BOOTSTRAP SEMINARS 2013Financial Planning & Control

Introduction

• Why Financial planning is important• Building Forecasts• Gross Profit & Breakeven• Managing cash in a start up• 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• 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

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?

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 £1200 £2500

Other Costs £700 £1000 £1500

Net Profit £100 £200 £1000

Cash Balance £50 £100 £1050

Gross Profit % 80% 80% 83.33%

Breakeven Units 100 120 140

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

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

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 wont 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.

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 25% 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

https://ewf.companieshouse.gov.uk//runpage?page=welcome

You will need– Company name and registered office address ( Company name must

be unique check first not used at Co House Webcheck http://wck2.companieshouse.gov.uk//wcframe?name=accessCompanyInfo)

– 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 Eg Founders share buy back provisions• First right of refusal on issue of new shares (Pre emption rights)

THANK YOU Q&A