story)• 5 years projection (though 3 yr is focus)

– Monthly analysis year 1– Quarterly analysis years 2 and 3– Annual analysis years 4 and 5

• Monthly perspective to cash flow break even– Shows expected additional capital raises– Calls out key assumptions and risk

• Sensitivity analysis• Selective market metrics

– Avg. revenue per customer– Avg. cost to acquire customer– Days receivable– Days payable– Inventory turnover

•Perspective: sources and uses of cash!

Designing a Financial Plan: Key Elements


Developing Your Assumptions


• Revenue = Units x Price–What is your sales unit (device, subscription, royalty, etc.)?–How are you determining price?–Are you priced in line with competitors?–Will you have price pressure in future years?

• Relationship of Numbers Important–Address available market and present realistic market share gains–Sales unit growth should relate to market data–Recurring revenue should be based on an installed base–Sales expense should relate to revenue–Hockey stick growth is not believable

• Determine key milestones–FCS (First Customer Ship) Date

Developing Your Assumptions: Revenue


• Cost of Goods Sold (COGS) = Units x Cost to Produce

• How much does it cost to produce a sales unit?–Materials, Labor or both

• Review comparable businesses to determine costing–Benchmark multiple vendors to attain best product cost

• Address if your are costs fixed or variable?

• Build in cost reductions to meet future pricing pressures

• Other cost of sales–Minimum of 5% -15% or more for freight, tech support, warranty, etc…

Developing Your Assumptions: COGS


• Operating Expenses–Salaries, Commissions, Benefits

• Fringe Benefits (e.g.15%)• Merit increase (e.g. 4%)• Bonus/Commission Assumptions• Recruiting fees

– e.g. $5k -15k or more per person for every hire or determine to pay only a certain amount per quarter

–Rent and Utilities• Benchmark market rates per

square footage• Determine space needed

(e.g. per head?)• Total Lease cost• Don’t forget Utility expenses

Developing Your Assumptions: Operating Expenses

• Operating Expenses–Marketing, Tradeshow, Advertising–Insurance–Travel and Entertainment

• Traveler (e.g. $1,500 per month)• Non-traveler (e.g. $100 per month)

–Research and Development• Outside Contractors

–Shipping–Repairs and Maintenance–Fees–Office Expense–Website


• Capital Expenditures – Furniture and Fixtures (e.g.~$50,000 or per head)– Facility Build out– Lab Equipment– IT Infrastructure

• Cash Burn or Burn Rate–Know on monthly or quarterly basis

• Runway– # of months operating at a loss before all cash is gone

• Cash Flow Break Even– Point at which cash from revenues = or > Cash Burn

Developing Your Assumptions: Cash Flow


Sensitivities

•Accept that these are best guesstimates, not absolutes

•Explain sensitivities in terms of ‘knowns’ and ‘unknowns’

•Take into account appropriate assumption relationships

•Discuss leverage points• Annuity sales model or one time

sale• Switching pain for customers• Stickiness of product once

customer uses it• Push/pulling of revenue• CapEx changes• Margin improvements

Developing Your Assumptions: Sensitivities & Metrics

Metrics

•Relationship of numbers is important• Sales units should make sense

with market data• Sales expense relates to revenue• Recurring revenue based on

installed base

•Focus on key metrics• Cash, cash, and cash• How long to breakeven?• How much does it cost to get a

customer?• What is the profitability of a

customer?• What is the productivity of a sales

person?


Financial model does not support B-Plan assertionsContradicts total servable market assumptions

Time to profitability unrealistic based on industry trends

Assumptions, Gross and Operating Margins in outer years not in line with industry standards

Seasonality not reflected

Financial Metrics Not Relevant

Revenue and Cost Models Lack DetailAssumptions not supported by rest of business plan

Growth is hockey stick on steroids

Financing needs not linked to milestones

Developing Your Assumptions – Red Flags


• Search the SEC EDGAR Database - http://www.sec.gov– Companies and Other Filers– Input Company Name or Ticker Symbol– 10-K Filing (Annual Report), 10-Q Filing (Quarterly

Report)– Financial sections (e.g. Income Statement, Balance

Sheet, MD&A)

• Yahoo Finance– Company– Financials

• Trade Press

• Market Research Reports

Developing Your Assumptions: How to?


http://www.sec.gov/

Cleantech Open Team Activity


Conclusions


• The Financial Section of the B-Plan is the “happy ending” to your story

• Investor Mantra: “Show Me the $$$”

• Reality gets funded

Conclusions: Final Thoughts


Contact Information

Deloitte Financial Advisory

Services LLP

200 Berkeley Street

Boston, MA 02116

USA

Joseph McKneely

Manager Tel: +1 617 437 2047

Business Valuation [email protected]

www.deloitte.com

Mr. McKneely is a Manager in the Valuation services team at Deloitte Financial Advisory Services LLP. He specializes in the valuation of business interests, intangible assets, closely held securities, privately held companies, and intellectual property.

Mr. McKneely focuses on valuation matters associated with Statement of Financial Accounting Standards Nos. 141, 142, and related GAAP. He has also worked on several valuation projects for tax related purposes such as 409A and 280G, as well as valuations for purposes of tax planning, and pre-merger planning.

Mr. McKneely has broad experience across a range of industries, having been a significant contributor on projects in the oil and gas, biotechnology, manufacturing, retail, telecommunications, and software industries, among others. Mr. McKneely also has considerable experience in providing SAS review audit support across these industries; including reviews of valuations prepared for IFRS reporting purposes such as asset impairment testing and purchase price allocations for international companies.

Education

• Texas A&M University, M.S., Finance

• Texas A&M University, B.B.A., Accounting

New England CFO Strategies

Suzanne C. Oakley, CPA

Business Planning/Interim CFO

139A Charles Street #284, Boston, MA 02114

617-840-4766 [email protected] www.necfo.com

New England CFO Strategies is led by Suzanne Oakley, CPA. Ms. Oakley has 25+ years experience in business planning, financial modeling, financial management, and strategy development for companies ranging in size from start-up to Fortune 500. A seasoned financial executive, Ms. Oakley is a Certified Public Accountant in Massachusetts. She has extensive experience in:

•Providing financial oversight for start-up companies or corporate operating divisions,

•Developing and managing annual budgets and quarterly outlooks,

•Financial reporting and analysis to Executive management and Boards of Directors,

•Sarbanes Oxley compliance, and

•Implementing financial planning and reporting systems.

Ms. Oakley earned her MBA in Finance and New Business Development from MIT's Sloan School of Management and her BS in Business Administration, cum laude, from Georgetown University School of Business.


mailto:[email protected]

http://www.necfo.com/

Questions?


Building an Investor- Worthy Financial Model Cleantech Open Northeast Conference Suzanne C. Oakley,...

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