In order for an early stage or emerging company to raise money, it must provide investors with a set of financial projections.  Typically, companies will pull together a top-down P&L projection going out for three to five years.  I have learned from hard experience that this is wholly inadequate.  You will need either an awesome Executive Summary professionally produced, or a complete Business Plan which once the company starts executing, the plan becomes an Operating Plan. The development of financial projections is an interactive exercise with the me working alongside the entrepreneur, not created in a vacuum and thrown over the wall. My business planning work includes teaching the business owner(s) how to explain the financials and you get an understanding of fundamental financial terminology you can show potential investors and lenders.

I have developed a set of financial tools for comprehensive Business Plan financials, which embodies my 28 years experience and 2,500 combined years of my 100+ CFO partners’ experience.  I have designed and built such plans companies in all industries at all stages of business:

· Pre-funded, pre-revenue startups

· Funded, pre-revenue startups

· Hyper growth entrepreneurial companies

· Revenue generating companies that want to grow

My war chest of tools provide rapid development of custom Executive Summaries, Financial Models and Business Plans/Operating Plans which clients use to go get funded.

These are the financial elements of a Business Plan/Operating Plan suitable for presentation to investors, please see below.

• Revenue Model
• Department Budgets
• Expense Summary
• Fixed Assets
• Income Statement / P&L
• Cash Flow Projections

There are many reasons why a simple top-down P&L will not suffice for raising capital. Firstly, before contacting investors, the company should determine how much capital it needs to raise. A P&L projection can tell you the operating losses that you will need to fund, but it misses at least three other major items that consume cash, and it does not show any relation to what other companies in your industry are doing and have done. It does not properly reflect your purchases of equipment, software and other capital assets (a minor ongoing depreciation item in your P&L, but a lump-sum up front cash outflow). It ignores your accounts receivables (booked income as far as your P&L is concerned, but in reality cash that is NOT yet in your bank account). And it misses your inventory (not yet expensed in your P&L projection, but again an up front cash outflow).  In many cases the total amount of cash required to reach cash flow break-even can be two to three times the operating losses indicated in the P&L projections.

I include analysis of Industry benchmarks, which are included to validate assumptions, ratios, profitability, and financial ratios. These industry benchmarks are used as a starting point, and then the differences between the company and the industry are explained in detail.

Moreover, a P&L alone cannot answer a wide range of questions concerning the company’s business model and possible performance.  For instance, does the company consume more cash before reaching cash flow break-even by growing quickly or slowly?  How much cash needs to be raised to reach the first milestone at which the company’s riskiness (and therefore its cost of capital) drops sharply?  How many assets can be funded with inexpensive asset-based debt finance rather than expensive VC equity?  The answers to these and many other questions determine the optimum financing strategy to avoid unnecessary dilution of the founding team’s ownership percentage in the company.   They can only be answered by a thorough analysis of the P&L, Balance Sheet and Statement of Cash Flow.

For all of these reasons, it is critical that a startup develop a complete economic model of its business, a living, breathing set of interactive relationships modeled in a spreadsheet that behaves like the actual business and can be used for scenario generation, analysis and optimization.  This document is not just a pretty picture for investors, it is a hardcore Operating Plan with all of the gritty details of who, what and when.  Properly done, the management team can analyze and discard many alternative approaches to launching or growing the business, including testing different pricing schemes, distribution strategies, sales force models, support options, payment cycles, hiring plans and marketing budgets, to name just a few.

The output of such an Operating Plan is a set of P&L, Balance Sheet, and Cash Flow projections.  But standing behind these is a complete model of the business that provides the following benefits:

• • The entire management team knows exactly what each individual needs to do in each month of the plan.
  • The management team has a yardstick against which to measure execution.
  • The management team knows exactly how much cash it needs to raise to reach cash flow break-even, and how sensitive that number is to changes in key operating assumptions.
  • The Company has hard evidence to provide investors that it has thought through every aspect of execution.
  • The Company can strongly support the credibility of its projections by showing investors that its forecast is built from the bottom up, sale by sale, hire by hire, with all key assumptions clearly articulated.
  • The Company has a cash forecasting tool that can be adjusted for actual results to provide invaluable early warning of the need to start looking for another round of equity with time to raise it before running out of cash.

A savvy management team will have all of this in place before getting in front of investors.

