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CIE From Invention to Start-Up Cash Flow – More Important Than Your Mother. Alan Dishlip CFO – WildTangent, Inc. February 13, 2007 3:30 P.M. – 5:00 P.M. Agenda. Introduction Financial Planning Financial Projections Cash Planning Raising Capital Summary.

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cie from invention to start up cash flow more important than your mother

CIEFrom Invention to Start-UpCash Flow – More Important Than Your Mother

Alan Dishlip

CFO – WildTangent, Inc.

February 13, 2007

3:30 P.M. – 5:00 P.M.



  • Introduction
  • Financial Planning
  • Financial Projections
  • Cash Planning
  • Raising Capital
  • Summary
financial planning understanding risk
Financial Planning - Understanding Risk
  • Finance - a way to think about cash, risk & value
    • Creating value is a key responsibility
  • Financial risk - uncertainty about future cash flows
    • Uncertainty creates risk, but uncertainty can usually be analyzed to understand risk
    • Significant value can be created by managing risk
      • Market, Management, Technology, Competition
  • Finance does not answer questions
    • It does not make decisions
    • Finance can help identify the right questions to ask and narrow down the options
  • When viewed from the finance perspective, some decisions will turn out to be illogical or unfeasible.
financial planning 10 must answer questions
Financial Planning10 Must Answer Questions
  • How much cash will we really need?
  • What do the 5 year financials look like?
  • What’s the path to profitability?
  • What are the risks and rewards?
  • How can these be managed successfully?
  • How large is the addressable market?
  • How fast is the market growing?
  • Who’s the management team?
  • What is the value of my company?
  • What is the exit strategy?

One angel to others on a cloud

Don’t let this be you!

financial projections investor quotes
Financial Projections - Investor Quotes
  • “Financial projections consistently are the weakest part of business plans.”
  • “I rarely see a financial plan I can’t take apart quickly.”
  • “No consistent formats”
  • “Lack of detail – not bottoms up”
  • “Unrealistic and overly optimistic assumptions – especially timing related (revenues, development schedule, cash flow break even)”
  • “Model cannot be easily manipulated (too much hard wiring and not enough assumptions-driven)”
  • “Omission of costs and balance sheet items”
    • Understates capital requirements
projections overview
Projections - Overview
  • A reflection of your business plan quantified
    • Consistent with the plan strategy
    • Will help demonstrate whether your strategy is financially feasible
    • A key indicator of the amount of outside financing necessary to support the execution of your strategy
  • Understand the quantitative and financial elements of your business plan
    • Not doing so is the fastest way to lose credibility
  • Include key financial ratios and compare to competitors’/industry averages
projections overview9
Projections - Overview
  • High level figures
    • Underlying detail should be available
  • Projections should answer
    • How will the company perform financially?
      • P & L
    • What will the company's cash position be?
      • Cash Flow
    • What will the company's financial position be?
      • Balance Sheet
  • Five-years - integrated
    • Monthly for the first two years, quarterly for the remaining 3 years
    • Well-thought out assumptions
    • Include key financial ratios and compare to competitors & industry
    • Include any historical financial information, if any
what s wrong with most financial plans
What’s Wrong With Most Financial Plans?
  • Waste too much ink on numbers –
    • Too little focus on information that really matters
    • Numbers should support strategy and key drivers of success
      • Manufacturing - yield on a production process
      • Magazine publishing - the anticipated renewal rate
      • Software - impact of using various distribution models
      • At what level of sales is the business profitable?
      • When does cash flow turn positive?
what s wrong with most financial plans11
What’s Wrong With Most Financial Plans?
  • No need for detailed, month-by-month projections that stretch out for years
  • Financials are typically wildly optimistic.
    • Few entrepreneurs correctly anticipate how much capital and time will be required to accomplish objectives.
projection assumptions
Projection Assumptions
  • Organize input assumptions in an easily accessible separate worksheet
    • Helps identify key items in one place
    • Can be used for sensitivity and breakeven analysis
  • Don’t be afraid to make material assumptions – especially uncertain ones (e.g. re-purchase rate, returns, collections cycle)
    • Individualize
      • e.g., don't just show advertising costs as a % of sales.
        • Most advertising expenditures are made months before sales result
    • Include financial obligations of bringing your product/service to market
      • New employees ► Deviations from historical trends
      • Additional physical space ► Increases in inventory and A/R
  • Support your assertions with valid data
    • Identify what data you have and also be clear about what you don’t know

