Tech Hub Financial Planning Workshop
- 1. Business & Financial Planning Workshop Jim Bailey September 2011
- 2. Agenda Introduction, Order of the Day and Objectives Financial Planning Key Performance Indicators Financial Statements Profit & Loss Balance Sheet Cashflow Valuation Q & A Session Closing / Feedback Slide 2
- 3. Introduction LBS Alum – Corporate Finance Business and Strategic Planning for 20+ years Did work for Tech Hub client and suggested of high value Practical Things you can do today and everyday Generally your FD i th l t person you hi – b t shouldn’t b G ll is the last hire but h ld ’t be Slide 3
- 4. Order of the Day Expectations on both sides Informal Setting Highly Interactive – Relate to your company situation Presentation and discussion on the 4 main concepts and tie that into models I’ve worked on to give examples Questions and Answers Slide 4
- 5. Objectives of the Workshop Provide tools you can take away and apply Give an appreciation of the financial issues and perspective Decide when to seek outside assistance – ST or PT Finance Director Understanding of terminology when you’re dealing with your accountant What I won’t talk about Financing – that’s a whole other session Strategy development – thi i about th fi St t d l t this is b t the financial aspects only i l t l Slide 5
- 6. Agenda Introduction, Order of the Day and Objectives Financial Planning Key Performance Indicators Financial Statements Profit & Loss Balance Sheet Cashflow Valuation Q & A Session Closing / Feedback Slide 6
- 7. The Main Premise You can’t build the strategy without the financial plan And You can’t build the financial plan without the strategy Slide 7
- 8. The Financial Plan is integral to the BP Section Relevance of Financial Plan Summary • Amount of finance required and purpose • Highlights of financial projections The Market • Size of market ‐ and by implication your share (an output!) • Margins versus target segments (large versus small customers) Competition • Response of potential competitors to your plan (eg. pricing) Marketing & Sales • Detailed marketing plan: pricing and trends, discounts • Customer service & support Production and • Sources of supply / costs and margins Operations • M k Make or buy b Management • Analysis of shareholdings, control • Staff plans ‐ hiring, development & retention (option plans) … and many other links as well Source: British Venture Capital Association: Business Plans & Financing Proposals Slide 8
- 9. The Process of Raising Finance 85% of investment opportunities submitted to VC firms are rejected at a very early stage; serious consideration given to 15%; negotiation stage is only reached by 5% Decision to proceed beyond an initial reading will depend on the quality of the Business Plan Any subsequent examination of the business by the investor will take as its starting point the contents of a well structured and written plan The Business Plan is the first, and often best, chance for management to impress investors Source: British Venture Capital Association: Business Plans & Financing Proposals Slide 9
- 10. How long should the planning horizon be? 3 - 5 years (1st year b month) by th) Generally would like to get to a point where the business is established / mature Technically the length of forecast period should be equal to the length of time management expects new investment rates of return to exceed the cost of capital - known as extraordinary returns (accuracy is not determinant), considering the following: Proprietary technologies Patented products Product lifecycles Established brands Source: British Venture Capital Association: Business Plans & Financing Proposals Slide 10
- 11. Length of Forecast Period Forces Driving Industry Competitiveness Potential Entrants Industry Rivalry / Suppliers Competition Buyers y Substitutes Slide 11
- 12. Agenda Introduction, Order of the Day and Objectives Financial Planning Key Performance Indicators (KPIs) Financial Statements Profit & Loss Balance Sheet Cashflow Valuation Q & A Session Closing / Feedback Slide 12
- 13. Key Performance Indicators (KPIs) Main drivers of value Indicators of how the business is performing Things you can touch and feel – customers, expenses Main issues you should manage in the business Maintain a “dashboard” to monitor regularly Slide 13
- 14. KPIs and Forecasting: How low can you go? Revenue # of Customers Rev / Customer Prepaid Postpaid Initial Recurring Fixed Usage Charge Pricing Discount Slide 14
