Post on 07-May-2015
BOOTSTRAP SEMINARS 2013Financial Planning & Control
Introduction
• Why Financial planning is important• Building Forecasts• Gross Profit & Breakeven• Managing cash in a start up• How much funding should you raise and when should
you raise it• Making best use of a £3K investment/competition prize • R&D Tax Credits• How to set up a company
Why it’s important
• Ensure the business is likely to be viable• Support your investment case.• Most important ensure Cash managed – Cash is king. • By planning know in advance if cash flow problem – its
too late when bank account empty. Must be able to pay bills as they fall due. Raising finance takes 3-6 months minimum.
• Usually have a limited amount of cash to spend – ensure allocated to desired activities eg marketing, development etc
• Growing business can very often have cash flow problems
BUILDING A BUDGET FORECAST
Some terminology
• Profit/Loss = Sales less costs of producing those sales.
Sales £1,000 Goods/services sold to customer
Cost of Sales £200 Direct costs of producing those sales – materials, factory labour.
Gross Profit £800 Gross profit = 80%
Other Costs £300 Marketing, admin, sales, depreciation, travel, office, R&D etc.
Profit/Loss £500
Cash and Profit
• Cash Flow and Profit are usually different, eg £100K profit doesn’t always = £100K of increased cash balance.
• This is caused by– Payments from customer usually on credit– Payments to suppliers usually on credit– Items of capital expenditure eg computers charged to
P&L over a long period• However suggest that for initial forecasts you assume
cash and profit are the same.
How to build a forecast
• Investors typically want a 3-5 yr forecast but concentrate on year 1
• Start with setting up template (See Spreadsheet)• What are the projected sales (Revenue Model) – number
of units, price, when etc – is the business seasonal?• When will the cash be received – cash sales , credit
sales typically paid 30-60 days after supply• Set up costs – hardware/software development, factory
fit out , website development etc.
How to build a forecast
• Cost of sales – what does it cost to make/buy in the units.
• What are the overheads – staff, rent, marketing etc• Having identified Income + expenditure set out in a
spreadsheet by month• Show net cash flow for mth + cash flow at month end• Remember a forecast is a best estimate!
Where does the info come from?
• Personal knowledge• Competitors eg what do competitors charge• Competitor accounts• Industry statistics• Suppliers ask them what they will charge to supply when do
volume discounts kick in.• Property – ask an estate agent• Work with someone who has industry knowledge• How are going to acquire customers – salesman ,advertising,
what is the cost of acquiring customers likely to be. Resulting forecast is a best estimate
• State assumptions - particularly Sales, cost of sales, marketing plan
Building a sales forecast
• Forecast unit sales and average selling price per month• Use results of your market research• Use past data if you have it – either for your business or
similar business • Is business seasonal? A lot of internet businesses are
seasonal. Eg Christmas, games see drop-off in August• If you have a new technology it can be very difficult to
predict sales levels
What costs do we typically incur?
Most companies• Office costs - rent, rates Electricity, gas, cleaning,
security, coffee, postage etc (Consider serviced office when starting up eg The Hangout)
• Marketing • Professional Fees eg Accountancy, Tax, Payroll, Legal• Insurance - Employers Liability legally required
Employee salaries • Capital Expenditure - computers , office furniture
Manufacturing business• Capital Expenditure - Plant and machinery• Production salaries • Raw Materials including packaging• Distribution• Factory building - Lease or Buy - keep it flexible, may not
be possible if high set up costs
What costs do we typically incur?
Web Business • Web site design and maintenance - in house or
outsource • Hosting • Domain registration• Office Space• Employees• Fulfilment costs – postage, storage
What costs do we typically incur?
Software/ other intellectual Property • Development Staff - Biggest cost• Patent fees/Royalties and legal costs • Computer hardware/software
What costs do we typically incur?
Summary slide for presentations
Year 1 Year 2 Year 3
Sales £1,000 £1,500 £3,000
Cost of Sales £200 £300 £500
Gross Profit £800 £1200 £2500
Other Costs £700 £1000 £1500
Net Profit £100 £200 £1000
Cash Balance £50 £100 £1050
Gross Profit % 80% 80% 83.33%
Breakeven Units 100 120 140
GROSS PROFIT & BREAK-EVEN
Gross Profit and Break Even
• Gross Profit = Selling price – Cost Price• Gross Profit % - above expressed as a %
Bar sells drink for £10
Cost of drink £4
Gross Profit £6
Gross Profit % 60%• Break Even - How many £/units to sell each
day/week/month to cover your costs
Why is this important?
