Bootstrapping Entrepreneurs & Their BusinessesA Marriage Made in _____ (fill in the blank)

Creating, Managing, & Understanding Startup Financials

Presented by Dan Vishny, CPA, MBA(and Recovering Entrepreneur)

Successful Bootstrapping

• Define your goal• Set the milestones• Sprint to the milestones (it’s not a marathon)• Invest in things that your customers see• Discipline- set the rules and live by them• Financial Advice

Financial Advice

• ♫ You gotta know when to hold em... ♫• Don’t micromanage the finances• Focus on getting the product to market• The “Language” of accounting & finance• Profit, Profit, Profit

Financial Projections

Main Points to Convey

• You have done your homework• You understand the costs involved• You understand the market space• Your assumptions are reasonable

Projections- Minimum Requirements

• 5 year Profit & Loss Statement• 5 year Balance Sheet• 5 year Statement of Cash Flows• Valuation Statement and ROI Analysis• Breakeven Analysis• What if Analysis• Assumptions

Breakeven Analysis

• Puts your business in perspective• Worst case scenario• Can you achieve break even and when?– Compare to competitors– Compare to last year

• Do you have enough production capacity?• Do this analysis as often as possible

Breakeven Analysis2009 2010 2011 2012 2013

Fixed Expenses: Payroll $ 150,000 $ 195,000 $ 405,000 $ 840,000 $ 4,350,000 R&D Materials 150,000 130,000 270,000 560,000 2,900,000 Rent 24,000 48,000 48,000 48,000 120,000 Marketing - 195,000 405,000 840,000 4,350,000 Utilities & Facilities 20,000 40,000 60,000 80,000 250,000 Insurance 12,000 24,000 24,000 36,000 48,000 Legal & Professional 12,000 24,000 24,000 48,000 60,000 Depreciation Expense n/a n/a n/a n/a n/a Total Fixed Expenses $ 368,000 $ 656,000 $ 1,236,000 $ 2,452,000 $ 12,078,000

Average Gross Margin % 60.00% 60.58% 61.11% 61.61% 62.07%Average Margin Per Unit $3,000 $3,150 $3,300 $3,450 $3,600

Annual Breakeven Units 123 208 375 711 3,355 Annual Breakeven Dollars $613,333 $1,082,921 $2,022,545 $3,980,058 $19,459,000 Monthly Breakeven Units 10 17 31 59 280Monthly Breakeven Dollars $51,111 $90,243 $168,545 $331,671 $1,621,583

Formula for Breakeven Units: Fixed Expenses/Average Margin Per UnitFormula for Breakeven Dollars: Fixed Expenses/Average Gross Margin %

What If AnalysisWhat is the monthly breakeven in units based on various margins and increases in Marketing Costs?

[---------------------- Margin Per Unit -----------------------]10 $3,000 $3,500 $4,000 $2,500$0 10 9 8 12

Marketing Costs $200,000 16 14 12 19$400,000 21 18 16 26$600,000 27 23 20 32

What is the monthly breakeven in dollars based on various margin %s and increases in Marketing Costs?

[---------------------- Margin Per Unit -----------------------]51,111 60% 65% 70% 40%

$0 $51,111 $47,179 $43,810 $76,667Marketing Costs $200,000 $78,889 $72,821 $67,619 $118,333

$400,000 $106,667 $98,462 $91,429 $160,000$600,000 $134,444 $124,103 $115,238 $201,667

Assumptions

Anticipate the Questions• What will you charge for your product and

why?• How do your marketing costs support your

sales growth?• How do you scale up your business?– How long? How much money?

