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# Sabin & Thorne Deadlines - PowerPoint PPT Presentation

Sabin &amp; 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 &amp; Balance Sheet Explanation of use of prize money

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*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
• Attract capital (investors)
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

Example

Exit

Sales

Break

Even

Another Example

Ten times too optimistic!

\$ 1 million

\$ 9 million

Rules of Thumb
• 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 
Example

Exit

Sales

Break

Even

Moral of this Story

If you want/need investor money

• You must deliver the return they need
• 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

.

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”
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
• 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

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?

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 ?

> 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

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
• 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

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?

And, Fill in the Gaps

Fill in

Fill in

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!

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

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

Example -- Year Two

From Balance Sheet Formulas

Loss

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 \$?

You are likely to be much too optimistic

> Things just take longer -- to happen

> Cost more than you think

> Under-estimate cash needed