Assumptions – Some to Consider

  • Revenue by distribution channel
    • Volume
    • Pricing
    • Sales per sales person
  • Manpower plan
  • COGS detail (labor, material, overhead)
  • Expenses by department
    • Dependent on manpower (payroll, space, benefits, supplies)
    • Independent of manpower (insurance, prof. fees, advertising, depreciation)
  • Fixed assets purchases and depreciation
  • Debt and related collateral calculations
  • Interest income and expense
  • Ratios & Metrics
    • Compare to industry averages and specific competitors
  • Sensitivity Analysis
projections assumptions linking

Cost of Sales

Benefits & payroll taxes

Depreciation Exp

Headcount Driven Expenses

Interest Expense

Interest Income

Income Taxes

Net Profit

Accounts Receivable

Bad Debt Reserve

Inventories and Reserves

Balance Sheet Accruals

Linked to


Headcount & Salaries

Fixed Assets & Accum Dep

Manpower Plan

Specific Debt Instruments

Cash and Investments

Profit before Tax (w/ NOL)

Equity Section of Bal Sheet


Bad Debt Expense


Underlying Expenses

Projections – Assumptions Linking
bottoms up projections
Bottoms Up Projections
  • Build from low levels of detail
    • Vs. Tops Down
      • Revenues extrapolated from market size & share
      • Expenses are forecast as percentages of revenue
  • Start with line items that are relevant to describing the business model
bottoms up projections16
Bottoms Up Projections
  • Revenues
    • Forecast sales at the lowest level of product or service detail (channel, sales person, region)
    • Assumptions of volume and pricing
      • By geographic market, customer or distribution channel
  • Expenses
    • Break into relevant categories
      • Separate line items for most important and/or magnitude
bottoms up projections create line items that are activity driven
Bottoms Up Projections Create Line Items that are Activity Driven
  • Don’t plan the dollars – plan the underlying activities that drive profits and cash flow
  • Assumptions come from table above
    • Don’t forget that productivity improves over time
    • Sales ramp over time
    • Understand the cost impacts
      • By linking between selling activities, productivity assumptions and cost rates for the variable expenses
projections should be integrated
Projections Should be Integrated
  • Enter assumptions and data and set up links
    • The statements build themselves according to GAAP
  • P&L
    • Segregate revenues, COGS, Op Ex, Income Taxes
      • Subtotals for gross margin, operating profit, net income
  • Balance Sheet
    • Segregate short- and long-term assets and liabilities
    • Account for retained earnings and equity capital
  • Cash Flow
    • Tie out to balance sheet
    • Segregate operating, investing and financing activities
projections alternative scenario analysis
Projections - Alternative Scenario Analysis
  • Changing many assumptions for different strategy or business environment
    • Vs. Sensitivity where change an individual assumption to reveal financial impact
  • Examples
    • Alternate distribution channels strategy
    • Timing issues (sales or development delayed)
    • Alternate volumes and pricing
  • Use this to run your business!!
projections plug cash
Projections - Plug Cash
  • On the balance sheet
    • Cash = [Total Liabilities + Equity] minus

[Total Assets other than Cash]

  • If cash is negative, the company is undercapitalized
    • Need to raise equity capital or borrow or both
  • If cash is positive and growing, the company is generating positive cash flow
  • Identifies seasonality needs
ratios and metrics
Ratios and Metrics
  • Ratios
    • Gross margin %
    • Days sales in A/R; days sales in inventory
    • Current Ratio & quick ratio
    • Debt to equity
    • EBITDA
  • Metrics
    • Headcount
    • Sales per employee
    • Sales per sales person
    • Customer acquisition cost
    • Unique ratios to your business
  • Show trends and compare to similar companies
understanding cash
Understanding Cash
  • First rule : Cash is the most important resource
    • More cash is better than less cash
    • Cash now is better than cash later
  • Focus on cash flow versus accounting income
  • Growth often absorbs cash flow because of a higher need for working capital and fixed investments
    • Entrepreneurial firms with negative income and high growth can have a very fast cash burn rate
    • Today’s investments are tomorrow’s growth opportunities
  • Focus on the dynamic picture of cash flow
    • Cash cycles (A/R collections, A/P payments), seasonality
  • Last rule:CFIMITYM !!!
    • Cash Flow is More Important Than Your Mother!!


