1. Financial Management of Business Incubators Jim Greenwood, President Greenwood Consulting Group, Inc. Sanibel, Florida gail-jim@g-jgreenwood.com www.g-jgreenwood.com Copyright © 2012 by Greenwood Consulting Group, Inc.

2. Agenda 1.Sources & Uses of Incubator Funding 2.Estimating incubator financial needs & tracking operations 3.Recommendations on financial self sustainability 4.Questions & discussion

3. Sources & Uses of Incubator Funding Sources – Grants Federal, state, local government Foundations Corporations Other: _____________________ – Loans Bank, consortium of banks Local government through “bonding” Building sellers Private parties Other: ______________________ – Donations Furniture & equipment from banks, corporations Use of vacant building at no charge by owners, universities, government Free/reduced cost services from architects, engineers, construction contractors Other: ______________________ – Other sources __________________________________________________

4. Sources & Uses of Incubator Funding Uses 1.Planning Feasibility study Business plan 2.Development Acquisition Construction/renovation Furnishings & equipment Operating deficit 3.Operations Day-to-day operations of the incubator

5. Estimating Incubator Financial Needs & Tracking Operations Use #1: Planning – Feasibility study Answers the question “will an incubator be successful in our community?” Typical cost: US $24,000 to $28,000 – Business plan Answers the question “now that we know the incubator will be feasible, how do we develop and begin to operate it?” Typical cost: US $17,000 to $20,000 Business plan is less expensive because uses data collected in feasibility study (especially the market surveys)

6. Estimating Incubator Financial Needs & Tracking Operations Use #1: Planning – To keep planning costs lower 1.Don’t require a lot of interim reports 2.Don’t require a lot of presentations 3.Don’t require analysis in feasibility study that doesn’t need to be done until business plan – Example: no reason to discuss tenant entrance criteria in the feasibility study 4.Don’t authorize consultant to do business plan until feasibility of the incubator is proven – No reason to do the business plan if feasibility study says this incubator should not be developed 5.Use same consultant to do business plan as you did for the feasibility study – They can use in the business plan what they learned in the feasibility study

7. Estimating Incubator Financial Needs & Tracking Operations Use #2: Development – Acquisition cost based on expected purchase price – Incubator occupies 10% of site, so assume 10% of acquisition cost – No renovation, because existing structure unusable and will be demolished Cost CategoryAmountComment Building/land acquis $ 200,000 10% of est cost of whole site Renov, wall constr n/a Furn/equip/phone 50,000 Phone, copier, etc New construction $ 5,000,000 $200/sf allowance Demolition $ 1,000,000 Pete's estimate Closing/a&e/Soft cost $ 50,000 Pete's projection Contingency 404,000 8% of renov, constr & furnishings Facility Cost 6,704,000 Operating subsidy 150,000 From operations projections Total Cost $ 6,854,000

8. Estimating Incubator Financial Needs & Tracking Operations Use #2: Development – Include allowance for equipment & furniture in common areas, telecommunication system – Assumes new construction of 25k sf at $200/sf using estimates for local construction cost – Demolition of existing structures very costly in this example Cost CategoryAmountComment Building/land acquis $ 200,000 10% of est cost of whole site Renov, wall constr n/a Furn/equip/phone 50,000 Phone, copier, etc New construction $ 5,000,000 $200/sf allowance Demolition $ 1,000,000 Pete's estimate Closing/a&e/Soft cost $ 50,000 Pete's projection Contingency 404,000 8% of renov, constr & furnishings Facility Cost 6,704,000 Operating subsidy 150,000 From operations projections Total Cost $ 6,854,000

9. Estimating Incubator Financial Needs & Tracking Operations Use #2: Development – Include allowance for legal, survey & similar “soft costs” – Include contingency allowance for unknown, unexpected, overlooked costs – Add together these costs to estimate cost of developing the incubator facility Cost CategoryAmountComment Building/land acquis $ 200,000 10% of est cost of whole site Renov, wall constr n/a Furn/equip/phone 50,000 Phone, copier, etc New construction $ 5,000,000 $200/sf allowance Demolition $ 1,000,000 Pete's estimate Closing/a&e/Soft cost $ 50,000 Pete's projection Contingency 404,000 8% of renov, constr & furnishings Facility Cost 6,704,000 Operating subsidy 150,000 From operations projections Total Cost $ 6,854,000

