Developing Financial Projections for a Business Plan

1. Developing Financial Projections for a Business Plan Dave Ziler February 10, 2016

2. Agenda • Basic Income Statement formats • Testing the business concept • Tying data & assumptions to the financial projections • Developing Year 1 • Projecting Years 2 & 3

3. Three Disclaimers • There is no “right way”. What is contained in this presentation is a proven approach. It may not be consistent with courses you’ve taken or approaches expressed by other business professionals. • The method shown to account for cash is not proper accounting. It’s simply an approach to help think through the use of the funds.

4. What Is An Income Statement? A financial statement that reports revenues and expenses for a fiscal period as a means of determining how well a company has performed in creating profit. * Also known as Earmings Before Interest & Taxes (EBIT)

5. Income Statement Example Comments • Key variable cost line items • Parts & supplies to produce the product • Labor to build equipment • Sales commissions • Compensation & Benefits • Usually the largest SG&A component • OK to estimate benefits • For startups • ~1.10 * salaries w/o benefits • ~1.25 * salaries w/benefits • Operating Expenses • Consider applicable line items • Minimize costs to the extent practical • Avoid “Other” in your business plan

6. Summary of Income Statements • Demonstrates profitability • Typically used for two purposes: • Results…..up and running businesses • Projections…..your focus for the BYOBB • Vary from business to business at the detailed level • Projections must be tied to valid & logical assumptions • Don’t get sidetracked on Variable Cost vs. SG&A • Be thorough on all projected costs • There is no “standard” format for a type of business • There are some items that will be the same (marketing, facilities, etc)

7. Testing The Business Concept An approach to the “back of the envelope Excel test” • Assume you are going to win the BYOBB ($40K cash) • Assume $0 revenue for year 1…. unless you already have sales • Start the income statement by listing all cost line items • Don’t be concerned about variable vs. SG&A • Be exhaustive….salaries, channel costs, marketing, & more • How much cash is remaining after year 1? • Can you generate enough revenue in year 2 to break even? • Will you be profitable in year 3?

8. Aligning the Plan With The Financials Include a summary statement that describes the use of the funding Quantitative Examples Qualitative Examples Target market segment Resource additions Channel partners Marketing approach Advertising approach • Win BYOBB = $40K cash • Market share • Development costs • Hosting costs • Office equipment & supplies

9. Developing Year 1 • Beginning Cash • Assumes winning the BYOBB Grand Prize • Variable Costs • Zero in Year 1 unless there are sales • Sales, General, & Administrative • These 4 are the most common • Be thorough • Include all lines….even if Y1 = 0 • Net Income • A Y1 loss is acceptable

10. Estimating Years 2 & 3 • Cash Estimates (does not consider cash flow) • Y2 = $40K + Y1 Net Income • Y3 = Y2 Beginning Cash + Y2 Net Income • Don’t forget about taxes! • May assume that you acquire additional funding • Revenue • Tie to price & market share assumptions • Must be realistic • Variable Costs • Consider channel costs & sales commission • Raw material examples: • Ingredients for a restaurant • Materials to make clothing • Inventory for a beauty supply shop • Sales, General, & Administrative • Tie resource add timing to assumptions • Plan for ongoing costs • Net Income • Profitability in Y2 or Y3 • May be negative if additional funding is raised

11. Summary • Be thorough when considering costs…the best place to start • Assumptions to construct the financials need to be consistent with the business plan • Financial projections need to be consistent with the assumptions • They are estimates……do they make sense?