Financial Projections for
Financial Projections for
Start-Up Businesses
Start-Up Businesses
Mark Leslie Mark Leslie
[email protected] [email protected]
650.561.1228 650.561.1228
Financial Projections
Financial Projections
! Why do Financial Plan? Why do Financial Plan?
! Basic Building Blocks Basic Building Blocks
! Key Variables Key Variables
! Bottoms up / Tops Down Bottoms up / Tops Down
! Model Companies Model Companies
! Planning Issues Planning Issues
! Financial Models Financial Models – – the crucible to test ideas the crucible to test ideas
! “ “What-if What-if” ” Scenarios Scenarios
! Lest we forget Lest we forget… …
Why do a financial Plan
Why do a financial Plan
! Can Can’ ’t raise money without one? t raise money without one?
! Feasibility of business model Feasibility of business model
! Understand the key variables for your business Understand the key variables for your business
! Understand the cash requirements Understand the cash requirements
! Sharpens focus on key planning areas Sharpens focus on key planning areas
! Focus on key operating metrics Focus on key operating metrics
! Oh, yeah Oh, yeah… …
! ! Can Can’ ’t raise money without one!!! t raise money without one!!!
Basic Building Blocks
Basic Building Blocks
–
–
Department Budget
Department Budget
Depreciation Depreciation
head 2 head 2
q3 q3 q4 q4 y1 y1
capital capital
expenses expenses
Salary Salary ovhd ovhd
Salary total Salary total
head 1 head 1
y2 y2 q2 q2 q1 q1
Eng Budget Eng Budget
Key Variables
Key Variables
Department Budget
Department Budget
!Headcount Headcount
! ! Salary / overhead / Salary / overhead /
recruiting recruiting
! ! Facilities / communications Facilities / communications
/ IT / IT
! ! T& E / other T& E / other
!Capital Equipment Capital Equipment
Dept Budget
Key Variables
Key Variables
Department Budget
Department Budget
! G&A G&A
! ! Headcount Headcount
! Exec office / CFO Exec office / CFO
! ! legal legal
! ! Accounting Accounting
! ! Corporate Corporate allocatable allocatable expenses expenses
! IT and communications IT and communications
infrastructure infrastructure
! Real estate Real estate
Dept Budget
Key Variables
Key Variables
Department Budget
Department Budget
!Engineering Engineering
! ! Headcount Headcount
! ! NRE NRE
! ! consulting (e.g. FCC consulting (e.g. FCC
approval) approval)
! ! prototypes, expensed prototypes, expensed
materials materials
! ! product enhancements and product enhancements and
sustaining engineering sustaining engineering
Dept Budget
Key Variables
Key Variables
Department Budget
Department Budget
!Marketing Marketing
! ! Headcount Headcount
! ! product launch product launch
! ! Advertising / PR Advertising / PR
! ! seminars, trade shows, seminars, trade shows,
web site web site
! ! brochures, literature brochures, literature
Dept Budget
Key Variables
Key Variables
Department Budget
Department Budget
!Sales Sales
! ! Headcount Headcount
!Mgrs, SE Mgrs, SE’ ’s s
! ! Productivity model Productivity model
! ! partnerships, coop. partnerships, coop.
Advertising Advertising
! ! remote offices remote offices
Dept Budget
Key Variables
Key Variables
Department Budget
Department Budget
!
Headcount
Headcount
!
Headcount
Headcount
!
