Business Plan – Finance Workshop

Bhavan Suri

Bhavan Suri
 Agenda

• Introductions
• Finance Overview (10 – 10:10 AM)
• Financial Statements
• Income Statements
• Examples and Discussion
• Lunch (11:30 – 12:00 PM)
• Team Breakout Session – Workshop (12 – 1:30
PM)
• Summary Presentations from Teams (1:30 – 2:30
PM)
• Q & A and feedback forms

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 Introduction

• What is a business plan?

• A Business Plan is the document you create that

details your business’ history, current standing
and future plans

• The business plan is the first document that most

investors will see about your company

Bhavan Suri
 Introduction

• As an Entrepreneur – at what stage should you

write a business plan?

• How does investing generally work?

– Angel/Seed, Series A, Series B, etc …

• How does ownership work as an entrepreneur:

– Your idea
– Investor’s stakes
– Exit Strategy

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 Finance Overview
• A business plan depends on both words and numbers
• In this workshop, we go through the basics of how the numbers
come together
• The single most important analysis in a business plan is a cash
flow plan, because cash is the most critical element in business
• However, you can't do a cash flow plan without looking at the
income statement and balance sheets as well
• But you really can't do the income statement without looking at
sales, cost of sales, personnel expenses and other expenses, so
you need those too
• And to do a sales forecast without understanding your market, so
a market analysis is recommended.
• And then you have the break-even as part of the initial
assessment, and tables for business ratios, general assumptions,
and other numbers
• Step by step, the business plan becomes a collection of tables and
charts around the text.

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 Finance Overview

• We are trained to think of business as profits:

sales minus costs and expenses
• We need to manage cash as well
• When starting a new business, you think of what
it costs to make the product, what you can sell it
for, and what the profits might be
• We are trained to think of business as sales
minus costs and expenses, which is profits
• Unfortunately, we spend cash in a business

Bhavan Suri
 Finance Overview

• Profitable companies can go broke because they

had all their money tied up in assets and couldn’t
pay their expenses

• Working capital is critical to business health

• Unfortunately, we don’t see the cash implications

as clearly as we should, which is one of the best
reasons for proper business planning. We have to
manage cash, as well as profits.

Bhavan Suri
 Finance – Cash Flow
• Cash flow refers to the Transaction In Out

amounts of cash being Incoming Loan $50.00

received and spent by a Sales (which were paid for in cash) $30.00
business during a defined
period of time, sometimes Materials ($10.00)

tied to a specific project. Labor ($10.00)

Purchased Capital ($10.00)

• This is very important for
describing the health of the Loan Repayment ($5.00)

business because although taxes ($5.00)

you may have made $1000

in sales, you still may have
TOTAL Cash Flow for the Period $40.00

to wait to collect that cash

(due to the terms you have
with the customer).

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 Finance – Income Statement
Revenues
• Income statements for Net Sales $ 3,400,000
companies indicate how
Revenue (money received
Rent revenue $ 40,000

from the sale of products Interest revenue $ 12,000

and services before Total revenue $ 3,452,000

expenses are taken out, Expenses (usually sorted by amount)

also known as the "top Cost of goods sold $ 2,000,000

line") is transformed into Selling expenses $ 450,000

Net Income (the result
after all revenues and
Administrative expenses $ 350,000

expenses have been Interest expense $ 45,000

accounted for, also known Total expense $ 2,845,000

as the "bottom line"). Income before taxes $ 607,000

• Also called Profit and

Income taxes $ 180,600
Net income $ 426,400
Loss Account (P&L)

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 Finance – Balance Sheet
Assets
• A balance sheet is a Current assets
statement of the book Cash

value of a business at a Marketable securities

particular date Accounts receivable

Net inventory
• A balance sheet is often Other current assets
described as a "snapshot" Total current assets
of the company's financial Fixed assets (or property, plant, and equipment - PP&E)

condition on a given date. Property

Of the basic financial Plant & equipment

statements, the balance Gross PP&E

(Accumulated depreciation)
sheet is the only statement Net PP&E
which applies to a single Total assets
point in time, instead of a
period of time