Assumptions

Nail down the Costs• Payroll- have you added 15% for payroll

taxes?• Rent- get a quote from a broker• Miscellaneous- add a cushion for error• Detailed Cost Sheet

ConclusionBootstrap Responsibly

Cash is KingTreat it with Respect, Invest & Spend it Wisely

Extra Slides

Monthly CEO Dashboard

MARCH 2009

Revenue:    Compared to last year       YTD Sales $4,146,255   2009 2008 Difference YTD Projections $4,235,000 YTD Sales $4,146,255 $2,889,293 $1,256,962 Surplus (Deficit) ($88,745) YTD Gross Margin % 49% 51% -2%

   YTD Operating Expenses $1,906,506 $1,618,717 $287,789

YTD Gross Margin % 49% YTD Net Income (Loss) $88,035 ($157,579) $245,614 YTD Operating Expenses $1,906,506    

YTD Net Income (Loss) $88,035 Cash in Bank $115,964 $54,949 $61,015     Accounts Receivable $2,114,224 $1,467,456 $646,768

    Accounts Payable $1,691,421 $1,414,280 $277,141

Cash Position:   Cash in Bank $115,964 Accounts Receivable $2,114,224   $2,230,188

Accounts Payable $1,691,421

  $538,767

Pro Forma Balance Sheets2008 2009 2010 2011 2012 2013

ASSETS

Cash $ 3,672 $ 475,672 $ 4,389,672 $ 4,455,344 $ 3,989,566 $ 6,653,515

Inventories - 100,000 187,500 366,667 1,283,333 2,050,000

Fixed Assets 32,625 92,625 222,625 372,625 572,625 812,625

Accum. Depreciation (5,200) (22,400) (63,857) (133,569) (241,539) (390,759)

Total Assets $ 31,097 $ 645,897 $ 4,735,940 $ 5,061,067 $ 5,603,985 $ 9,125,381

LIABILITIES

Accounts Payable $ 19,438 $ 19,438 $ 19,438 $ 19,438 $ 19,438 $ 19,438

Total Liabilities 19,438 19,438 19,438 19,438 19,438 19,438

EQUITY

Capital 524,955 1,524,955 5,524,955 5,524,955 5,524,955 5,524,955

Retained Earnings (513,296) (898,496) (808,453) (483,326) 59,592 3,580,988

Total Equity 11,659 626,459 4,716,502 5,041,629 5,584,547 9,105,943

Total Liabilities & Equity $ 31,097 $ 645,897 $ 4,735,940 $ 5,061,067 $ 5,603,985 $ 9,125,381

Pro Forma Income Statements2009 2010 2011 2012 2013

Sales $ - $ 1,300,000 $ 2,700,000 $ 5,600,000 $ 29,000,000

Cost of Goods Sold - 512,500 1,050,000 2,150,000 11,000,000

Gross Profit - 787,500 1,650,000 3,450,000 18,000,000

Operating Expenses:

Payroll 150,000 195,000 405,000 840,000 4,350,000

R&D Materials 150,000 130,000 270,000 560,000 2,900,000

Rent 24,000 48,000 48,000 48,000 120,000

Marketing - 195,000 405,000 840,000 4,350,000

Utilities & Facilities 20,000 40,000 60,000 80,000 250,000

Insurance 12,000 24,000 24,000 36,000 48,000

Legal & Professional 12,000 24,000 24,000 48,000 60,000

Total Operating Expenses $ 368,000 $ 656,000 $ 1,236,000 $ 2,452,000 $ 12,078,000

Other Expenses:

Depreciation Expense 17,200 41,456 69,713 107,969 149,220

Income (Loss) Before Taxes (385,200) 90,044 344,287 890,031 5,772,780

Provision for Income Taxes - - 19,161 347,112 2,251,384

Net Income (Loss) $ (385,200) $ 90,044 $ 325,126 $ 542,919 $ 3,521,396

Statements of Cash Flows2009 2010 2011 2012 2013

Beginning Cash $ 3,672 $ 475,672 $ 4,389,672 $ 4,455,344 $ 3,989,566

Cash Inflows:

Sales Revenues - 1,300,000 2,700,000 5,600,000 29,000,000

Angel Funds 1,000,000 - - - -

Series A - 4,000,000 - - -

Series B - - - - -

1,000,000 5,300,000 2,700,000 5,600,000 29,000,000

Cash Outflows:

