Creating an Effective Set of Financial Projections
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CREATING AN EFFECTIVE SET OF FINANCIAL PROJECTIONS STRATEGIC CAPITAL PARTNERS SEPTEMBER 14, 2015 Neil Davis TEDCO
Transcript of Creating an Effective Set of Financial Projections
CREATING AN EFFECTIVE SET OF FINANCIAL PROJECTIONS
STRATEGIC CAPITAL PARTNERS
SEPTEMBER 14, 2015
Neil DavisTEDCO
PREPARING FINANCIAL PROJECTIONS
We explain that…
• Target attendee is the start-up entrepreneur.• Preparing budgets and forecasts for the mature business is a
different process.
And then we…• Talk about some of the basics & the process.• Work thru an example.• Let the attendee practice via a case study.
PREPARING FINANCIAL PROJECTIONS
Basic Rules…
1. Yes, you do need to prepare financial projections!2. It's not accounting, it’s business.3. Financial projections will never be correct…but they have to make
sense.• Investors will always discount your projections.• They have to be “big enough” to matter.• They are a reflection of your assumptions about the business,
dressed up to look like a P&L.4. The end goal is to be discussing your assumptions, not the actual
numbers.
PREPARING FINANCIAL PROJECTIONS
Oh, yeah – and just one more thing…
“I only need 0.01% of this really big market to make money.”
The Macro (Top Down) approach is not acceptable because no one, including you, can assess whether your execution plan is reasonable and whether you can execute.
Investors want to see a Micro (Bottom Up) approach that starts with the customer and is grounded in market research.
PREPARING FINANCIAL PROJECTIONS
Financial Projections
Go-to-market
strategy
Market Research
Operating Assumptions
PREPARING FINANCIAL PROJECTIONS
We advocate a Market Segmentation Strategy that is linked to Market Research & Financials.
1. Use market research to add credibility to assumptions.2. Use segment strategy & assumptions about contract value &
structure to build annual revenue projections.3. Use estimate of COGS to calculate gross margin % and
operating profit.4. Use segment strategy & assumptions about sales channels &
other overhead expenses to build annual SG&A budget.5. Calculate EBIT and determine investment needs.
PREPARING FINANCIAL PROJECTIONS
Financial Projections ($1000) Year 1 Year 2 Year 3 Year 4 Year 5
Units 20 40 80 160 320Revenues 100 200 400 800 1600
COGS (25) (50) (100) (200) (400)Gross Margin 75 150 300 600 1200
SG&A (150) (200) (250) (300) (350)EBIT (75) (50) 50 300 850R&D
Spending (100) 0 (500) 0 0
CAPEX 0 (25) 0 (100) 0Beginning
Cash 0 100 25 175 375
Investment 275 0 600 0 0Ending Cash 100 25 175 375 1225
PREPARING FINANCIAL PROJECTIONS
Watch out for…
1. Constant %GM 2. %GM too low.3. Constant %SG&A.4. Multiples of prior years.5. Confusing cash with accounting – It’s all about burn rate and
investment needs, not depreciation, amortization, and revenue recognition rules.
FINANCIAL PROJECTIONS
Now that you’re all done building your projections from the bottom up…you should calculate your % share of the total market.
That % should be reasonably attainable, allowing for plenty of downside risk and upside opportunity. In other words “not too large and not too small…just right!”.
Conclusion
…and, if you didn’t notice, what was just outlined here is about 2/3 of a 10 slide investor pitch deck!
FINANCIAL PROJECTIONS
Neil DavisTEDCO
Director, Entrepreneurial Development410.715.4164