Headcount
Headcount
Dept Budget
Key Variables
Key Variables
–
–
Capital Equipment
Capital Equipment
!Cost per head Cost per head
!NRE NRE
!Technology Buyout Technology Buyout
!Tooling Tooling
!IT infrastructure IT infrastructure
!Purchased Purchased Bldgs Bldgs Corp Cap Budget
Basic Building Blocks
Basic Building Blocks
Corp Rollup and Cap Schedule
Corp Rollup and Cap Schedule
Dept Budget
Dept Budget
Dept Budget
Dept Budget
Corp Exp Budget
Corp Cap Budget
Key Variables
Key Variables
Revenue Model (cross checked)
Revenue Model (cross checked)
! Market Market
! ! Available / Served Available / Served
! Price Price
! ! List / discount / List / discount / Avg Avg selling price selling price
! Forecast Forecast – – by Product by Product
! ! Product mix Product mix
! ! Trajectory of Ramp Trajectory of Ramp
! Forecast Forecast – – by Channel by Channel
! ! Net cost by channel Net cost by channel
! Forecast Forecast – – by Sales Capacity by Sales Capacity
! ! Sales Yield (sum of quota less safety Sales Yield (sum of quota less safety
margin) margin)
! ! Productivity ramp Productivity ramp
! ! Attrition calculation Attrition calculation
! ! Staffing plan Staffing plan
! Cost for customer acquisition Cost for customer acquisition
Revenue Model
Key Variables
Key Variables
Cost Model
Cost Model
! Product Product
! ! Estimated BOM Estimated BOM
! Rush charges Rush charges
! Design changes Design changes
! Warranty Warranty
! Obsolescence / write Obsolescence / write– –offs offs
! ! Labor Labor
! ! Volume Volume
! Services Services
! ! Labor Labor
! ! Training Training
! ! Efficiency Efficiency
Cost Model
Basic Building Blocks
Basic Building Blocks
–
–
Income
Income
Statement
Statement
Dept Budget
Dept Budget
Dept Budget
Dept Budget
Revenue Model
Income Statement
Revenue
COGS
Expenses
Profit
Product Cost
Model
Key Variables
Key Variables
Capitalization (Funding) Plan
Capitalization (Funding) Plan
! Equity Financing Equity Financing – – amount and timing amount and timing
! ! Seed Seed
! ! Startup A Startup A
! ! Development B Development B
! ! Mezzanine C Mezzanine C
! ! IPO IPO
! ! Post IPO Post IPO
! Debt Financing Debt Financing
! ! Capital equipment Leasing Capital equipment Leasing
! ! Working capital bank Line Working capital bank Line
! ! Convertible debt securities Convertible debt securities
Capitalization Plan
Key Variables
Key Variables
–
–
Capital Equipment
Capital Equipment
!Cost per head Cost per head
!NRE NRE
!Technology Buyout Technology Buyout
!Tooling Tooling
!IT infrastructure IT infrastructure
!Purchased Purchased Bldgs Bldgs Corp Cap Budget
Basic Building Blocks
Basic Building Blocks
–
–
Balance
Balance
Sheet and Cash Flow
Sheet and Cash Flow
Balance Sheet
Cash Flow
Capitalization Plan Corp Cap Budget
Dept Budget
Dept Budget
Dept Budget
Dept Budget
Rev enue Model
Income Statement
Rev enue
COGS
Expenses
Profit
Product Cost
Model
Bottoms-up / Tops-down
Bottoms-up / Tops-down
! Bottom-up Bottom-up
! ! Built from details Built from details
! ! Variable assumptions Variable assumptions
! ! Start up and growth stage Start up and growth stage
! Top-down Top-down
! ! “ “model model” ” of the mature company of the mature company
! ! Similar to other companies / products / markets Similar to other companies / products / markets
! The Five-Year Plan The Five-Year Plan
! ! Year 5 = model company (or close to it) Year 5 = model company (or close to it)
! ! Year 1 = raw start up Year 1 = raw start up
! ! Year 2 Year 2 " " 5 development stage to mature company 5 development stage to mature company
The Model Company
The Model Company
! Income Statement Income Statement
! ! Revenue Revenue
! ! Gross Margin Gross Margin
! ! Departmental expenses as percentage of revenue Departmental expenses as percentage of revenue
! ! Operating Income Operating Income
! Balance sheet items Balance sheet items
! ! DSO (A/R days sales outstanding) DSO (A/R days sales outstanding)
! ! Inventory turns Inventory turns
! Employee Metrics Employee Metrics
! ! Revenue / employee Revenue / employee
! ! Expense / employee Expense / employee
! ! Expenses as a percent of revenue Expenses as a percent of revenue
Basic Building Blocks
Basic Building Blocks
–
–
Department Budget
Department Budget
S t a r t u p " M o d e l
Income
Statement
Balance
Sheet
Cash Flow
Y1
Income
Statement
Balance
Sheet
Cash Flow
Y4
Income
Statement
Balance
Sheet
Cash Flow
Y2
Income
Statement
Balance
Sheet
Cash Flow
Y5
Intergalactic Optical
Intergalactic Optical
Nanotubes
Nanotubes
, Inc.