REVENUE MODEL

The Revenue Model starts by defining the basic unit of sale, which might be a single product sale, a long term project, a subscription, a service transaction, or a customer relationship.  Whatever the unit is, the Revenue Model defines the economics of a single unit sale, and then builds revenues by generating multiple transactions across all product and service lines.  Revenues are generated by definable inputs, such as the number of salespeople hired times the average productivity per sales person, or the number of retail outlets carrying the product times the average units sold per outlet.

This granular bottoms-up approach builds real credibility for your projections.  It transforms arguments from investors along the lines of “We don’t think your revenue ramp is achievable” into conversations such as “Yeah, hiring one salesperson a month doesn’t seem unreasonable” and “Your projected revenue per salesperson is about industry average, and we like the way you don’t show any sales for the first six months after a new sales hire”.

DEPARTMENT BUDGETS

The Operating Plan includes a spreadsheet detailing expenses for each department in the enterprise.  Since most expense items are driven by headcount, a department budget starts with a section that tracks personnel and salary costs.  The second section then extrapolates an expense line for each expense item.  Expense items are generally defined to match exactly to the Company’s General Ledger account structure, so that historical data and future updates for actual results can be easily copied in.

Special expense categories such as rent, travel, outsourced Server Farm charges or Help Desk expenses are calculated in their own sub-models within the appropriate Department spreadsheet.  All variable expenses are ratio driven and tie to primary drivers, such as unit sales, total number of customers or headcount employed, which in turn are driven by the primary revenue assumptions so that all variable expenses shift up and down naturally with changes in revenue projections.  This approach ensures that the model behaves like a real business and can be used for accurate scenario generation and sensitivity analysis.

EXPENSE SUMMARY

The Operating Plan includes a spreadsheet called Expense Summary which summarizes total corporate expenses by Expense Item and also by Department.  This summary provides investors with a complete picture of how you intend to spend their cash.

INCOME STATEMENT

The Income Statement ties together the Revenue Model and the Expense Summary to create a P&L for the Company.  Since the expenses for certain Departments are split between Cost of Sale and SG&A categories, the Income Statement includes sophisticated checksums to ensure that no expenses are left unaccounted for.

BALANCE SHEET

Many entrepreneurs approach investors without a Balance Sheet in their projections because they figure that investors don’t really care about this aspect of their company.  Moreover, it’s very difficult to get a projected Balance Sheet to actually balance, so why bother?   The answer is simple.  You can’t get an accurate Statement of Cash Flow without a Balance Sheet, and EVERYONE cares about cash.

The Balance Sheet contains the critical assumption for the average number of days in the customer payment cycle, which in turn drives the amount of cash tied up in Accounts Receivables.  For product companies, the Balance Sheet also calculates the amount of cash tied up in the inventory needed to support the sales volumes from the Revenue Model.  And for all companies, the Balance Sheet draws in the cash consumed by the asset purchases indicated in the Fixed Asset Schedule.

STATEMENT OF CASH FLOW

The Statement of Cash Flow is the Queen of all financial statements. Sophisticated entrepreneurs and investors alike care most about this view. Entrepreneurs want to know how much cash they are going to have to raise to reach cash flow break-even. Investors want to know how much more money will be needed to support their initial investment, and, failing that, how much dilution they stand to absorb from follow-on investment.

The Statement of Cash Flow integrates cash consumed or generated from operating activities flowing in from the P&L with the cash consumed or generated by changes in Balance Sheet items such as Accounts Payable, Accounts Receivable, Inventory and Plant, Property & Equipment.

KEY RATIOS and ASSUMPTIONS

Investors want to see the story behind the numbers, and they need to see the rationale and assumptions the entrepreneur used to create the numbers. There are a lot of numbers in financial projections, some are derived, others are entered based on discussion with a competent CFO and documented thoroughly in the plan. Many entrepreneurs make the mistake of not including the thoughts, how they arrived at each of the numbers, and they often fail to prepare the backup material and assumptions that show the investor you have put some serious thought and work into your planning. Those that have not planned this way are seen as financially unsophisticated which leads investors to believe you probably are not the type of person in which they want to invest.

Tags: angel capital, angel investor, budgeting, business planning, business plans, business plans in colorado, colorado angels, colorado business plans, colorado cfo, executive summary, financial model, financial modeling, financial projections, forecasting, fund raising, marketing plan, raise capital, sales model

Do You Know Your Banker?

