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# Sabin & Thorne Deadlines - PowerPoint PPT Presentation

Sabin & Thorne Deadlines. * if you want a mentor. Sabin Environmental Prize. Financial Projections January 31, 2014. Sabin Application (Due March 24). Five years of financial projections Income Statement & Balance Sheet Explanation of use of prize money

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*if you want a mentor

Financial Projections

January 31, 2014

Sabin Application (Due March 24)

• Five years of financial projections

• Income Statement & Balance Sheet

• Explanation of use of prize money

• Total \$ needed – to make business work

• Attract capital (investors)

• Their money back in, say, 5 years

• A nice return, say, 100% per year

50% gone

in 4 years

7

Lose SOME or All money 1/3 of the time

Boring returns another 1/3 of the time

Make good money 1/3 of the time

Good Investors:

8

Exit

Sales

Break

Even

Ten times too optimistic!

\$ 1 million

\$ 9 million

• Sales:

• Small in Year One

• 1x after to Year 4 and Year 5

• Profits:

• Lose a little in Year One, more in Year Two

• Break even Year 3, then 

Exit

Sales

Break

Even

If you want/need investor money

• You must deliver the return they need

• These are the numbers I need…

• Can my business produce them?

Ten times too optimistic!

\$ 1 million

\$ 9 million

• Build a detailed Year One

• Review the “Rules of Thumb”

• Apply them to Years 2-5

• Then do a sanity check --

• What assumptions do you need?

• Are these doable?

• Income Statement

• Balance Sheet

• Sources and Uses of Funds

.

Revenues (Sales):

> \$ value exchanged

> for products or services

Expenses:

> \$ value of resources used

> to earn those revenues

Divide expenses into:

Direct Costs/Expenses

and

Indirect Costs/Expenses

Direct Costs or “Cost of Goods Sold”

Costs of Making a Product/Service

Direct Costs = Cost of Goods Sold

Materials

Labor

Packaging

Inspection

Shipping

Customer Service

Revenues – Cost of Goods Sold

= Gross Profit

Operating Expenses (Sales & Marketing, General & Administrative, R&D or “S,G&A”)

Other Costs – to run the Company

Indirect Costs

Rent

Accounting

Insurance

Sales Expense

CEO

IT, HR, Legal, etc.

Gross Profit – Operating Costs

= EBITDA

Key Measure -- for Startups Administrative, R&D or “S,G&A”)

EBITDA

Earnings Before Interest, Taxes,

Depreciation & Amortization

Measures -- earning power

E - BIT - DA

25

Net Income (Loss) Administrative, R&D or “S,G&A”)

EBITDA minus:

• Depreciation

• Interest expense

• Taxes

• “One time events”

Why These Categories? Administrative, R&D or “S,G&A”)

Property, Plant & Equipment (Fixed Assets)

• Long term assets of the company

• Not for sale

• Things that have or create value – over time

Examples of PP&E Administrative, R&D or “S,G&A”)

Buildings

Factories

Vehicles

Equipment

Computers

Furniture

• Fixed Assets provide valueover time

• Also, wear out over time

• Over their useful life

A Company buys a wind turbine to generate its electricity. It pays \$750,000 for the turbine.

It expects the turbine to:

• Last for 25 years,

• Wear out evenly, and

• Then be worth \$0

What is the “depreciation” of this asset?

• \$750,000/25 years = \$30,000 year

• \$30,000 = annual depreciation expense

This is called: “straight line” depreciation

33

Quick Review Administrative, R&D or “S,G&A”)

What Gets Depreciated?

Green Wind Co. sells and installs wind turbines for customers.

Are the following: Cost of Goods Sold, Operating Costs or Property, Plant & Equipment?

Delivery trucks?

Wind turbine?

Finance staff?

Installation?

Sales people?

Billing IT system?

Back to Building Projections Administrative, R&D or “S,G&A”)

The Details Administrative, R&D or “S,G&A”)

• Sales: Price? First sale? How do sales grow? What makes them grow?

• Costs: What do you need to make the product? Sell it? Who will you hire? When? Do you buy ads? Make brochures?

• More costs: Office rent? Costs of running it? Who does the hiring? How do you pay people? Health insurance?

Start “ Big Picture ” Administrative, R&D or “S,G&A”)

> People ?

> Machines ?

> Locations?

• What are the key sales drivers ?

> How many sales calls per month?

> Success rate of sales calls?

> Time till sale is completed?

> Average price of a sale?

• Sales require a sales force

The Product Administrative, R&D or “S,G&A”)

• Fresh farmed tilapia fillets

• “Seafood Safe” and Organic

• 100% organic feed

• Purified and filtered re-circulated water

• Suppliers of restaurants, grocery & fish stores

• Also, Trader Joe’s, Whole Foods

Quote from EcoFish: Administrative, R&D or “S,G&A”)

“We will buy everything you have to sell.”