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 Financial Statements
• Lets start with $100, which we’ll call capital
• At the beginning of this exercise, your balance sheet has assets of
$100--the money--and capital of $100
• Assets are equal to capital plus liabilities
• A summary of the simple financial statement:

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 Financial Statements

• We have a business that sells widgets

• We buy a widget for $100 and sell it for $150,
and end up with $50 profit
• This is what your income statement cover - Sales
minus costs are profit
• We have $150 in the bank
• The balance sheet shows the $100 in original
capital plus $50 in earnings, which are equal to
the $150 in cash (an asset)

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 Financial Statements

• Replicate the sale - buy another widget for $100

and sell it again for $150,
• Now there is $200 in the bank. Do it again, and
there is $250 in the bank
• The Income Statement shows sales of $450, cost
of sales of $300, and profit of $150
• Below is the income statement and balance sheet

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 Financial Statements
• The business has sold 3 units and made $150
profit. In theory it has $250 in the bank

• Let’s add Some Realism

• Most sales of products to businesses go on terms,

with the money due in 30 days
• So if the widget was sold on credit you don’t have
$150 in the bank - you still have $50 in your
bottom line, but now you have nothing in the
bank
• Instead, a customer owes you $150 – this is
known as “Accounts Receivable”

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 Financial Statements

• Sales and profits are the same as in, but you sold
on credit, so now you have no money in the bank

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 Financial Statements

• You now get your Widget supplier to sell to you

on the same terms you sell, net 30, instead of for
cash
• Now you have $100 that you owe to suppliers -
called “Accounts Payable”
• You also have $100 worth of widget in inventory

Bhavan Suri
 Financial Statements

• Business looked good, so you borrowed the

money to buy another widget and continue
• You have an extra $100 in assets (the widget in
inventory) and an extra $100 as liabilities
(Accounts Payable), so you are still in balance
• And you still have no money

Bhavan Suri
 Financial Statements

• So you have the same sales and profits as in the

Sell 3 Widgets earlier example, but the balance
sheet is more complex
• Now the case is more like what you have with
real business numbers
• You have to manage your cash very carefully
• The amounts sitting in inventory and accounts
receivable are significant

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 Income Statement
• The standard Income statement in accounting subtracts
costs and expenses from sales and shows profits as the
bottom line of the statement
• Expenses start with personnel and include rent, utilities,
equipment, advertising, sales commissions, public
relations, and other expenses
• The result is profits - Profits are what is left over after you
start with sales, then subtract cost of sales, expenses, and
taxes
• The Income statement is the same as the Profit and Loss
statement
• Also known as "pro forma," meaning projected, as in "pro
forma income" or "pro forma profit and loss"
• The pro forma income is the same as a standard income
statement except that it projects the future

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 Income Statements
• COST OF GOODS SOLD (Cost of Sales or COGS): COGS are
expenses directly related to producing or buying your
products or services
• E.g. purchases of raw materials, wages (and payroll taxes)
of employees directly involved in producing your
products/services. These expenses usually go up and down
along with the volume of production or sales
• Control of COGS is the key to profitability for most
businesses
• For each category of product/service, analyze the elements
of COGS: labor, materials, packing, shipping, sales
commissions, etc
• Underestimating COGS can lead to under pricing, which
destroys profit
• Analyze carefully and be realistic

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 Income Statements
• GROSS PROFIT: Gross Profit is Total Sales minus Total
COGS
• OPERATING EXPENSES (Overhead): These are necessary
expenses which are not directly related to making or
buying your products/services.
• E.g.: Rent, utilities, telephone, interest, and the salaries
(and payroll taxes) of office and management employees
• Most operating expenses remain reasonably fixed
regardless of changes in sales volume
• Some, like sales commissions, may vary with sales. Some,
like utilities, may vary with the time of year. Your
projections should reflect these fluctuations
• NET PROFIT: This is Gross Profit minus Total Operating
Expenses

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Income Statement

• Subtract cost of sales

from sales
• This gives gross
margin, an important
ratio for comparisons
and analysis
• A more detailed Profit
and Loss is shown in
the next illustration.

