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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
Sabin & Thorne Deadlines

*if you want a mentor

financial projections january 31 2014

Sabin Environmental Prize

Financial Projections

January 31, 2014

sabin application due march 24
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
Purpose of Financial Projections
  • Answer: Can the business make $?
  • Help you think through the details
  • Attract capital (investors)
what do investors want
What do Investors Want?
  • Their money back in, say, 5 years
  • A nice return, say, 100% per year
risk of loss
Risk of Loss

50% gone

in 4 years

7

risk of loss1
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
Example

Exit

Sales

Break

Even

another example
Another Example

Ten times too optimistic!

$ 1 million

$ 9 million

rules of thumb
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 
example1
Example

Exit

Sales

Break

Even

moral of this story
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 example1
Another Example

Ten times too optimistic!

$ 1 million

$ 9 million

projections
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
Types of Statements
  • Income Statement
  • Balance Sheet
  • Sources and Uses of Funds

.

income statement definitions
Income Statement Definitions

Revenues (Sales):

> $ value exchanged

> for products or services

Expenses:

> $ value of resources used

> to earn those revenues

expenses
Expenses

Divide expenses into:

Direct Costs/Expenses

and

Indirect Costs/Expenses

direct costs cost of goods sold
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

indirect costs
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
Key Measure -- for Startups

EBITDA

Earnings Before Interest, Taxes,

Depreciation & Amortization

Measures -- earning power

E - BIT - DA

25

net income loss
Net Income (Loss)

EBITDA minus:

  • Depreciation
  • Interest expense
  • Taxes
  • “One time events”
depreciation
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
Examples of PP&E

Buildings

Factories

Vehicles

Equipment

Computers

Furniture

depreciation1
Depreciation
  • Fixed Assets provide valueover time
  • Also, wear out over time
  • Depreciationspreads these costs
  • Over their useful life
example2
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
example3
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
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
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
Start “ Big Picture ”

> People ?

> Machines ?

> Advertising?

> Locations?

  • What are the key sales drivers ?
example4
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
slide40
The Product
  • Fresh farmed tilapia fillets
  • “Seafood Safe” and Organic
  • 100% organic feed
  • Purified and filtered re-circulated water
slide41
Customers
  • Suppliers of restaurants, grocery & fish stores
  • Also, Trader Joe’s, Whole Foods
slide42
Quote from EcoFish:

“We will buy everything you have to sell.”

think big picture
Think “ Big Picture ”

> Systems that grow fish

  • The Good Fish key sales driver:
slide44
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
First 12 Month’s Projections

Do this for 12 months

next step costs
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
slide48
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
slide49
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
slide50
Depreciation – from Equipment purchases
  • “Pod System”
  • Filleting machine
  • $60,000 total
  • Lasts 10 years
  • (120 months)
cost projections
Cost Projections

Do this for 12 months

moving forward
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
Example: Timing of Milestones

Exit

Sales

Break

Even

next step pick a 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
And, Fill in the Gaps

Fill in

Fill in

make a list
Make a List

Key assumptions that drive the model

  • How do your sales grow?
  • Costs?
  • People?
  • Key equipment?
sanity check on year five
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!

good fish balance sheet as of 12 31 14
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
Balance Sheet

Assets =

Liabilities + Shareholders’ Equity

balance sheet definitions
Balance Sheet Definitions

Assets:

> What the company owns

Liabilities & Shareholders’ Equity

> How the company pays for what it owns

think about a house
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
Shareholders’ Equity
  • What the investors put in

Plus

  • What the company makes (net income)

Less

  • What investors take out (dividends)
balance sheet more definitions
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
Transfer Income Statement Data
  • From Custom Projections
  • Into Model Template
construct model formulas
Construct Model Formulas

Old Property Investments + New

example balance sheet
Example -- Balance Sheet

From Balance Sheet Formulas

Loss

example year two
Example -- Year Two

From Balance Sheet Formulas

Loss

exercise construct a balance sheet

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
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
example5
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
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
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!