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

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

What Is An Income Statement? Definition +RevenueThe amount a company expects to receive upon the sale of goods and/or services -Variable CostCosts directly associated with generating revenues =Contribution MarginRevenue minus Variable Cost -Sales, General, & Administrative (SG&A) The sum of all direct and indirect selling expenses and all general and administrative expenses of a company =Operating Profit*Contribution Margin minus SG&A +Earned InterestInterest earned on investments -TaxesCorporate tax =Net IncomeIncome retained by the company 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)

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

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)

Testing The Business Concept An approach to the “back of the envelope Excel test” 1. Assume you are going to win the BYOBB ($40K cash) 2. Assume $0 revenue for year 1…. unless you already have sales 3. 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 4. How much cash is remaining after year 1? 5. Can you generate enough revenue in year 2 to break even? 6. Will you be profitable in year 3?

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

Developing Year 1 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 Beginning Cash Assumes winning the BYOBB Grand Prize

Estimating Years 2 & 3 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 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

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?