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 • Operating expenses
divided into categories,
including Sales and
Marketing expenses
and General and
Administrative
expenses (SG&A)
• The sum of expenses
ultimately determines
the company's
profitability
• This is the “budgeted”
business plan

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 Balance Sheet

• Projecting your balance sheet can be quite

complex
• The result should be a plan detailing what
additional resources will be needed by the
company, and how they will be financed
• Use your historical balance sheet as a starting
point for your projections
• Balance sheet is composed of ASSETS and
LIABILITIES and these MUST balance

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 Balance Sheet - Assets

• How will the year's operations affect assets,

debts, and equity assuming significant sales
growth in the coming year:

– ASSETS: Inventory and Accounts Receivable will have to

grow. New equipment may be needed for increased
production. You may draw down on cash to finance
some of this

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 Balance Sheet - Liabilities
• The balance sheet must balance, so on the other side we have
liabilities:

– LIABILITIES & EQUITY: Some of the growth may be financed by

profits retained in the business as Retained Earnings.
– Your Profit & Loss Projection shows how much might be available
from that source.
– Funds may also be contributed by the owners through
contributions of more Invested Capital or loans to the company
(Notes Payable to Stockholders).
– Suppliers may provide some of the financing via increased
Accounts Payable.
– The rest will have to be financed by borrowing, which can be:
Short term loans (due within 12 months) such as a line of credit.
Or by Long Term Debt (maturity greater than 12 months)

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 Balance Sheet
A B C D E F G H
1 Basic Excel: Balance Sheet
2
3 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05
4 Assets
5 Accounts Receivable $ 500 $ 1,000 $ 2,000 $ 4,000 $ 8,000 $ 16,000
6 Inventory $ 600 $ 630 $ 662 $ 695 $ 729 $ 766
7 Prepaid Expenses $ 200 $ 230 $ 260 $ 290 $ 320 $ 350
8 Property, Plant, Equipment $ 11,900 $ 12,810 $ 13,734 $ 14,676 $ 15,639 $ 16,628
9 Total $ 13,200 $ 14,670 $ 16,656 $ 19,660 $ 24,689 $ 33,744
10
11 Liabilities and Equity
12 Accounts Payable $ 730 $ 873 $ 924 $ 1,087 $ 1,175 $ 1,267
13 Debt $ 1,000 $ 800 $ 600 $ 400 $ 200 $ -
14 Preferred Equity $ 500 $ 500 $ 500 $ 500 $ 500 $ 500
15 Common Equity $ 10,970 $ 12,497 $ 14,632 $ 17,673 $ 22,814 $ 31,977
16 Total $ 13,200 $ 14,670 $ 16,656 $ 19,660 $ 24,689 $ 33,744
17
18 Capital Account
19 Starting PPE $ 11,000 $ 11,900 $ 12,810 $ 13,734 $ 14,676 $ 15,639
20 Depreciation $ 1,100 $ 1,190 $ 1,281 $ 1,373 $ 1,468 $ 1,564
21 Capital Expenditure $ 2,000 $ 2,100 $ 2,205 $ 2,315 $ 2,431 $ 2,553
22 Ending PPE $ 11,900 $ 12,810 $ 13,734 $ 14,676 $ 15,639 $ 16,628

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 Examples and Discussion
• Starting from scratch

• Forecasting sales is the starting point for the financial projection

• The sales forecast is key, so it is important to use realistic
estimates
• Divide projected monthly sales into "Categories“ which are
divisions that make sense for your type of business. Example
categories are: product lines, departments, branch locations,
customer groups, geographical territories, or contracts.
• Enter annual sales, by category, in the four "Sales History"
columns on the right side of the sheet. (Startup businesses can
delete this section)
• Analyze past sales and note seasonal/periodic fluctuations;
determine what caused them and when they are expected to recur
• Build these fluctuations into your projections for the coming year