Why Not?

Do you know your banker by name (other than the bank’s name!)? When you walk into the bank to make a deposit, does your banker say “hello” and ask how the business is going? If not, you have work to do!

Everyone who owns a small business, or works with small business owners, should focus on the banking relationship. The old adage  when you need money, the bankers don’t want to talk to you and when you don’t, they want to talk to you, is true. So, the time to build a relationship with your banker is now.

Call them today and set an appointment to meet in person. You want to meet with the Business Banker. Take your financial statements, a business plan, and your enthusiasm regarding the prospects for your business. Explain to them what you do, where you are going, and how you plan to get there. Ask them how the bank can help you. Banks today have a vast array of services for the small business. You will be amazed at what they can provide to businesses.

Follow up this meeting every quarter. Show them how you are growing, how you are marketing, and your profitability. When the time comes to apply for a line of credit, or equipment loan, or some other banking service, they will be more aware of you and your business. Your chances of getting their attention will be much greater.

Read this article. It explains even more why the relationship with your banker is vital to your business.
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Pick up the phone today. Give them a call!

Make it a great week.

Tags: banker, Banking, banking relations, CASH, cfo, loans, small business

If you’re a typical small business owner, you spend more of your time working on today’s issues than tomorrow’s potential. That may keep the doors open for now, but what about when you’re ready to retire, or no longer have the will or energy to run your business?
As mid to large businesses grow, owners typically realize they’ll need to find a way out, but most small business owners do not have an exit strategy. Rather than simply selling inventory and closing the doors, the suggestion is that small business owners can increase their wealth by capitalizing on the goodwill or customer base they’ve built up. Here are some basic business practices that many entrepreneurs overlook, but can help keep the company buffed up and ready for the marketplace.
Key Business Practices:
1. Write down the business processes You can’t sell a business that is in your head. So, you need to write it down. Entrepreneurs don’t typically like dealing with details and the fine points, but you must document how everything works in your organization. For example, spell out the roles of management and employees, not titles, but their actual responsibilities. Or describe a typical customer visit. Franchise companies list these types of details; a small business owner can use the same tactics to show the value of their company to a potential buyer.
2. Set financial goals You cannot sell a business that is not making money. And, how do you know if you’re growing if you don’t know where you started and where you’re going? Once you’ve set some target goals, measure them on a regular basis. Look at the internal processes of your business and make sure they are still working for your customers and your company alike. You may be pleasing customers, but are you making money? Know what your return on investment is, so you can explain it to those interested in buying your company.
3. Have a marketing budget and plan Many small business owners don’t allocate money for marketing. A marketing plan, with a corresponding budget, is key to attracting and keeping customers. One rule of thumb is to spend the equivalent of one staff salary on your marketing and advertising. Think of it as your “silent” employee working 24/7. Market awareness of your brand and demonstrated customer loyalty can dramatically increase the value to potential purchasers. Marketing is the last thing you cut even if times are bad.
4. Keep track of customer information Often, the most valuable aspect of a business to a potential buyer is your customer list, especially if your potential buyer is a competitor. Keeping track of customer contact information including name, address, phone number and email (along with permission to contact them electronically) is a must. Being able to deliver customer profiles and buying habits to a new owner demonstrates how well your business is run and makes your customer list invaluable. If business owners don’t have customer data, they’ll be in trouble.
5. Keep employees in the loop Your staff represents your company to customers and buyers alike. Make sure they know your goals. Communicate with your employees and ask for ideas. They can help you dress the business up for sale. If you’ve decided to sell because the business is in trouble, let them know. It is unlikely to be a surprise and few things demoralize a staff more than having to rely on water cooler rumors. Try to avoid staff salary cuts if possible. Your people are the face of your business and a salary cut may backfire. Try looking at your business processes and finding ways to save money instead.
6. Get professional advice Identify the areas of your operation that need improvement and look for specialized help to simplify your processes. Make sure to test them before the potential buyer does. There are consulting professionals on a part-time basis who have knowledge implementing transition strategies for businesses and can help you, for a reduced fee.
So, don’t ignore one of the most vital elements of your business plan, the exit strategy. With careful planning and monitoring from day one, your last days of business can bring rich rewards.

Tags: colorado cfo, company value, exit strategy, sell a business