how does cash planning work
How Does Cash Planning Work?
  • One part of financial statement forecasting
    • Falls out of developing the Income Statement and Balance Sheet
  • Goal: Provide well-balanced cash flow (ins & outs)
  • Understand the Operating Cycle (“OC”)
    • The OC is the system through which cash flows (purchase inventory, collect A/R, expenses, loan borrowing & payments).
      • Measures flow of assets into cash.
    • Need to finance a continuous OC
  • Cash flow analysis shows whether daily operations generate enough cash to meet obligations.
  • Compare actual cash flow to plan
    • Analysis allows opportunity to prepare for growth and fine tune plan
the cash flow projection
The Cash Flow Projection
  • How cash flows in & out of your business
    • Indicates capital investment requirements
  • Components
    • From operations
      • Net income or loss (revenues, expenses)
      • Changes in operating assets and liabilities (A/R, A/P, Prepaid Expenses, Accrued Expenses) other than cash
    • From Investing
      • Property & equipment
    • From Financing
      • Long and short-term debt
      • Issuance of equity
control your cash flow
Control Your Cash Flow
  • Prepare realistic projections
  • Compare actual results to the plan
    • Identify patterns and constantly refine projections
    • Investigate variances and make operating changes, if necessary
    • Spend most time in areas you can make quick and large impact
      • A/R, A/P, Inventory, Discretionary Expenses
increasing cash flows
Increasing Cash Flows
  • Collect receivables
    • Actively manage and quickly collect past dues
    • Shortens operating cycle
    • However, increasing sales (on credit), actually decreases cash flow (timing of collection and purchase of inventory)
  • Tightening credit requirements
    • More cash sooner
    • But may cost in less sales
    • Need the proper balance
  • Pricing
    • Proper pricing is critical to achieving a profit and maintaining positive cash flow
    • Must understand market, competition and distribution channels structure
  • Manage your expenses – necessary and reasonable

Cash Reserve

  • Always keep enough cash on hand to cover expenses for at least 3 months and, preferably more.
    • Provides cushion against “unknown unknowns”
  • But don’t keep too much in cash
    • Invest excess in interest bearing instruments with priority:
      • Safety (gov’t securities, CDs, etc.)
      • Liquidity
      • Return

Cash Flow and Accounting Punch List

  • Prepare monthly financial statements.
    • Compare with prior periods.
  • Frequently update your projections and cash flow plan.
  • Keep track of key income statement percentages.
    • If you're in manufacturing, your COGS % should be relatively the same or better as competitors in your industry.
  • Maintain good internal controls to prevent dishonesty and shrinkage.
  • Do not delegate the authority to sign checks or purchase orders.
  • Don't use money that you have withheld for payroll taxes or sales taxes for other purposes.
    • A "payroll service provider" can be used to manage these responsibilities.
  • Liquidity is not the same as making money.
    • You can be making a profit and still go broke by running out of cash. Learn and practice cash flow control.
  • Arrange for financing well before the need arises.
thoughts on raising capital
Thoughts on Raising Capital
  • Be prepared to concisely link the strategy & financial elements of your plan
    • Milestone-based
  • Raising capital is a long, hard and challenging process that requires a substantial time & effort
  • Who you raise capital from is much more important than how much capital you raise
  • Listen, learn & improve your plan along the way
  • Have realistic expectations about how much money you can raise and have a “plan B”
  • Friends, family & personal funds are usually the only source of capital available for new ventures
  • Milestones and expected cost
    • Shows business understanding and intention to track performance closely against the business plan
  • Milestone Examples
    • Hiring of a full management team
    • Completing product specifications
    • Completing prototype
    • Product testing
    • First customer shipment
    • First full quarter of profitability
    • Achieving $X million in revenue

The “Fully Funded” Folly


A Customer


Idea isFeasible


Risk (ß)







Funding to Milestonesaka “Old-Fashioned Venture Capital”

Idea isFeasible


A Customer


P(success) = 80%

Req’d IRR = 30%


P(success) = 50%

Req’d IRR = 50%

P(success) = 40%

Req’d IRR = 70%

P(success) = 30%

Req’d IRR = 100%

Risk (ß)







what is the planned use of proceeds
What is the planned "Use of Proceeds"?
  • Investors want to know how their money is being deployed
    • Capital to invest in sales/market growth
      • What will it allow you to accomplish?
    • When will your company break even in terms of profitability and cash flow?
  • The ultimate goal is to reach an exit scenario
    • Profitable businesses are more attractive to potential buyers or public markets
  • Create value by managing risk
  • Communicate the business strategy in easily understandable and believable financial terms
    • Strategy & Financials - complementary and consistent
  • Projections need to be realistic and believable
    • Focus on information that really matters
      • Numbers should support strategy and key drivers of success
    • Integrate assumptions and statements
    • Bottoms Up approach
    • Funding milestones within cash and revenue projections
    • Reduce risks of the business
      • Funding milestones Especially mng’t quality and experience
  • Understand the Operating Cycle
  • Don’t run out of Cash!!