, Inc.
Income Statement
Income Statement
176.0 176.0 124.0 124.0 12.0 12.0 (2.0) (2.0) (2.5) (2.5)
Op Profit Op Profit
2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.0 2.0
Engineering Engineering
4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 2.5 2.5
Total Op Ex Total Op Ex
1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 0.5 0.5
SG&A SG&A
280.0 280.0 128.0 128.0 16.0 16.0 1.6 1.6 0 0
Gross Gross Mrgn Mrgn
350.0 350.0 160.0 160.0 20.0 20.0 2.0 2.0 0 0
Revenue Revenue
Y5 Y5 Y4 Y4 Y3 Y3 Y2 Y2 Y1 Y1
Model Companies Model Companies – – Operating Stacks ($M) Operating Stacks ($M)
25 25 43 43 9,993 9,993 2,122 2,122 3,578 3,578
Net Income Net Income
31 31 88 88 13,217 13,217 2,844 2,844 4,882 4,882
Operating Operating
Income Income
.20 .20 .20 .20 .19 .19 .91 .91 .50 .50
EPS EPS
57 57 702 702 13,284 13,284 3,505 3,505 8,351 8,351
Total Op Exp Total Op Exp
35 35 537 537 8,625 8,625 3,050 3,050 4,818 4,818
SG&A SG&A
22 22 143 143 4,659 4,659 455 455 3,135 3,135
Eng Eng
89 89 790 790 26,501 26,501 6,349 6,349 13,233 13,233
Gross Margin Gross Margin
8 8 163 163 5,686 5,686 29,055 29,055 5,645 5,645
Cogs Cogs
97 97 953 953 32,187 32,187 35,404 35,404 18,878 18,878
Revenue Revenue
Rambus Rambus Yahoo Yahoo Microsoft Microsoft Dell Dell Cisco Cisco
Model Companies
Model Companies
–
–
Common Sizing (%)
Common Sizing (%)
26 26 4.5 4.5 31 31 6 6 19 19
Net Income Net Income
32 32 9 9 41 41 8 8 26 26
Operating Income Operating Income
59 59 74 74 42 42 10 10 44 44
Total Op Exp Total Op Exp
36 36 56 56 26 26 9 9 25 25
SG&A SG&A
23 23 15 15 15 15 1 1 17 17
Eng Eng
92 92 83 83 82 82 18 18 70 70
Gross Margin Gross Margin
8 8 17 17 18 18 82 82 30 30
Cogs Cogs
100 100 100 100 100 100 100 100 100 100
Revenue Revenue
Rambus Rambus Yahoo Yahoo Microsoft Microsoft Dell Dell Cisco Cisco
Model Companies
Model Companies
–
–
Market Value
Market Value
100 100 75 75 31 31 38 38 41 41
Multiple of Multiple of
Earnings Earnings
.02 .02 .04 .04 10 10 2.1 2.1 3.6 3.6
Earnings ($B) Earnings ($B)
20 20 3 3 10 10 3 3 8 8
Multiple of Multiple of
Revenue Revenue
.1 .1 1 1 32 32 35 35 19 19
Revenue ($B) Revenue ($B)
2 2 3 3 317 317 95 95 146 146
Market Cap ($B) Market Cap ($B)
Rambus Rambus Yahoo Yahoo Microsoft Microsoft Dell Dell Cisco Cisco
Planning Issues
Planning Issues
! Revenues (always) take longer Revenues (always) take longer
! ! Sales forecasts are optimistic Sales forecasts are optimistic
! ! Un-tested Un-tested “ “sales model sales model” ”
! ! Unrealistic productivity assumptions Unrealistic productivity assumptions
! Margins aren Margins aren’ ’t as great as planned t as great as planned
! ! Design creep Design creep
! ! Hidden costs like yield, scrap, obsolescence, warranty Hidden costs like yield, scrap, obsolescence, warranty
! Operating expenses higher than plan Operating expenses higher than plan
! Capital needs are high . . . and not free Capital needs are high . . . and not free
! ! Cost of capital is inversely proportional to the execution of the plan Cost of capital is inversely proportional to the execution of the plan
Sanity Testing
Sanity Testing
!Rate of Sales Growth Rate of Sales Growth
!Staffing Staffing
! ! Growth Growth
! ! Non-growth Non-growth
!(engineer one product, sell it forever) (engineer one product, sell it forever)
!Profits Profits
!Proxy Proxy – – compare your plan to the compare your plan to the
experience of existing companies experience of existing companies
Financial Models --
Financial Models --
The crucible to test your ideas!