Think “ Big Picture ” Administrative, R&D or “S,G&A”)

> Systems that grow fish

• The Good Fish key sales driver:

Sales depend on Administrative, R&D or “S,G&A”) “Pod Systems”

• A Pod System produces 50,000 lbs fish/yr

• Fresh organic tilapia sells for \$5.63/lb

• One Pod System in Year 1

• Couple of months to get going

• Couple of months to ramp up

First 12 Month’s Projections Administrative, R&D or “S,G&A”)

Do this for 12 months

First Year Administrative, R&D or “S,G&A”)

35

197

Next Step -- Costs Administrative, R&D or “S,G&A”)

Cost of Goods Sold – materials, labor, delivery, customer service

Operating costs – sales people, travel, ads, CEO, rent, supplies

• Going forward, 12 months

Cost of Goods Sold Administrative, R&D or “S,G&A”)

• Baby fish

• Facilities: Rent & heating

• Feed: Organic vegetarian

• Staff: Monitor, move, clean, fillet fish

• Delivery to customers

• Byproducts: Waste and offal

Operating (S,G&A) Costs Administrative, R&D or “S,G&A”)

• Sales person

• List in organic seafood directories

• Host events, tours, tastings

• CEO, accounting, IT, office rent

Depreciation Administrative, R&D or “S,G&A”)– from Equipment purchases

• “Pod System”

• Filleting machine

• \$60,000 total

• Lasts 10 years

• (120 months)

Cost Projections Administrative, R&D or “S,G&A”)

Do this for 12 months

Moving Forward Administrative, R&D or “S,G&A”)

• First year projections – aim for accuracy

• After that, it’s more “vision”

• Apply the “rules of thumb”

• Focus on meeting investor expectations

• Then checking for sanity

Example: Timing of Milestones Administrative, R&D or “S,G&A”)

Exit

Sales

Break

Even

Next Step: Pick A Break Even Administrative, R&D or “S,G&A”)

How big must sales be?

Break

Even

Year

Can I cover my costs

with \$3-4M in sales?

Break Even Administrative, R&D or “S,G&A”)

15 pods

Then, Exit Administrative, R&D or “S,G&A”)

Exit

And, Fill in the Gaps Administrative, R&D or “S,G&A”)

Fill in

Fill in

Fill in the Gaps Administrative, R&D or “S,G&A”)

Make a List Administrative, R&D or “S,G&A”)

Key assumptions that drive the model

• How do your sales grow?

• Costs?

• People?

• Key equipment?

Sanity Check on Year Five Administrative, R&D or “S,G&A”)

Find some comparable public companies

• Look at gross and EBITDA margin

• Cost ratios (S&M/Sales, G&A/Sales)

• Sales per employee

How do yours compare?

Warning: they should not be better!

Example: Sanity Check Administrative, R&D or “S,G&A”)

How Much \$ Do We Need? Administrative, R&D or “S,G&A”)

\$60k Pod Administrative, R&D or “S,G&A”)

Next – Building a Balance Sheet Administrative, R&D or “S,G&A”)

Cash 9.9

Accounts Receivable 32.7

Property & Equipment 60.0

Less Depreciation (6.0)

Other Assets 2.0

Total Assets \$125.6

Liabilities

Accounts Payable 26.9

Accrued Expenses 24.4

Total Liabilities 51.3

Shareholders’ Equity

Common Stock 450.3

Retained Earnings (376)

Total Liabilities & Shareholders’ Equity \$125.6

Good Fish Balance Sheet as of 12/31/14

Balance Sheet Administrative, R&D or “S,G&A”)

Assets =

Liabilities + Shareholders’ Equity

Balance Sheet Definitions Administrative, R&D or “S,G&A”)

Assets:

> What the company owns

Liabilities & Shareholders’ Equity

> How the company pays for what it owns

Asset:the house

Liability: the mortgage

Shareholders’ Equity =

the “equity” in the house, or

value of the house - mortgage

Shareholders’ Equity Administrative, R&D or “S,G&A”)

• What the investors put in

Plus

• What the company makes (net income)

Less

• What investors take out (dividends)

Balance Sheet: More Definitions Administrative, R&D or “S,G&A”)

Accounts Receivable

What Customers Owe You

Accounts Payable

What You owe Suppliers

Accrued Expenses

What you owe non-suppliers

Inventory

Products in stock

Transfer Income Statement Data Administrative, R&D or “S,G&A”)

• From Custom Projections

• Into Model Template

Construct Model Formulas Administrative, R&D or “S,G&A”)

Old Property Investments + New

Example -- Balance Sheet Administrative, R&D or “S,G&A”)

From Balance Sheet Formulas

Loss

Done ! Administrative, R&D or “S,G&A”)

Sell Some Stock

Example -- Year Two Administrative, R&D or “S,G&A”)

From Balance Sheet Formulas

Loss

Done ! Administrative, R&D or “S,G&A”)

Sell More Stock

How much \$ do you need – now? Administrative, R&D or “S,G&A”)

Exercise: Construct a Balance Sheet

• Cash = 3% of sales

• Customers pay in 30 days

• You pay all expenses – in 15 days

• You hold 2 months product, in stock

• You need a 60K Pod, plus a 15K filleting machine

What You Use the \$ For Administrative, R&D or “S,G&A”)

• List the key items (not exhaustive)

• \$5k items or more (good rule of thumb)

• Show you have thought about it

• Show you know what things cost

Green Wind will use the \$25k to:

• Buy x equipment to build a demo (15k)

• Attend y important industry event (5k)

• Design and print sales brochures (5k)

What will you do to:

Show progress? Reduce Risk? Get more \$?

You are likely to be much too optimistic

> Things just take longer -- to happen

> Cost more than you think

> Under-estimate cash needed