• Gross Profit drives the amount you need to sell to breakeven – increased margin means you need to sell less to breakeven – e.g. a bar
Selling Price £10 £10
Cost Price £6 £5
Gross Profit £4 £5
Gross Profit % 40% 50%
Daily Costs £500 £500
No of drinks to sell to break even each day
125 drinks 100 drinks
MANAGING CASH FLOW IN A START-UP
Managing the cash in a start-up
• Cash is always tight in the start-up phase– Initial start up capital is expensive so rarely have lots of
surplus cash– Launch delayed– Unexpected costs– Customers pay late– Suppliers wont give credit
Managing the cash in a start-up
• How can the cash be stretched out– Defer salaries – founders work for free– Try and get things for free – use your network – Credit from suppliers– Find a way of generating revenue quickly – proof of
concept, test customers, discounts for early adoption or early payment.
HOW TO MAKE BEST USE OF A £3K INVESTMENT
How much cash to raise?
• Your forecast will indicate how much cash you estimate you will need to reach profitability.
• Raising finance is expensive – how much of the company do you have to sell to raise the money ?
• If your forecast indicates that you need £2M to reach profitability it is very unlikely that you will be able to raise this in one financing round
• Company Valuations and attractiveness to potential investors are related to the risk of the investment.
How much cash to raise?
• In early stage companies some of the key risks are- Will the technology/product/service work- How much will the product cost to develop/service launch- Can the business overcome some regulatory issues eg planning
permission- Will anyone buy the product/service- What will the sales price be
• Aim to raise sufficient funds (plus a contingency) at each round to eliminate risks with the result you achieve a better valuation and a greater chance of raising the next round. Ensure this is reflected in your forecast.
How to make best use of £3K
• Use it to mitigate some of the risks– Build a proof of concept– Find early customer(s)– Carry out detailed market research– Sort out regulatory issues eg get necessary licences– If specific risks with the technology attempt to resolve
them
R&D TAX CREDITS
R&D Tax Credits
• Tax refund from HMRC for R&D Costs• You do not need to have previously paid tax• Get refund of approx 25% of Salary, Employers national
insurance and consumables used in the R&D process eg cost of building a prototype.
• Contractor cost refund is approx 16%• Claimed when you file your annual tax return. Supporting
narrative is required• Refund is usually paid within 4-10 weeks of submitting the
claim• Suggest you use a firm of accountants that understands
R&D tax credits – not of all of them do.
SETTING UP A LIMITED COMPANY
Company
• Key Advantages– Shareholders and directors have limited liability - (worst
is loose investment)– Separate legal entity from directors/ shareholders so
directors not personally liable for debts – (except in cases of negligence/fraud/Wrongful trading)
– Raise finance by issuing shares• (Wrongful trading – if directors knowingly make a
financial commitment that they know the company cant pay for they can be personally liable)
Types of Company
• XYZ Limited (Private Limited Company)– Most common for small/medium business not listed on
stock exchange. – This is what you will use• XYZ PLC (Public Limited Company)– Companies listed on a stock exchange– More onerous reporting/shareholder protection than
Limited Company
How to incorporate a Company
• Companies House– Cardiff based government agency that is the Registrar of
Companies. – Companies file specific details that are available on the
public record.– www.companieshouse.gov.uk
How to incorporate a Company
• To incorporate a company– Use a lawyer or Company formation agent– Or do it yourself on Companies House Website – cost
£15– It is a straight forward process– Directors/shareholders/Articles can all be changed later
by filing appropriate forms so don't worry if you get initial details wrong
DIY Incorporation
Website Address
https://ewf.companieshouse.gov.uk//runpage?page=welcome
You will need– Company name and registered office address ( Company name must
be unique check first not used at Co House Webcheck http://wck2.companieshouse.gov.uk//wcframe?name=accessCompanyInfo)
– NB worth checking if web domain for proposed name is available– Director and Secretary – name, address, date of birth (need at least 1
director, no longer requirement for secretary)– Shareholder name, address, no of shares, amount paying per share– £15 Payment
Articles of Association
• Company rule book • must be filed at Companies House• Standard Articles are available – suggest you use these
for initial incorporation• It is likely that investors will require special terms • Approved by shareholders
Articles usually contain
• The issuing of shares – what authority board has• Different rights attached to different classes of shares• The appointments of directors - which shows whether a shareholder
dominates or shares equality with all contributors• Directors meetings - the quorum and percentage of vote• Management decisions – Investor, Board or Management (reserved
matters)• Transferability of shares – Permitted transfers • Special voting rights of a Chairman, and his/her mode of election• The dividend policy - a percentage of profits to be declared when there is
profit or otherwise• Winding up - the conditions, notice to members• Founders Eg Founders share buy back provisions• First right of refusal on issue of new shares (Pre emption rights)
THANK YOU Q&A