The crucible to test your ideas!
!If you understand the model, feasibility of If you understand the model, feasibility of
ideas are more self-evident ideas are more self-evident
!Make Key Assumptions into variables Make Key Assumptions into variables
! ! Investigate alternatives Investigate alternatives
! ! Sensitivity Analysis Sensitivity Analysis
!Determine CASH consumption Determine CASH consumption
!Understand the path to profitability Understand the path to profitability
Modeling
Modeling
–
–
“
“
What-if
What-if
”
”
Scenarios
Scenarios
!Document assumptions Document assumptions
! ! Facilitates changes in future Facilitates changes in future
! ! Operational (e.g.,product engineering Operational (e.g.,product engineering
plan/milestones) plan/milestones)
!Develop a feel for the dynamics Develop a feel for the dynamics
! ! E.g., Reduced investment in engineering = E.g., Reduced investment in engineering =
product schedule slip of X months = revenue product schedule slip of X months = revenue
delay delay
Lest we forget
Lest we forget
…
…
Cash
Cash
…
…
…
…
is King.
is King.
Again!
Again!
Financial Projections for
Financial Projections for
Start-Up Businesses
Start-Up Businesses
Mark Leslie Mark Leslie
[email protected] [email protected]
650.561.1228 650.561.1228
doc_740290393.pdf
Financial Projections for
Start-Up Businesses
Start-Up Businesses
Mark Leslie Mark Leslie
[email protected] [email protected]
650.561.1228 650.561.1228
Financial Projections
Financial Projections
! Why do Financial Plan? Why do Financial Plan?
! Basic Building Blocks Basic Building Blocks
! Key Variables Key Variables
! Bottoms up / Tops Down Bottoms up / Tops Down
! Model Companies Model Companies
! Planning Issues Planning Issues
! Financial Models Financial Models – – the crucible to test ideas the crucible to test ideas
! “ “What-if What-if” ” Scenarios Scenarios
! Lest we forget Lest we forget… …
Why do a financial Plan
Why do a financial Plan
! Can Can’ ’t raise money without one? t raise money without one?
! Feasibility of business model Feasibility of business model
! Understand the key variables for your business Understand the key variables for your business
! Understand the cash requirements Understand the cash requirements
! Sharpens focus on key planning areas Sharpens focus on key planning areas
! Focus on key operating metrics Focus on key operating metrics
! Oh, yeah Oh, yeah… …
! ! Can Can’ ’t raise money without one!!! t raise money without one!!!
