FINANCIAL PLANNING FOR STARTUPS
Tom Schryver, CFA Visi3ng Lecturer, Johnson Graduate School of Management
Execu3ve Director, Center for Regional Economic Advancement Cornell University
Why Create a Financial Plan?
• Know when you’re running out of money • Know how much money you need • Enable you to describe your vision
– To partners – To employees – To funders
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Why Pitch a Startup?
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Why Pitch a Startup?
à Generate interest in the next conversa3on
• Very very very rarely will anyone write a check based solely on a pitch
• Uninformed investors are dangerous • Tom’s rule of investors: they all add value, the ques3on is the +/-‐
sign
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Financials In A Pitch – Audience View
• Does the company have a good understanding of its poten3al market?
• Does the company have a sense of how much of that market is obtainable? Are poten3al unit sales reasonable?
• Are sales prices reasonable? Is there any evidence to back them up?
• Are projected costs complete and reasonable? • How much money will be required to start the business? • How much money will be required to get the company to self-‐
sustainability? • How profitable could the company be at maturity?
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Financials In A Pitch – Ideas of What To Include
You choose what you think investors should be most interested in / know about / have as main takeaways about the opportunity: • Details on target market: size, basis of es3ma3on, es3mate
on how much is obtainable by you • Es3mate of startup costs with details on major items • Projec3on of 3me to ramp up to cash flow breakeven and
total startup + losses to breakeven • Projec3on of profitability at scale
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Showing Returns To Investors
• If you are pursuing a loan, demonstra3ng ability to service payments with a safety margin is cri3cal
• If you are pursuing an equity investment, demonstra3ng ability to exceed required cost of capital is cri3cal
My opinion: • Defining a poten3al exit is very difficult; only volunteer it if an exit is the
only way an investor can get their money returned (no possibility of dividends)
• Calcula3ng an IRR or NPV on investment is not your job – it’s the investor’s: give them the informa3on they need around profit poten3al and allow them to do their assessment themselves
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Financials In A Pitch – What To Avoid
• $Trillion markets • Magical thinking:
– Unreasonably high net income margins (sofware and pharma rarely exceed 30%)
– Revenue growing while other costs remain flat-‐line – Revenue growth without marke3ng expense – Free labor, free space, no insurance costs, etc. – Ignoring 3ming impacts of acquiring inventory or capital items before revenue
• Showing loan proceeds without interest expense or repayment • Providing excessive detail that demonstrates lack of focus on key
performance indicators
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Key Building Blocks
• Revenue Model • Key Resources • Cost Model
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Revenue Model -‐ Es3ma3on
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Month 0 Month N
Units Zero Reasonable share of
TM (total? per loca3on / store?)
Price / Unit N/A Validated Price
Revenue Zero Units * Price = Revenue
Revenue Model -‐ Details
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• Experiment with reasonable growth rates • Es3mate number of months to get to “N” • Compartmentalize by product line, loca3on, store, etc. as
much as possible • Must stack up to a reasonable share of reasonable market
Key Resources
• What do our value proposi3ons require to happen? • How do we support our channels? • Do we need resources to have the customer rela3onships we
want? • How about suppor3ng our revenue streams?
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Key Resources are all the things required to open your business
Key Resources -‐ Types
• Physical – buildings, cash registers, phones, trucks, etc. • Intellectual – patents, databases, process knowledge • Human – salespeople, customer service reps, store managers,
produc3on staff, R&D • Financial – funds to pre-‐buy inventory, vendor financing
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Key Resources -‐ Examples
• Physical – Dean & Deluca store; FedEx trucks • Intellectual – drug patent; process knowledge on how to
make beer • Human – people to fill and cap toothpaste tubes; picking
orders and packaging goods for shipment; people to answer the phone
• Financial – money to buy the product that will be sold in the store, or to buy raw materials to be made into finished goods; funds to cover gap between sending an invoice and receiving payment; vendor lease
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Key Resources -‐ Es3ma3on
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Month -‐N Month 0
Building
Equipment
Patents
Beginning Inventory
Etc.
Key Resources
• What key resources will be required? • What are a few hidden things that might otherwise get
forgoren? • How much will it cost to get these in place?
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Cost Model
• What will your costs be when you are up and running? • How will those costs change as you grow? • What risks are inherent in your cost assump3ons?
