Business Plan Preparation

1. Business Plan Preparation Frank MoyesLeeds College of Business University of ColoradoBoulder, Colorado Financial Plans

2. Tonight Financial Plans Financial Plan Customer acquisition costs In the Fire - Customer Survey results Team meetings

3. Next Week Financial Plans • In the Fire - Marketing plan • Prepare 6 slides • 10 minutes • 2 entrepreneurs • Hand-in: • Marketing Plan - draft • Customer surveys & summary of results • Financial Workshops • Monday 6:00 room 230 • Wednesday 12:00 room 302 • Wednesday 5:00 room 330

4. Marketing Plan Outline Financial Plans Customer Research Target Market Strategy Channel Strategy Positioning Product/Service Strategy Pricing Strategy E-commerce Communications Strategy Sales Strategy Revenue Model

5. 0 Business Plan Elements Financial Plans Executive Summary Company Overview Product or Service Description Industry and Marketplace Analysis Marketing Plan Operations Plan Development Plan Management Financial Plan Offering, Funding Requirements, Valuation

6. Financial Plan Financial Plans Financial Projections Key Assumptions Business Risks

7. Business Plan Perspective “People write-up their business plan with a top-down mentality. They invariably talk about a particular vertical market that has X billions of dollars in sales each year. They’ll tell us that they can get 10% of that market. But when we ask them for the average sale or the cost of customer acquisition, the answer almost always is “I’ll get back to you.” Dan Beldy, Hummer Winblad Venture Partners Financial Plans

8. Financial Projections Financial Plans • Income Statement • By years for 5 years • By months for years 1-2 & by quarters for years 3-5 • Balance Sheet by years for 5 years • Cash Flow • By years for 5 years • By months for years 1-2 and by quarters for years 3-5 • Break-even Analysis

9. Focus Your Attention On Financial Plans Revenue Model Cost of Revenue Operating Expenses Personnel Extraordinary income & expense Taxes Property & Equipment Working Capital Funding

10. Financial Assumptions Financial Plans • Describe ~ 5 assumptions critical to success of your business • Revenue model, e.g. prices, market share, new products • Margins • Prices • Cost of Revenues - labor, material & indirect expenses • Operating Expenses – key expenditures Sales & Marketing, R & D and General & Administrative • Capital Expenditures • Working Capital – Accounts Receivable, Inventory & Accounts Payable • Funding • Do not be resource constrained at the beginning

11. Suggested Approach Financial Plans • Keep record of key assumptions • COMP’s provide reality check • Revenue projections by months & quarters are important. DETERMINES: • Cost of Revenue • Operating Expenses • Working Capital • Monthly & Quarterly projections • Why else?

12. Common Weaknesses Financial Plans • Profitability • Gross margins are too high • Operating expenses are too low • Assets & Liabilities • Working Capital must be based on industry • Fixed Assets & Capital Expenditures not addressed • Seasonality not addressed • Growth not anticipated

13. 0 Powerful Tool Financial Plans Upfront effort What if? questions Sensitivity analysis How tell if projections make sense?

14. Risks I Financial Plans • What major risks does the venture face? • What can go wrong? • What must go right • How mitigate?

15. Risks II Financial Plans • Market • Size of market • Competitor’s response • Sales cycle • Closing window (12 VC funded companies) • Strategic - establishing strategic partnerships • Operational - large number of interrelated components

16. Risks III Financial Plans • Technology • Will it work • Time and cost to development • Scalability • Financial • Risk/return • Dilution • Macro-economic • Volatile industry • Government approval • Exchange rates

17. Financial Plan Section Financial Plans • Financial Projections • Summary goes in Plan • All Financial Statements go in Appendix • Assumptions • ~5 key assumptions go in Plan • Detailed assumptions go in Appendix • Business Risks

18. 0 Summary of Financial Projections Financial Plans

19. 0 Business Plan Perspective “Entrepreneurs have got to display a clearly articulated vision for what they want to do. And they must tell their story from the bottom up. A bottom-up approach means that they know with absolute certainty whom they’ll sell to, how much it will cost, and what the sales per week will be next March. Sure, a lot of assumptions are involved, but entrepreneurs need to break their business down to the molecular level. That information leads logically to the next step which is saying to an investor, ‘I am going to take this money and do X, Y, and Z with it and here’s what will happen in the end.’ Your survival depends on knowing that stuff cold.” Dan Beldy, Hummer Winblad Venture Partners Financial Plans

20. Critical Mistakes I “Let’s go smoke something” “These trees sure are pretty” “We can get orders in a month” Sales cycle No one knows you “We can whip this puppy out in 6 months” Development time-line longer More expensive “Look at how much they spend on marketing! We won’t have to spend that much” Financial Plans

21. “Sure, operating expenses are high at the beginning, but then they will go down.” Operating expenses don’t decline Salaries must be realistic Growth requires spending money “ “We’ll lean on our suppliers and not pay them for 90 days.” “Our customer will pay us in 30 days.” Critical Mistakes II Financial Plans

22. Financial Dynamics Who does the financial projections? Should my projections be optimistic or pessimistic? Investor questions 0 Financial Plans