10. Estimating Incubator Financial Needs & Tracking Operations Use #2: Development – Now add in an estimated amount to cover ALL operating deficits that will occur before incubator reaches “break even” Where incubator revenues finally begin to exceed its operating costs Pull this number from operating financials (see Use #3 slides) Cost CategoryAmountComment Building/land acquis $ 200,000 10% of est cost of whole site Renov, wall constr n/a Furn/equip/phone 50,000 Phone, copier, etc New construction $ 5,000,000 $200/sf allowance Demolition $ 1,000,000 Pete's estimate Closing/a&e/Soft cost $ 50,000 Pete's projection Contingency 404,000 8% of renov, constr & furnishings Facility Cost 6,704,000 Operating subsidy 150,000 From operations projections Total Cost $ 6,854,000

11. Estimating Incubator Financial Needs & Tracking Operations Use #2: Development – Add facility development cost to operating subsidy to have a total estimated development cost of your new incubator – Note this is an expensive project because Site must be bought New construction is very expensive in this community Demolition is very expensive on this site – Therefore, you probably should explore alternative locations! Cost CategoryAmountComment Building/land acquis $ 200,000 10% of est cost of whole site Renov, wall constr n/a Furn/equip/phone 50,000 Phone, copier, etc New construction $ 5,000,000 $200/sf allowance Demolition $ 1,000,000 Pete's estimate Closing/a&e/Soft cost $ 50,000 Pete's projection Contingency 404,000 8% of renov, constr & furnishings Facility Cost 6,704,000 Operating subsidy 150,000 From operations projections Total Cost $ 6,854,000

12. Estimating Incubator Financial Needs & Tracking Operations Use #3: Incubator Financial Operations – What will incubator generate in revenues & costs as it operates? – When (or even if) the incubator revenues will begin to exceed costs? – Is the incubator financially viable in its operations, or is it a bad project that shouldn’t even be undertaken?? Best way to answer these questions: The Cash Flow Forecast Simple definition: projecting what your checkbook balance will look like year-to-year

13. Estimating Incubator Financial Needs & Tracking Operations Use #3: Incubator Financial Operations The General Format of a Cash Flow Forecast: Year #1 1. How much money do you have at the start of the first year?$1000

14. Estimating Incubator Financial Needs & Tracking Operations Use #3: Incubator Financial Operations The General Format of a Cash Flow Forecast: Year #1 1. How much money do you have at the start of the first year?$1000 2. How much money will you bring in from sales & other sources that year? +500

15. Estimating Incubator Financial Needs & Tracking Operations Use #3: Incubator Financial Operations The General Format of a Cash Flow Forecast: Year #1 1. How much money do you have at the start of the first year?$1000 2. How much money will you bring in from sales & other sources that year? +500 3. How much money do you have to pay out that year to employees, suppliers, etc? -1750

16. Estimating Incubator Financial Needs & Tracking Operations Use #3: Incubator Financial Operations The General Format of a Cash Flow Forecast: Year #1 1. How much money do you have at the start of the first year?$1000 2. How much money will you bring in from sales & other sources that year? +500 3. How much money do you have to pay out that year to employees, suppliers, etc? -1750 4. Take #1, add #2, subtract #3. This is the checkbook balance at the end of the year - 250

17. Estimating Incubator Financial Needs & Tracking Operations Use #3: Incubator Financial Operations The General Format of a Cash Flow Forecast: Year #1Year #2 1. How much money do you have at the start of the first year?$1000-$ 250 2. How much money will you bring in from sales & other sources that year? +500 3. How much money do you have to pay out that year to employees, suppliers, etc? -1750 4. Take #1, add #2, subtract #3. This is the checkbook balance at the end of the year - 250 5. Ask the same questions for the second year, using the answer to #4 as the amount of cash you will start with in Year 2