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Cost Types
• Fixed costs – remain the same (mostly) regardless of volume • Variable costs – vary propor3onally based on how many you
make
Consider: • Economies of scale – savings as you grow in volume • Economies of scope – savings as you grow in breadth
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Fixed Costs
• Management and overhead compensa3on • Buildings • Machinery • Permits and licenses
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Variable Costs
• Direct labor • Raw materials • Shipping • U3li3es
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Economies of Scale
• Buying in bulk • Shipping in larger volumes • More efficient use of machinery • More efficient use of labor (ie: specializa3on)
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Economies of Scope
• One store selling many products • Mul3ple value proposi3ons for a single customer • Mul3ple revenue streams from the same transac3on (product
+ extended warranty)
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Categorizing Expenses by Type: COGS
• Cost of Goods Sold (COGS) are the direct costs associated with providing the product or service. Examples: – Direct labor – Raw materials – Warehousing – Produc3on equipment
• Revenue – COGS = Gross Profit
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Categorizing Expenses by Type: SG&A
• Selling, General and Administra3ve expenses (SG&A) are the indirect costs associated with opera3ng a business. Examples: – Adver3sing – Sales salaries and commissions – Management salaries – Fringe benefits – Office rents – Insurance
• Revenue – COGS = Gross Profit • Gross Profit – SG&A = Opera3ng Profit
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Categorizing Expenses by Type: Non-‐Opera3ng
• Non-‐Opera3ng Expenses are business costs that do not impact regular opera3ons. Examples: – Interest – Income taxes – One-‐3me revenues and expenses (ie asset sales) – Foreign exchange gain / loss
• Revenue – COGS = Gross Profit • Gross Profit – SG&A = Opera3ng Profit • Opera3ng Profit – Non-‐Opera3ng Expenses = Net Income
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Expense Checklist
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q Rent q Furnishings q Computers
q Sofware! q U3li3es
q Electric q Internet
q Payroll q Payroll taxes q Workman’s comp q Unemployment
insurance q Gen. liab. Insurance q Key man Insurance q Banking and Credit Card
fees q Patent fees
q Professional services q Cleaning services q Lawn care q Lawyers q Accountant q Bookkeeper q Recrui3ng q Other freelance
q Marke3ng expenses q Web development q Print q Conferences q Memberships q Ads q trademarks q Other
q Travel q Discounts
q Sales taxes q Shipping
q Customs q Supplies
q Toner! q Misc
q Repairs and Maintenance q Facili3es q Equipment
q Licenses q Royal3es
Use this as a guide and apply the level of detail that matches your business
Cost Model -‐ Es3ma3on
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Month 1 Month N
Raw Material / Unit Costs at Low Volume Costs at Full Volume
Labor Divide total by units / mo Divide total by units / mo
Produc3on Equipment Divide total by units / mo Divide total by units / mo
Total COGS / Unit
Adver3sing Startup Run-‐Rate
Other SG&A Startup Run-‐Rate
Non-‐Opera3ng Expenses
Cost Model -‐ Es3ma3on
• Start to link revenue growth with costs • Keep in mind 3ming of costs compared to revenues! • Use unit growth to drive breakpoints in cost decreases as you get to scale
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Building Your Cash Basis Financial Model
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Startup Costs: Acquire Key Resources
Revenue: Units * Price
Cost of Goods Sold: Units * COGS / Unit
Selling, General, Administra3ve
Non-‐Opera3ng Expenses (Including Costs of Financing!)
Net Income (Cash Basis)
Pre-‐Revenue Startup Growth Profitable Maturity
Source of Cash: Investments
PLUG N’
CHUG
“I have no idea what the poten3al financial performance of my business is”
>
“I don’t know what these numbers signify, there’s lirle thinking behind them – I just have
them because I was told I have to” “I don’t know what this model does – I just filled
out someone else’s form”
Cash vs. Accrual Method: When To Go Accrual
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• Do you have significant 3ming risks? • Inventory • Holding other peoples’ money • Other people holding your money • High upfront capex
Hypothesis Tes3ng
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Fundamental principles: • The financial plan you just created is made up of a large number of
hypotheses • It is cri3cal to maintain your plan as a living document to reflect new
knowledge • Your financial plan should help you iden3fy key areas of risk – which is
made up of: 1. Areas of high magnitude: large profit drivers, big capital expenses 2. Areas of high uncertainty: shaky es3mates, factors with a large number of
con3ngencies
What Do You Do About It?
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• If an item is substan3al and you are es3ma3ng, dig to ensure no cheap / free informa3on is available that could help you refine
• Treat revenue model, key resources, and cost model as areas of testable hypotheses
• Iden3fy key data, test, and measure
What to Present
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• How much will it cost to get started – and how long • How long will it take you to become self-‐sustaining • What does the sunny, happy future look like (how profitable)
• Choose metrics and graphs based on industry norms
Q&A
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