Academic excellence for business and the professions

BOOTSTRAP SEMINARS 2014 Making sense of the numbers

Introduction •  Why Financial planning is important •  Building Forecasts •  Gross Profit & Breakeven •  Managing cash in a start up •  Financial Control •  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 (Depreciation) •  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 and timing of take-up.

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?

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

•  Changing gross profit may indicate problems

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

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 £1,200 £2,500

Other Costs £700 £1,000 £1,500

Net Profit £100 £200 £1,000

Cash Balance £50 £100 £1,050

Gross Profit % 80% 80% 83.33%

Breakeven Units 100 120 140

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 won’t 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.

FINANCIAL CONTROL

What is Financial Control •  Measurement of actual v plan P+L and cash, balance sheet, KPIs,

keeping track of product costs. •  Ratio analysis •  How are doing against our plan •  Thinking ahead revising our budgets

Importance of Financial Control •  Allows us to indentify how we are doing – good and bad from a

financial point of view and it may point to problems in specific areas of the business – eg lack of sales, poor margins may mean problems in purchasing, marketing dept spending in excess of budget

•  Allows you to take corrective action in plenty of time – its too late to worry about a lack of cash when the bank account empty – avoid surprises.

•  Plan for growth ahead of time if sales are growing quicker than anticipated

•  Board should review mgt accounts at regular board meetings.

What do we do •  Mthly mgt accounts – compare actual v budget analyse the

variances •  Mgt a/c may be as simple as a review of bank statement •  Understand product costs •  Reforecast – budget typically fixed for 12 mths but each mth/qtr

reforecast •  Calculation of ratios/key performance indicators – benchmark

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 24% 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 http://www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml You will need –  Company name and registered office address ( Company name

must be unique check first not used at Co House Webcheck –  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 e.g. Founders share buy back provisions •  First right of refusal on issue of new shares (Pre-emption rights)

Academic excellence for business and the professions

THANK YOU Q&A