Basic Building Blocks
Basic Building Blocks
–
–
Department Budget
Department Budget
Depreciation Depreciation
head 2 head 2
q3 q3 q4 q4 y1 y1
capital capital
expenses expenses
Salary Salary ovhd ovhd
Salary total Salary total
head 1 head 1
y2 y2 q2 q2 q1 q1
Eng Budget Eng Budget
Key Variables
Key Variables
Department Budget
Department Budget
!Headcount Headcount
! ! Salary / overhead / Salary / overhead /
recruiting recruiting
! ! Facilities / communications Facilities / communications
/ IT / IT
! ! T& E / other T& E / other
!Capital Equipment Capital Equipment
Dept Budget
Key Variables
Key Variables
Department Budget
Department Budget
! G&A G&A
! ! Headcount Headcount
! Exec office / CFO Exec office / CFO
! ! legal legal
! ! Accounting Accounting
! ! Corporate Corporate allocatable allocatable expenses expenses
! IT and communications IT and communications
infrastructure infrastructure
! Real estate Real estate
Dept Budget
Key Variables
Key Variables
Department Budget
Department Budget
!Engineering Engineering
! ! Headcount Headcount
! ! NRE NRE
! ! consulting (e.g. FCC consulting (e.g. FCC
approval) approval)
! ! prototypes, expensed prototypes, expensed
materials materials
! ! product enhancements and product enhancements and
sustaining engineering sustaining engineering
Dept Budget
Key Variables
Key Variables
Department Budget
Department Budget
!Marketing Marketing
! ! Headcount Headcount
! ! product launch product launch
! ! Advertising / PR Advertising / PR
! ! seminars, trade shows, seminars, trade shows,
web site web site
! ! brochures, literature brochures, literature
Dept Budget
Key Variables
Key Variables
Department Budget
Department Budget
!Sales Sales
! ! Headcount Headcount
!Mgrs, SE Mgrs, SE’ ’s s
! ! Productivity model Productivity model
! ! partnerships, coop. partnerships, coop.
Advertising Advertising
! ! remote offices remote offices
Dept Budget
Key Variables
Key Variables
Department Budget
Department Budget
!
Headcount
Headcount
!
Headcount
Headcount
!
Headcount
Headcount
Dept Budget
Key Variables
Key Variables
–
–
Capital Equipment
Capital Equipment
!Cost per head Cost per head
!NRE NRE
!Technology Buyout Technology Buyout
!Tooling Tooling
!IT infrastructure IT infrastructure
!Purchased Purchased Bldgs Bldgs Corp Cap Budget
Basic Building Blocks
Basic Building Blocks
Corp Rollup and Cap Schedule
Corp Rollup and Cap Schedule
Dept Budget
Dept Budget
Dept Budget
Dept Budget
Corp Exp Budget
Corp Cap Budget
Key Variables
Key Variables
Revenue Model (cross checked)
Revenue Model (cross checked)
! Market Market
! ! Available / Served Available / Served
! Price Price
! ! List / discount / List / discount / Avg Avg selling price selling price
! Forecast Forecast – – by Product by Product
! ! Product mix Product mix
! ! Trajectory of Ramp Trajectory of Ramp
! Forecast Forecast – – by Channel by Channel
! ! Net cost by channel Net cost by channel
! Forecast Forecast – – by Sales Capacity by Sales Capacity
! ! Sales Yield (sum of quota less safety Sales Yield (sum of quota less safety
margin) margin)
! ! Productivity ramp Productivity ramp
! ! Attrition calculation Attrition calculation
! ! Staffing plan Staffing plan
! Cost for customer acquisition Cost for customer acquisition
Revenue Model
Key Variables
Key Variables
Cost Model
Cost Model
! Product Product
! ! Estimated BOM Estimated BOM
! Rush charges Rush charges
! Design changes Design changes
! Warranty Warranty
! Obsolescence / write Obsolescence / write– –offs offs
! ! Labor Labor
! ! Volume Volume
! Services Services
! ! Labor Labor
! ! Training Training
! ! Efficiency Efficiency
Cost Model
Basic Building Blocks
Basic Building Blocks
–
–
Income
Income
Statement
Statement
Dept Budget
Dept Budget
Dept Budget
Dept Budget
Revenue Model