18. Estimating Incubator Financial Needs & Tracking Operations Use #3: Incubator Financial Operations The General Format of a Cash Flow Forecast: Year #1Year #2 1. How much money do you have at the start of the first year?$1000-$ 250 2. How much money will you bring in from sales & other sources that year? +500 +1500 3. How much money do you have to pay out that year to employees, suppliers, etc? -1750 4. Take #1, add #2, subtract #3. This is the checkbook balance at the end of the year - 250 5. Ask the same questions for the second year, using the answer to #4 as the amount of cash you will start with in Year 2

19. Estimating Incubator Financial Needs & Tracking Operations Use #3: Incubator Financial Operations The General Format of a Cash Flow Forecast: Year #1Year #2 1. How much money do you have at the start of the first year?$1000-$ 250 2. How much money will you bring in from sales & other sources that year? +500 +1500 3. How much money do you have to pay out that year to employees, suppliers, etc? -1750 -1800 4. Take #1, add #2, subtract #3. This is the checkbook balance at the end of the year - 250 5. Ask the same questions for the second year, using the answer to #4 as the amount of cash you will start with in Year 2

20. Estimating Incubator Financial Needs & Tracking Operations Use #3: Incubator Financial Operations The General Format of a Cash Flow Forecast: Year #1Year #2 1. How much money do you have at the start of the first year?$1000-$ 250 2. How much money will you bring in from sales & other sources that year? +500 +1500 3. How much money do you have to pay out that year to employees, suppliers, etc? -1750 -1800 4. Take #1, add #2, subtract #3. This is the checkbook balance at the end of the year - 250 -550 5. Ask the same questions for the second year, using the answer to #4 as the amount of cash you will start with in Year 2

21. Estimating Incubator Financial Needs & Tracking Operations Use #3: Incubator Financial Operations The General Format of a Cash Flow Forecast: Year #1Year #2 1. How much money do you have at the start of the first year?$1000-$ 250 2. How much money will you bring in from sales & other sources that year? +500 +1500 3. How much money do you have to pay out that year to employees, suppliers, etc? -1750 -1800 4. Take #1, add #2, subtract #3. This is the checkbook balance at the end of the year - 250 -550 5. Ask the same questions for the second year, using the answer to #4 as the amount of cash you will start with in Year 2 6. Repeat for subsequent years

22. Estimating Incubator Financial Needs & Tracking Operations Use #3: Incubator Financial Operations Sample of an Incubator’s Cash Flow Forecast

23. Estimating Incubator Financial Needs & Tracking Operations Use #3: Incubator Financial Operations Where the Operating Deficit Estimate Comes From - for Use #2, Development Costs -Rounded up to $150k in this example Take the largest number in this row

24. Recommendations on Financial Self Sustainability Self sustainability – An incubator’s ability to cover its operating costs from reasonably reliable sources of revenue Vs. Self sufficiency – Self sufficiency = incubator revenues exceed costs – Self sustainability = revenues from incubator and other, non incubator sources exceed costs Non incubator sources such as economic development services, revolving loan fund management, real estate leasing to clients outside of the incubator – Self sustainability is easier to achieve (more realistic goal)

25. Recommendations on Financial Self Sustainability Importance – If your incubator requires an on-going operating subsidy year-after-year to cover its costs, what happens when A new mayor is elected? A new university president is hired? Your parent organization changes its priorities? Your funders get tired of paying your on-going expenses? You need to take a stand that is in the best interests of your incubator clients but isn’t popular with your funders? Your tenants don’t respect your advice because you are not running a financially sound business?

26. Recommendations on Financial Self Sustainability Advice on achieving self sustainability 1.Make it a priority in your incubator design & operations 2.Don’t put the incubator in an infeasible building 3.Evaluate multiple incubator alternatives, then select one that is financially self sustainable in its operations 4.Don’t include expensive common equipment or labs in your incubator unless tenants willing to pay full cost 5.Don’t charge cheap rent (or worse, no rent!) 6.Collect rent like a real landlord 7.Look for other sources of revenue 8.Look at sharing staffing with other programs 9.Constantly update cash flow forecasts, trim costs, delay payments until due date

27. Questions??