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					     Dollars and Sense:
Will Your Idea Make Money?
            Jim Chung
   Director, VentureAccelerator
                                       www.va.umd.edu




                  Agenda

•   Why Build a Financial Plan?
•   Financial Plan Components
•   Financial Analyses
•   Building the Financial Statement
•   Business Plan Competition
    Requirements
                                                   www.va.umd.edu




      Why Build the Financial Plan?
• Founder
  –   Reality Check: Will I Make Money?
  –   Identify Need for Financing Events
  –   Business Strategy Guide
  –   Sensitivity Analysis and Scenario Building
  –   Metrics for Measuring Progress
• Investor
  – Return on Investment
• Requirement for BPC Competition
                                               www.va.umd.edu




     Components: Assumptions
• Sales Projections   • Costs Forecast
  – Pricing             – Fixed v. Variable
  – Units Sold             •   Bill of Materials
                           •   Salaries
  – Growth Rate
                           •   Facilities
                           •   Equipment
                           •   Interest Expense
                           •   Taxes
                           •   Services Costs
                                                     www.va.umd.edu




          Financial Statements
• Income Statement (aka P&L Statement)
  – Profits and Losses over a time period
  – Long term prospects
• Cash Flow Statement (aka Statement of
  Sources and Uses)
  – Actual Cash Flow over a time period
  – Short term viability
• Balance Sheet
  – Snapshot of company’s Assets, Liabilities, and
    Owner’s Equity
  – Immediate health
                                                                                                                www.va.umd.edu




                          Income Statement
• Top Line (Revenues)                                                                 • Sales and Marketing
    –   Price                                                                         • General and Administrative
    –   Units Sold                                                                      (G&A)
    –   Product Lines                                                                 • Research and Development
    –   Goods and Services                                                              (R&D)
• Costs                                                                               • Depreciation
    – Cost of Goods Sold (COGS)                                     •     Bottom Line (Income or Profits)
    – Operating Expenses                                                    – Revenues – Costs = Profits
                                    Year 1        Year 2            Year 3           Year 4         Year 5
          Price                  $      100    $        105    $          110    $         116   $        122
          Units Sold                   2000           10000             34000            66000         106000
          Revenue                $ 200,000     $ 1,050,000     $    3,748,500    $   7,640,325   $ 12,884,366
          COGS                   $ 160,000     $ 630,000       $    1,874,250    $   3,056,130   $ 3,865,310
          Gross Profit           $ 40,000      $ 420,000       $    1,874,250    $   4,584,195   $ 9,019,056
          Operating Costs        $ 800,000     $ 1,200,000     $    1,600,000    $   2,000,000   $ 2,400,000
          Net Operating Profit   $ (760,000)   $ (780,000)     $      274,250    $   2,584,195   $ 6,619,056
          Cumulative Profit      $ (760,000)   $ (1,540,000)   $   (1,265,750)   $   1,318,445   $ 7,937,501

          Breakeven Point         Year 5
          Cash Flow Positive      Year 3
                                 www.va.umd.edu




Calculation of the Income Statement




Source: Dorf and Byers
                                                             www.va.umd.edu




               Cash Flow Statement
• Actual cash flows                • Different from income
   – Bank account v. credit          statement
     card statement                   – Accounts Payable &
   – Negative ending cash               Receivable
     balance?                            • Measured by time period
      • Bankruptcy                       • Industry and
      • Investment or debt                 Management Dependent
        required                      – Capital expenditures
   – Positive cash flow               – Depreciation (addback)
      • Can operate without new       – Financing activities
        debt or equity
                                         • Equity
      • Profitability does not
        equal positive cash flow         • Debt
                                             www.va.umd.edu




                         Cash Flow Process




Source: Dorf and Byers
                                          www.va.umd.edu




             Balance Sheet

• Snapshot of the health of the company
  – End of the Year
• Assets = Liabilities + Owner’s Equity
  – Assets: Cash, Accounts Receivable,
    Inventory, PP&E (Property, Plant, &
    Equipment)
  – Liabilities: Debt, Accounts Payable
  – Owner’s Equity: Stock, Retained Earnings
                                            www.va.umd.edu




             Financial Analysis
•   Breakeven Analysis   • Scenario Building
•   Required Financing   • Sensitivity Analysis
•   Positive Cash Flow     –   Pricing
•   Burn Rate              –   Units
                           –   Cost
                           –   A/R or A/P
                                                                                                                                      www.va.umd.edu




The Integrated Financial Statement
                                             Integrated Financial Statement Template
                                                     Pro Forma Financial Statements
          1                                                   Beginning Period 1   Period 2   Period 3   Period 4   Period 5   ETC.
          2
          3   Sales Forecast
          4
          5   Income Statement
          6   Sales Revenue
          7   less: Cost of Goods Sold
          8   GROSS PROFIT                                                     0          0          0          0          0
          9   less: Selling Expenses
         10         General and Administrative Expenses
         11         Depreciation Expense
         12         Other Operating Expenses
         13   Total Operating Expenses                                         0          0          0          0          0
         14   OPERATING PROFIT                                                 0          0          0          0          0
         15   less: Interest and Other Expenses
         16   plus: Interest and Other Revenues
         17   PRE-TAX INCOME                                                   0          0          0          0          0
         18   Income Tax
         19   NET INCOME                                                       0          0          0          0          0
         20
         21   Cash Flow Statement
         22   Net Income
         23   Depreciation Expense
         24   OPERATING CASH FLOW                                              0          0          0          0          0
         25   plus: Increase in Accounts Payable
         26         Increase in Other Payables
         27   less: Increases in Accounts Receivable
         28         Increase in Inventory
         29   OPERATING SOURCES (USES) OF CASH                                 0          0          0          0          0
         30   plus: Net Cash from Financing Activities
         31   less: Net Investment Outlays
         32   CHANGE IN CASH                                                   0          0          0          0          0
         33   plus: Beginning Cash
         34   ENDING CASH BALANCE                                              0          0          0          0          0
         35
         36   Balance Sheet
         37   ASSETS
         38   Cash and Equivalents
         39   Accounts Receivable
         40   Inventory
         41   CURRENT ASSETS                                           0       0          0          0          0          0
         42   Net Fixed Assets
         43   TOTAL ASSETS                                             0       0          0          0          0          0
         44   LIABILITIES
         45   Accounts Payable
         46   Notes Payable
         47   Wages Payable
         48   Taxes Payable
         49   Current Portion of Long-Term Debt
         50   CURRENT LIABILITIES                                      0       0          0          0          0          0
         51   Long-Term Debt
         52   TOTAL LIABILITIES                                        0       0          0          0          0          0
         53   Common Stock
         54   Retained Earnings
         55   TOTAL EQUITY                                             0       0          0          0          0          0
         56   TOTAL LIABILITIES AND EQUITY                             0       0          0          0          0          0

              Note: Cells with zeros are computed from other inputs.
                                                                   www.va.umd.edu




                BPC Requirements
• March 7: Executive Summary (3-5 pages total)
   – Revenues and Expenses
   – Breakeven Analysis
   – Positive Cash Flow
• April 11: Business Plan (10 pages text + 5 pages of appendix)
   – Time Frame
       • Minimum 2 years, but recommend until positive cash flow
       • If cannot achieve within 7 years, then reconsider plan
   – Pro Forma Financial Statements
       • Income Statement
       • Cash Flow Statement
       • Balance Sheet
   – Burn Rate
   – Breakeven Point
   – Required Financing

				
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