- 15. Understanding Cost Structures How do costs react to changes in sales volume? Fixed versus variable costs Easy to change in a short period of time or adjusts with revenue Tie into revenue forecast in some way Make or buy decisions 6,000 5,000 4,000 Outsourced 3,000 Internal 2,000 2 000 1,000 ‐ Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Slide 15
- 16. Considerations in Plan Development Its a spreadsheet, not the business Costs can usually be predicted with 100% accuracy, not revenues Spend ti S d time on th revenues and understanding th the d d t di these Re-visit cost assumptions as they relate to those revenues, especially as actual results are available The f financial plan is a live tool Slide 16
- 17. Benchmarking to arrive at final year metrics Find companies in similar business Generally public company financials – adjust for costs of being public, size, size etc Other industry sources - informal Combine with sensitivity analysis Slide 17
- 18. Sensitivity Analysis Involves adjusting key assumptions to assess impacts on: Cash Needs Valuation Realistic, optimistic and pessimistic views for each parameter Helps to understand risks and develop plans to mitigate these Helps to identify key value drivers and focus management attention and resources There are tools to help perform this analysis – including probabilities Slide 18
- 19. Scenario Planning Usually in complex situations Link assumptions so that mutually exclusive options are not considered Identify interdependencies in the Business Plan – revenues go down, costs should go down, etc. Slide 19
- 20. Agenda Introduction, Order of the Day and Objectives Financial Planning Key Performance Indicators (KPIs) Financial Statements Profit & Loss Balance Sheet Cashflow Valuation Q & A Session Closing / Feedback Slide 20
- 21. Financial Statements Profit & Loss – represents a period of time; flows p p ; Balance Sheet – represents a point in time; snapshot p p ; p Statement of Cashflows – sources and uses of cash Slide 21
- 22. Profit & Loss Turnover or Revenue Cost of Sales or Cost of Goods Sold Operating Expenses EBITDA – Earnings Before Interest, Tax, Depreciation and Amortization – Operating Cashflow Depreciation & Amortization PBIT / EBIT or Operating Profit Interest PBT or EBT Taxes T PAT or Net Income Slide 22
- 23. Balance Sheet Fixed Assets Tangible Assets Intangible Assets (Patents, Start up costs) Current Assets Stocks / Inventory Debtors / Accounts Receivable Cash at bank and in hand Current Liabilities / Creditors Amounts falling due within one year Net Current Assets Total Assets less Current Liabilities Long Term Liabilities / Creditors o g e ab t es C ed to s Amounts falling due after more than one year Net Assets Share Capital Equity Profit & Loss Account Shareholders Funds Slide 23
- 24. Financial Ratios Performance Analysis Gross Profit – Sales minus Cost of Sales Gross Margin % - Gross Profit / Sales Net Margin – Operating Profit / Sales Capital Employed – Equity + Debt (Long & Short Term) Return on Capital Employed – EBIT or PBIT / Capital Employed Stock Days – Stock / Cost of Sales * 365 Debtor Days – Trade Debtors / Sales * 365 Creditor Days – Trade Creditors / Sales * 365 Capital Structure Ratios Gearing – Debt / Capital Employed Interest Cover – PBIT or EBITDA / Interest Payable Liquidity Ratios Current Ratio – Current Assets / Current Liabilities “Acid Test” – Current Assets less Stock / Current Liabilities Other Turnover per Employee Turnover per Marketing Campaign Customer Acquisition Costs New Sales or Customers per Sales Person Overhead Costs per Employee Slide 24
- 25. Cashflow / Sources & Uses of Cash Cash from Operating Activities Net Income Add Back: Non cash items such as depreciation Changes in working capital (Stocks, Debtors, Creditors) Ch i ki it l (St k D bt C dit ) Cash from Investing Activities Capital Investment – Tangible Assets Capital In estment – Intangible Assets Investment Cash from Financing Activities Increase (Decrease) in short term borrowings Increase (Decrease) in long term borrowings Increase (Decrease) in shareholders loans Increase (Decrease) in equity Increase (Decrease) in Cash Opening Cash Balance Closing Cash Balance Slide 25
- 26. The Scary Concept of Working capital Slide 26
- 27. Agenda Introduction, Order of the Day and Objectives Financial Planning Key Performance Indicators (KPIs) Financial Statements Profit & Loss Balance Sheet Cashflow Valuation Q & A Session Closing / Feedback Slide 27
- 28. Agenda Introduction, Introduction Order of the Day and Objectives Financial Planning Key Performance Indicators (KPIs) Financial Statements Profit & Loss Balance Sheet Cashflow Valuation Q & A Session Closing Feedback Cl i / F db k Slide 28