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 Examples and Discussion
Sales Forecast (12 Months)
Enter your Company Name here

Fiscal Year Begins Jun-05

12-month Sales Forecast Sales History

Current
Month
Annual Ending
Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Totals mm/yy 2004 2003 2002
Cat 1 units sold 0
Sale price @ unit
Cat 1 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Cat 2 units sold 0

Sale price @ unit
Cat 2 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Cat 3 units sold 0

Sale price @ unit
Cat 3 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Cat 4 units sold 0

Sale price @ unit
Cat 4 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Cat 5 units sold 0

Sale price @ unit
Cat 5 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Cat 6 units sold 0

Sale price @ unit
Cat 6 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Cat 7 units sold 0

Sale price @ unit
Cat 7 TOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Monthly totals:
All Categories 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

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 Examples and Discussion

• Cash Flow:
– On the Profit & Loss Projection, check line by line when
cash should come and go. This is to determine when you
will actually collect from customers
– On the expense side, predict when you will actually have
to write the check to pay those bills
– Most items will be the same as on the P&L. Rent and
utility bills, for example, are paid in the month they are
incurred
– Insurance, taxes, for example, may be payable
quarterly or semiannually, even though you recognize
them as monthly expenses
– The payoff for an accurate cash flow is the ability to
manage and forecast working capital needs

Bhavan Suri
Cash Flow (12 months) Enter Company Name Here Fiscal Year Begins: Jan-06
Pre-Startup Total Item
Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06
EST EST
Cash on Hand (beginning of
0 0 0 0 0 0 0 0 0 0 0 0 0
month)

CASH RECEIPTS
Cash Sales

Collections fm CR accounts

Loan/ other cash inj.

TOTAL CASH RECEIPTS 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Cash Available (before
0 0 0 0 0 0 0 0 0 0 0 0 0 0
cash out)

CASH PAID OUT

Purchases (merchandise)

Purchases (specify)

Purchases (specify)

Gross wages (exact withdrawal)

Payroll expenses (taxes, etc.)

Outside services

Supplies (office & oper.)

Repairs & maintenance

Advertising

Car, delivery & travel

Accounting & legal

Rent

Telephone

Utilities

Insurance

Taxes (real estate, etc.)

Interest

Other expenses (specify)

Other (specify)

Other (specify)

Miscellaneous

SUBTOTAL 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Loan principal payment

Capital purchase (specify)

Other startup costs

Reserve and/or Escrow

Owners' Withdrawal

TOTAL CASH PAID OUT 0 0 0 0 Bhavan

0 Suri
0 0 0 0 0 0 0 0 0

Cash Position (end of month) 0 0 0 0 0 0 0 0 0 0 0 0 0 0

 Finances - Summary

• This is where you present your company's

financial history and projections
• Do not be overly creative in this section of your
plan
• You should be "vanilla-flavored“ – Present your
finances in the standardized manner to which
accountants and investors are accustomed
• Provide past results (if applicable), and two to
three years of projections (pro forma)

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 Workshop Project
• Consulting Company
– Basic Revenue Assumptions:

• Hours per week that you bill per consultant: 48

• Current (2006) Utilization Rate is 66%, assume this will go up to
75%
• Average Billable Rate is $150/hr, assume this goes up to $180/hr
• Currently (2006) 8 consultants, assume this will go up
• Assume you will have software products in 1 year, that will generate
revenue starting at $20,000 but will never exceed 1% of consulting
revenue

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• Consulting Company
– Basic Expense Assumptions:

• Fully loaded cost per consultant is 75% of revenue that the consultant brings in
• Product Development is 40% of the revenue that product sales brings in
• You have infrastructure costs that are $75,000 (2006), assume these will grow
doubling for the next few years before slowing down
• You have General and Administrative costs that are $75,000 (2006), assume
these will grow doubling for the next few years before slowing down
• You have R&D costs associated with product sales

• Create a Profit and Loss projection for 2006 out through 2011

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