1 Financial Plan Business Plan Preparation Financial Plan Frank Moyes Leeds School of Business University of Colorado Boulder, Colorado

2 Financial Plan Tonight  Plan presentation examples  Financial Plan  In the Fire – Customer Surveys  Hand-in: prelim customer surveys  Team meetings

3 Financial Plan Next Week  Management Plan  In the Fire - Marketing plan  Prepare 6 slides  10 minutes  4 entrepreneurs  Amber Hickory, Greenhouse Partners  Katarina Brown, Brand Juice  Scott Heinemann, Aweida  David Parkhurst, Alpine Access  Hand-in:  Marketing Plan - draft  Customer surveys & summary of results

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

5 Financial Plan  Financial Projections  Key Assumptions  Business Risks

6 Financial Plan 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

7 Financial Plan Approach  Download v6.8.6  Learn color codes  Notes  Play with example  Before start, erase all green data  Don’t mess with the Purple

8 Financial Plan Financial Projections  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  Financial Comps

9 Financial Plan Architecture  Outputs  Inputs  Funding & Valuation

10 Financial Plan Architecture - Outputs  5-year Income Statement  5-year Balance Sheet  5 year Cash Flow  Break-even Analysis  Income Statement by months & quarters  Cash Flow by months & quarters  Summary  Valuation

11 Financial Plan Architecture - Inputs  Revenue Model  Cost of Revenue  Operating Expenses  Personnel  Extraordinary  Taxes  Property & Equipment  Working Capital  Funding

12 Financial Plan Architecture – Funding & Valuation  Look at Cash Flow to determine funding requirements  Decide how you will fund  Equity  What % of company will you offer?  Valuation approaches – will cover week 13  Debt – what are the repayment terms & interest

13 Financial Plan Financial Assumptions  Describe assumptions critical to success of your business  Drivers  Revenue model, e.g. prices, market share, new products  Cost projections, e.g. sourcing agreement, process development  Capital Expenditures  Working Capital  Funding?  Do not be resource constrained at the beginning

14 Financial Plan Suggested Approach  Top down vs. bottoms up  Keep record of key assumptions  COMP’s provide reality check  Revenue projections by months & quarters is key. DETERMINES:  Cost of Revenue  Operating Expenses  Working Capital  Monthly & Quarterly projections

16 Financial Plan Issues  Profitability  Gross margins  Operating expenses  Assets & Liabilities  Working Capital  Fixed Assets & Capital Expenditures  Seasonality  Growth

17 Financial Plan Powerful Tool  Upfront effort  What if? questions  Sensitivity analysis  How tell if projections make sense?

18 Financial Plan Risks I  What major risks does the venture face?  What can go wrong?  What must go right  How mitigate?

19 Financial Plan Risks II  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

20 Financial Plan Risks III  Technology  Will it work  Time and cost to development  Scalability  Financial  Risk/return  Dilution  Macro-economic  Volatile industry  Government approval  Exchange rates

21 Financial Plan  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

Summary of Financial Projections

23 Financial Plan 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”

24 Financial Plan  “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  “ This equipment should last us for years.”  Assets must be replaced  “We’ll lean on our suppliers and not pay them for 90 days.”  “Our customer will pay us in 30 days.” Critical Mistakes II

25 Financial Plan Financial Dynamics  Who does the financial projections?  Should my projections be optimistic or pessimistic?  Investor questions

26 Financial Plan 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