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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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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

  • Total $ needed – to make business work


Purpose of Financial Projections

  • Answer: Can the business make $?

  • Help you think through the details

  • Attract capital (investors)


Stages of Financing


What do Investors Want?

  • Their money back in, say, 5 years

  • A nice return, say, 100% per year


Risk of Loss

50% gone

in 4 years

7


Risk of Loss

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


Stages of Financing


Example

Exit

Sales

Break

Even


Another Example

Ten times too optimistic!

$ 1 million

$ 9 million


Rules of Thumb

  • Sales:

    • Small in Year One

    • Big jump to Year 2 – 4x? 5x? 10x?

    • Less big jump to Year 3 – 1.2 x? 1.5x?

    • 1x after to Year 4 and Year 5

  • Profits:

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

    • Break even Year 3, then 


Example

Exit

Sales

Break

Even


Moral of this Story

If you want/need investor money

  • You must deliver the return they need

  • So, start with the endgoal in mind

  • These are the numbers I need…

  • Can my business produce them?


Another Example

Ten times too optimistic!

$ 1 million

$ 9 million


Projections

  • 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?


Types of Statements

  • Income Statement

  • Balance Sheet

  • Sources and Uses of Funds

.


Start with an Income Statement


Your “Income Statement”


Company Income Statement


Income Statement Definitions

Revenues (Sales):

> $ value exchanged

> for products or services

Expenses:

> $ value of resources used

> to earn those revenues


Expenses

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

EBITDA

Earnings Before Interest, Taxes,

Depreciation & Amortization

Measures -- earning power

E - BIT - DA

25


Net Income (Loss)

EBITDA minus:

  • Depreciation

  • Interest expense

  • Taxes

  • “One time events”


Why These Categories?


Depreciation

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

Buildings

Factories

Vehicles

Equipment

Computers

Furniture


Depreciation

  • Fixed Assets provide valueover time

  • Also, wear out over time

  • Depreciationspreads these costs

  • Over their useful life


Example:

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


Example:

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


Depreciation

33


Quick Review

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


The Details

  • 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 ”

> People ?

> Machines ?

> Advertising?

> Locations?

  • What are the key sales drivers ?


Example

> 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

  • Fresh farmed tilapia fillets

  • “Seafood Safe” and Organic

  • 100% organic feed

  • Purified and filtered re-circulated water


Customers

  • Suppliers of restaurants, grocery & fish stores

  • Also, Trader Joe’s, Whole Foods


Quote from EcoFish:

“We will buy everything you have to sell.”


Think “ Big Picture ”

> Systems that grow fish

  • The Good Fish key sales driver:


Sales depend on “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

Do this for 12 months


First Year

35

197


Next Step -- Costs

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

  • 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

  • Sales person

  • List in organic seafood directories

  • Advertise with trade associations

  • Host events, tours, tastings

  • CEO, accounting, IT, office rent


Depreciation – from Equipment purchases

  • “Pod System”

  • Filleting machine

  • $60,000 total

  • Lasts 10 years

  • (120 months)


Cost Projections

Do this for 12 months


Add up the First Year


Moving Forward

  • 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

Exit

Sales

Break

Even


Next Step: Pick A Break Even

How big must sales be?

Break

Even

Year

Can I cover my costs

with $3-4M in sales?


Break Even

15 pods


Then, Exit

Exit


Exit


And, Fill in the Gaps

Fill in

Fill in


Fill in the Gaps


Make a List

Key assumptions that drive the model

  • How do your sales grow?

  • Costs?

  • People?

  • Key equipment?


Sanity Check on Year Five

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


How Much $ Do We Need?


$60k Pod


Next – Building a Balance Sheet


Assets

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

Assets =

Liabilities + Shareholders’ Equity


Balance Sheet Definitions

Assets:

> What the company owns

Liabilities & Shareholders’ Equity

> How the company pays for what it owns


Think about a House

Asset:the house

Liability: the mortgage

Shareholders’ Equity =

the “equity” in the house, or

value of the house - mortgage


Shareholders’ Equity

  • What the investors put in

    Plus

  • What the company makes (net income)

    Less

  • What investors take out (dividends)


Balance Sheet: More Definitions

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

  • From Custom Projections

  • Into Model Template


Construct Model Formulas

Old Property Investments + New


Example -- Balance Sheet

From Balance Sheet Formulas

Loss


Done !

Sell Some Stock


Example -- Year Two

From Balance Sheet Formulas

Loss


Done !

Sell More Stock


How much $ do you need – now?

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

  • 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


Example

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 $?


Warning about Projections

You are likely to be much too optimistic

> Things just take longer -- to happen

> Cost more than you think

> Under-estimate cash needed


Final Advice

  • Think through sales & expense detail

  • Remember all Cash Needs!

  • Be realistic, careful – in year one

  • Keep total year $ needs to $350k max

  • Explain how you will use the $

  • Come to Feb 21st session on writing & presentations!


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