Income Statement
Revenue
COGS
Expenses
Profit
Product Cost
Model
Key Variables
Key Variables
Capitalization (Funding) Plan
Capitalization (Funding) Plan
! Equity Financing Equity Financing – – amount and timing amount and timing
! ! Seed Seed
! ! Startup A Startup A
! ! Development B Development B
! ! Mezzanine C Mezzanine C
! ! IPO IPO
! ! Post IPO Post IPO
! Debt Financing Debt Financing
! ! Capital equipment Leasing Capital equipment Leasing
! ! Working capital bank Line Working capital bank Line
! ! Convertible debt securities Convertible debt securities
Capitalization Plan
Key Variables
Key Variables
–
–
Capital Equipment
Capital Equipment
!Cost per head Cost per head
!NRE NRE
!Technology Buyout Technology Buyout
!Tooling Tooling
!IT infrastructure IT infrastructure
!Purchased Purchased Bldgs Bldgs Corp Cap Budget
Basic Building Blocks
Basic Building Blocks
–
–
Balance
Balance
Sheet and Cash Flow
Sheet and Cash Flow
Balance Sheet
Cash Flow
Capitalization Plan Corp Cap Budget
Dept Budget
Dept Budget
Dept Budget
Dept Budget
Rev enue Model
Income Statement
Rev enue
COGS
Expenses
Profit
Product Cost
Model
Bottoms-up / Tops-down
Bottoms-up / Tops-down
! Bottom-up Bottom-up
! ! Built from details Built from details
! ! Variable assumptions Variable assumptions
! ! Start up and growth stage Start up and growth stage
! Top-down Top-down
! ! “ “model model” ” of the mature company of the mature company
! ! Similar to other companies / products / markets Similar to other companies / products / markets
! The Five-Year Plan The Five-Year Plan
! ! Year 5 = model company (or close to it) Year 5 = model company (or close to it)
! ! Year 1 = raw start up Year 1 = raw start up
! ! Year 2 Year 2 " " 5 development stage to mature company 5 development stage to mature company
The Model Company
The Model Company
! Income Statement Income Statement
! ! Revenue Revenue
! ! Gross Margin Gross Margin
! ! Departmental expenses as percentage of revenue Departmental expenses as percentage of revenue
! ! Operating Income Operating Income
! Balance sheet items Balance sheet items
! ! DSO (A/R days sales outstanding) DSO (A/R days sales outstanding)
! ! Inventory turns Inventory turns
! Employee Metrics Employee Metrics
! ! Revenue / employee Revenue / employee
! ! Expense / employee Expense / employee
! ! Expenses as a percent of revenue Expenses as a percent of revenue
Basic Building Blocks
Basic Building Blocks
–
–
Department Budget
Department Budget
S t a r t u p " M o d e l
Income
Statement
Balance
Sheet
Cash Flow
Y1
Income
Statement
Balance
Sheet
Cash Flow
Y4
Income
Statement
Balance
Sheet
Cash Flow
Y2
Income
Statement
Balance
Sheet
Cash Flow
Y5
Intergalactic Optical
Intergalactic Optical
Nanotubes
Nanotubes
, Inc.
, Inc.
Income Statement
Income Statement
176.0 176.0 124.0 124.0 12.0 12.0 (2.0) (2.0) (2.5) (2.5)
Op Profit Op Profit
2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.0 2.0
Engineering Engineering
4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 2.5 2.5
Total Op Ex Total Op Ex
1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 0.5 0.5
SG&A SG&A
280.0 280.0 128.0 128.0 16.0 16.0 1.6 1.6 0 0
Gross Gross Mrgn Mrgn
350.0 350.0 160.0 160.0 20.0 20.0 2.0 2.0 0 0
Revenue Revenue
Y5 Y5 Y4 Y4 Y3 Y3 Y2 Y2 Y1 Y1
Model Companies Model Companies – – Operating Stacks ($M) Operating Stacks ($M)
25 25 43 43 9,993 9,993 2,122 2,122 3,578 3,578
Net Income Net Income
31 31 88 88 13,217 13,217 2,844 2,844 4,882 4,882
Operating Operating
Income Income
.20 .20 .20 .20 .19 .19 .91 .91 .50 .50
EPS EPS
57 57 702 702 13,284 13,284 3,505 3,505 8,351 8,351
Total Op Exp Total Op Exp
35 35 537 537 8,625 8,625 3,050 3,050 4,818 4,818
SG&A SG&A
22 22 143 143 4,659 4,659 455 455 3,135 3,135
Eng Eng
89 89 790 790 26,501 26,501 6,349 6,349 13,233 13,233
