Startup financials

Startup Financials Required component of a business plan Helps answer questions about Revenue, Expenses, and Profit Shows growth of the firm and profitability Cash balance in each time period How much capital will be required now and later. Required by investors Keeps you honest on your business model Active document! No Cash, No Startup – Harsha Purasinghe

Components of a Financial Plan Time Period (1-3 years for software startup) Revenue Profits! Sources of Cash Funding (angel, venture, or self) Uses of Cash Marketing Product Development Administrative Expenses (fees, salaries) Operational Costs (commissions, partnerships) Cash balance per term/period Assumptions

Key Terms Cost of Goods Sold (CoGS): Total cost of good sold by a company. Includes production and labor costs. Does not include sales and administrative expenses (indirect expenses) Selling, General, & Administrative (SG&A): sum of all direct and indirect selling expenses and all general and administrative expenses of a company Cost of Customer Acquisition (CoCA): indicates all the sales and marketing costs required to get a new customer

Pricing – e.g. $0.99 per app download Development cost Assumptions Pricing – e.g. $0.99 per app download Development cost Cost of Goods Sold (CoGS) SG&A Expenses CoCA Customers in the 1st, 2nd,….nth month Funding Needed Expected Growth

Changes to Cost Metrics Lower the CoGS, the more the profit. Create your product with limited resources CoCA will gradually go down: getting the first customer is hard but it gets progressively easier. SG&A should be kept as low as possible. Usually remains constant in a product lifetime

MicroImage - Time & Reporting Headcount: Starting Cash: Development Time: Testing Time: Operating Cost: Unit Price: Sales Volume: Other Costs: Customer Service, Sales, Marketing 5 80,000 6 Months Operating cost includes rent, electricity, internet, food 4 months 25,000/month 80,000/license 6 licenses for first customer

Sample Financial Plan/Budget Revenue/Sales SG&A Expenses Cash on hand Uses of Cash Administrative Operating Expenses Development Cost Cash balance per period

Sample Financial Projection Growth, Return on Investment Startup, seed funding

Always mention the ROI when asking for funding from an investor VC Term Return on Investment (ROI): Measure used to evaluate the efficiency of an investment. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. (Gain from Investment – Cost of Investment) Cost of Investment ROI = Always mention the ROI when asking for funding from an investor

Key Items to Note About Financial Statements Numbers must be correct! Validate your assumptions against a base-case Have a rational around your assumptions Be realistic about sales and your growth Consider all costs and expenditures (even food, drink, family etc.) Financial Statements are a key component. Any mistake and you will be dismissed by the investors!