Purchase of Fixed Assets 60,000 130,000 150,000 200,000 240,000

Purchases of Inventory 100,000 600,000 1,229,167 3,066,667 11,766,667

Operating Expenses 368,000 656,000 1,236,000 2,452,000 12,078,000

Income Taxes - - 19,161 347,112 2,251,384

528,000 1,386,000 2,634,328 6,065,779 26,336,051

Net Change in Cash 472,000 3,914,000 65,672 (465,779) 2,663,949

Ending Cash $ 475,672 $ 4,389,672 $ 4,455,344 $ 3,989,566 $ 6,653,515

Projected Valuation and ROI

Year Revenue Expenses EBITDA2009 $ - $ 368,000 $ (368,000)2010 $ 1,300,000 $ 1,168,500 $ 131,500 2011 $ 2,700,000 $ 2,286,000 $ 414,000 2012 $ 5,600,000 $ 4,602,000 $ 998,000 2013 $ 29,000,000 $ 23,078,000 $ 5,922,000

multiple factor 8Terminal Value $ 47,376,000

* The value of the Company is projected at 8X EBITDA in year 2013

Owner Initial % Year Capital Expected % Projected IRRCash On

Class Ownership Contributed Contributed in 2013 Value in 2013 (ROI) CashFounders 100.00% 2009 $ 524,955 41.25% $ 19,542,600 106% 37Angels 25.00% 2009 $ 1,000,000 13.75% $ 6,514,200 49% 7Series A 45.00% 2010 $ 4,000,000 45.00% $ 21,319,200 52% 5

170.00% $ 5,524,955 100.00% $ 47,376,000 9

Assumptions2009 2010 2011 2012 2013

Average Unit Sales Price $ 5,000 $ 5,200 $ 5,400 $ 5,600 $ 5,800 compare to similar productsUnits Sold - 250 500 1,000 5,000 Market Research

Average Unit Cost $ 2,000 $ 2,050 $ 2,100 $ 2,150 $ 2,200 Do you have a detailed cost sheet?

Revenue $ - $ 1,300,000 $ 2,700,000 $ 5,600,000 $ 29,000,000 formulaCost of Goods Sold $ - $ 512,500 $ 1,050,000 $ 2,150,000 $ 11,000,000 formulaGross Profit $ - $ 787,500 $ 1,650,000 $ 3,450,000 $ 18,000,000 formula

Operating Expenses:           Payroll $ 150,000 15.00% 15.00% 15.00% 15.00%percentage of sales R&D Materials 15.00% 10.00% 10.00% 10.00% 10.00%percentage of sales Rent $ 24,000 $ 48,000 $ 48,000 $ 48,000 $ 120,000 per R. Crieger commercial broker Marketing 0.00% 15.00% 15.00% 15.00% 15.00%percentage of sales Utilities & Facilities $ 20,000 $ 40,000 $ 60,000 $ 80,000 $ 250,000 based on current faciltites Insurance $ 12,000 $ 24,000 $ 24,000 $ 36,000 $ 48,000 per J. Kammer, insurance agent Legal & Professional $ 12,000 $ 24,000 $ 24,000 $ 48,000 $ 60,000 estimate

Average GM% 60.00% 60.58% 61.11% 61.61% 62.07%

Other Assumptions:Sales are collected at time of sale- no accounts receivablePurchases of Inventory are CODInventory Levels are 8% of Next Years' Cost of Goods Sold (30 days turn) 8%Income Tax Rate 39.00%

Assumptions- continued

Capital Investment:

2009 2010 2011 2012 2013 Angel Funds $ 1,000,000 Series A $ 4,000,000 Series B          

$ 1,000,000 $ 4,000,000 $ - $ - $ -

Fixed Asset Purchases:2009 2010 2011 2012 2013

Original CostMachinery & Equipment $ 50,000 $ 100,000 $ 100,000 $ 150,000 $ 150,000 Leasehold Improvements - 10,000 10,000 10,000 10,000 Computers & Software 10,000 10,000 20,000 20,000 60,000 Furniture & Fixtures - 10,000 20,000 20,000 20,000

$ 60,000 $ 130,000 $ 150,000 $ 200,000 $ 240,000