Gross Margin Gross Margin
8 8 163 163 5,686 5,686 29,055 29,055 5,645 5,645
Cogs Cogs
97 97 953 953 32,187 32,187 35,404 35,404 18,878 18,878
Revenue Revenue
Rambus Rambus Yahoo Yahoo Microsoft Microsoft Dell Dell Cisco Cisco
Model Companies
Model Companies
–
–
Common Sizing (%)
Common Sizing (%)
26 26 4.5 4.5 31 31 6 6 19 19
Net Income Net Income
32 32 9 9 41 41 8 8 26 26
Operating Income Operating Income
59 59 74 74 42 42 10 10 44 44
Total Op Exp Total Op Exp
36 36 56 56 26 26 9 9 25 25
SG&A SG&A
23 23 15 15 15 15 1 1 17 17
Eng Eng
92 92 83 83 82 82 18 18 70 70
Gross Margin Gross Margin
8 8 17 17 18 18 82 82 30 30
Cogs Cogs
100 100 100 100 100 100 100 100 100 100
Revenue Revenue
Rambus Rambus Yahoo Yahoo Microsoft Microsoft Dell Dell Cisco Cisco
Model Companies
Model Companies
–
–
Market Value
Market Value
100 100 75 75 31 31 38 38 41 41
Multiple of Multiple of
Earnings Earnings
.02 .02 .04 .04 10 10 2.1 2.1 3.6 3.6
Earnings ($B) Earnings ($B)
20 20 3 3 10 10 3 3 8 8
Multiple of Multiple of
Revenue Revenue
.1 .1 1 1 32 32 35 35 19 19
Revenue ($B) Revenue ($B)
2 2 3 3 317 317 95 95 146 146
Market Cap ($B) Market Cap ($B)
Rambus Rambus Yahoo Yahoo Microsoft Microsoft Dell Dell Cisco Cisco
Planning Issues
Planning Issues
! Revenues (always) take longer Revenues (always) take longer
! ! Sales forecasts are optimistic Sales forecasts are optimistic
! ! Un-tested Un-tested “ “sales model sales model” ”
! ! Unrealistic productivity assumptions Unrealistic productivity assumptions
! Margins aren Margins aren’ ’t as great as planned t as great as planned
! ! Design creep Design creep
! ! Hidden costs like yield, scrap, obsolescence, warranty Hidden costs like yield, scrap, obsolescence, warranty
! Operating expenses higher than plan Operating expenses higher than plan
! Capital needs are high . . . and not free Capital needs are high . . . and not free
! ! Cost of capital is inversely proportional to the execution of the plan Cost of capital is inversely proportional to the execution of the plan
Sanity Testing
Sanity Testing
!Rate of Sales Growth Rate of Sales Growth
!Staffing Staffing
! ! Growth Growth
! ! Non-growth Non-growth
!(engineer one product, sell it forever) (engineer one product, sell it forever)
!Profits Profits
!Proxy Proxy – – compare your plan to the compare your plan to the
experience of existing companies experience of existing companies
Financial Models --
Financial Models --
The crucible to test your ideas!
The crucible to test your ideas!
!If you understand the model, feasibility of If you understand the model, feasibility of
ideas are more self-evident ideas are more self-evident
!Make Key Assumptions into variables Make Key Assumptions into variables
! ! Investigate alternatives Investigate alternatives
! ! Sensitivity Analysis Sensitivity Analysis
!Determine CASH consumption Determine CASH consumption
!Understand the path to profitability Understand the path to profitability
Modeling
Modeling
–
–
“
“
What-if
What-if
”
”
Scenarios
Scenarios
!Document assumptions Document assumptions
! ! Facilitates changes in future Facilitates changes in future
! ! Operational (e.g.,product engineering Operational (e.g.,product engineering
plan/milestones) plan/milestones)
!Develop a feel for the dynamics Develop a feel for the dynamics
! ! E.g., Reduced investment in engineering = E.g., Reduced investment in engineering =
product schedule slip of X months = revenue product schedule slip of X months = revenue
delay delay
Lest we forget
Lest we forget
…
…
Cash
Cash
…
…
…
…
is King.
is King.
Again!
Again!
Financial Projections for
Financial Projections for
Start-Up Businesses
Start-Up Businesses
Mark Leslie Mark Leslie
[email protected] [email protected]
650.561.1228 650.561.1228
doc_740290393.pdf