Business Plan Preparation Frank Moyes Leeds College of Business University of Colorado Boulder, Colorado 1 Financial Plans

Tonight Financial Plan Customer acquisition costs In the Fire - Customer Survey results Team meetings Financial Plans 2

Next Week In the Fire - Marketing plan Prepare 6 slides 10 minutes 2 entrepreneurs Hand-in: Marketing Plan - draft Customer surveys & summary of results Financial Workshops Monday 6:00 room 230 Wednesday 12:00 room 302 Wednesday 5:00 room 330 Financial Plans 3

Marketing Plan Outline Customer Research Target Market Strategy Channel Strategy Positioning Product/Service Strategy Pricing Strategy E-commerce Communications Strategy Sales Strategy Revenue Model Financial Plans 4

Business Plan Elements Executive Summary Company Overview Product or Service Description Industry and Marketplace Analysis Marketing Plan Operations Plan Development Plan Management Financial Plan Offering, Funding Requirements, Valuation Financial Plans 5

Financial Plan Financial Projections Key Assumptions Business Risks Financial Plans 6

Business Plan Perspective Financial Plans 7 “People write-up their business plan with a top- down mentality. They invariably talk about a particular vertical market that has X billions of dollars in sales each year. They’ll tell us that they can get 10% of that market. But when we ask them for the average sale or the cost of customer acquisition, the answer almost always is “I’ll get back to you.” Dan Beldy, Hummer Winblad Venture Partners

Financial Projections Income Statement By years for 5 years By months for years 1-2 & by quarters for years 3-5 Balance Sheet by years for 5 years Cash Flow By years for 5 years By months for years 1-2 and by quarters for years 3- 5 Break-even Analysis Financial Plans 8

Focus Your Attention On Revenue Model Cost of Revenue Operating Expenses Personnel Extraordinary income & expense Taxes Property & Equipment Working Capital Funding Financial Plans 9

Financial Assumptions Describe ~ 5 assumptions critical to success of your business Revenue model, e.g. prices, market share, new products Margins Prices Cost of Revenues - labor, material & indirect expenses Operating Expenses – key expenditures Sales & Marketing, R & D and General & Administrative Capital Expenditures Working Capital – Accounts Receivable, Inventory & Accounts Payable Funding Do not be resource constrained at the beginning Financial Plans 10

Suggested Approach Keep record of key assumptions COMP’s provide reality check Revenue projections by months & quarters are important. DETERMINES: Cost of Revenue Operating Expenses Working Capital Monthly & Quarterly projections Why else? Financial Plans 11

Common Weaknesses Profitability Gross margins are too high Operating expenses are too low Assets & Liabilities Working Capital must be based on industry Fixed Assets & Capital Expenditures not addressed Seasonality not addressed Growth not anticipated Financial Plans 12

Powerful Tool Upfront effort What if? questions Sensitivity analysis How tell if projections make sense? Financial Plans 13

Risks I What major risks does the venture face? What can go wrong? What must go right How mitigate? Financial Plans 14

Risks II Market Size of market Competitor’s response Sales cycle Closing window (12 VC funded companies) Strategic - establishing strategic partnerships Operational - large number of interrelated components Financial Plans 15

Risks III Technology Will it work Time and cost to development Scalability Financial Risk/return Dilution Macro-economic Volatile industry Government approval Exchange rates Financial Plans 16

Financial Plan Section Financial Projections Summary goes in Plan All Financial Statements go in Appendix Assumptions ~5 key assumptions go in Plan Detailed assumptions go in Appendix Business Risks Financial Plans 17

Summary of Financial Projections Financial Plans 18

Business Plan Perspective Financial Plans 19 “Entrepreneurs have got to display a clearly articulated vision for what they want to do. And they must tell their story from the bottom up. A bottom-up approach means that they know with absolute certainty whom they’ll sell to, how much it will cost, and what the sales per week will be next March. Sure, a lot of assumptions are involved, but entrepreneurs need to break their business down to the molecular level. That information leads logically to the next step which is saying to an investor, ‘I am going to take this money and do X, Y, and Z with it and here’s what will happen in the end.’ Your survival depends on knowing that stuff cold.” Dan Beldy, Hummer Winblad Venture Partners

Financial Plans 20 Critical Mistakes I “Let’s go smoke something” “These trees sure are pretty” “We can get orders in a month” Sales cycle No one knows you “ We can whip this puppy out in 6 months” Development time-line longer More expensive “Look at how much they spend on marketing! We won’t have to spend that much”

Financial Plans 21 “Sure, operating expenses are high at the beginning, but then they will go down.” Operating expenses don’t decline Salaries must be realistic Growth requires spending money “ “We’ll lean on our suppliers and not pay them for 90 days.” “Our customer will pay us in 30 days.” Critical Mistakes II

Financial Plans 22 Financial Dynamics Who does the financial projections? Should my projections be optimistic or pessimistic? Investor questions