Finance and Forecasting specifically for the entrepreneur. Learn how to create a kick-ass financial slide as part of your investor pitch deck.

1. Forecasting & Finance
for Entrepreneurs
Graham McFarland

3. Year 1 Year 2 Year 3
Subscription Sales $196K $2.9M $12.1M
Services $45K $901K $3.6M
Total Revenue $241K $3.8M $15.6M
Cost of Revenue $25K $241K $1.1M
Gross Margin $216K $3.6M $14.5M
Gross Margin % 90% 94% 93%
Sales & Marketing $107K $1.5M $5.4M
Research & Development $ 29K $255K $1.8M
General & Administrative $73 K $629K $2.3M
Total Operating Expenses $210K $2.4M $9.5M
Operating Profit (EBITDA) $6K $1.2M $5.1M
Operating Profit % 3% 32% 32%

4. Cash vs. Accrual Accounting
Cash: Revenue = when Cash Received
Expenses = when Cash Paid
Accrual: Revenue = when Earned
Expenses = when Incurred
Financial Statements (GAAP):
Income Statement, Balance Sheet & Cash Flow
Statement

5. Year 1 Year 2 Year 3
Subscription Sales $196K $2.9M $12.1M
Services $45K $901K $3.6M
Total Revenue $241K $3.8M $15.6M
Cost of Revenue $25K $241K $1.1M
Gross Margin $216K $3.6M $14.5M
Gross Margin % 90% 94% 93%
Sales & Marketing $107K $1.5M $5.4M
Research & Development $ 29K $255K $1.8M
General & Administrative $73 K $629K $2.3M
Total Operating Expenses $210K $2.4M $9.5M
Operating Profit (EBITDA) $6K $1.2M $5.1M
Operating Profit % 3% 32% 32%

6. Revenue
The value of the items sold to a customer.
• Sale of something (widgets, licenses, items, etc.)
• Subscriptions (annual, monthly, retention rate)
• Services (installation, support, consulting)
• Shipping & handling

7. Cost of Sales (COS or COGS)
The direct cost of the items or services you sold
• Hard goods (raw materials)
• Product packaging & delivery
• Web site hosting costs
• Direct cost of providing services

8. Year 1 Year 2 Year 3
Subscription Sales $196K $2.9M $12.1M
Services $45K $901K $3.6M
Total Revenue $241K $3.8M $15.6M
Cost of Revenue $25K $241K $1.1M
Gross Margin $216K $3.6M $14.5M
Gross Margin % 90% 94% 93%
Sales & Marketing $107K $1.5M $5.4M
Research & Development $ 29K $255K $1.8M
General & Administrative $73 K $629K $2.3M
Total Operating Expenses $210K $2.4M $9.5M
Operating Profit (EBITDA) $6K $1.2M $5.1M
Operating Profit % 3% 32% 32%

9. Gross Margin
The amount of money you have left over from a
sale after subtracting the direct costs of
making that product or service.
Gross Margin = Sales – COS
High tech usually 85%-95%

10. Margin vs. Mark-Up
Sales Price = $125 Cost = $100 Margin: $25
Margin % of the selling price
= Gross Margin/Sales Price = $25/$125 = 20%
Mark-Up % of the cost
= Gross Margin/Unit Cost = $25/$100 = 25%
FYI: Mark-Up is always higher

11. Year 1 Year 2 Year 3
Subscription Sales $196K $2.9M $12.1M
Services $45K $901K $3.6M
Total Revenue $241K $3.8M $15.6M
Cost of Revenue $25K $241K $1.1M
Gross Margin $216K $3.6M $14.5M
Gross Margin % 90% 94% 93%
Sales & Marketing $107K $1.5M $5.4M
Research & Development $ 29K $255K $1.8M
General & Administrative $73 K $629K $2.3M
Total Operating Expenses $210K $2.4M $9.5M
Operating Profit (EBITDA) $6K $1.2M $5.1M
Operating Profit % 3% 32% 32%

12. Operating Expenses
Indirect costs required to operate your business.
• Sales & Marketing
• Research & Development
• General & Administrative

13. Sales & Marketing
Selling, marketing and promotional expenses.
• Sales salaries
• Commissions
• Advertising (web, print, e-mail campaigns)
• Sales travel, lodging, car rental and meals
• Trade show costs

14. Research & Development
Expenses related to maintaining existing technology
and developing new technology
• Contractors
• Developers salaries
• UI Design salaries
• Testing costs
• Engineering costs

15. Capitalized Software Development Costs
FAS 86 Technological
Feasibility End of
Revenues
Planning & Software Available
Research Development For Sale
(expense) (capitalize) (expense)
Product
Begin Released
Project
Amortize over 3 years
Total Development Cost / 3 yrs = expense recognized each year
Improves your Operating Profit but not your Cash Flow

16. General & Administrative
Expenses related to items that benefit the
entire company
• Legal expenses
• Rent / lease expense
• Accounting / bookkeeping expenses / salaries
• Insurance costs
• Utilities cost
• CEO salary & benefits

17. Year 1 Year 2 Year 3
Subscription Sales $196K $2.9M $12.1M
Services $45K $901K $3.6M
Total Revenue $241K $3.8M $15.6M
Cost of Revenue $25K $241K $1.1M
Gross Margin % 90% 94% 93%
Sales & Marketing $107K $1.5M $5.4M
Research & Development $ 29K $255K $1.8M
General & Administrative $73 K $629K $2.3M
Total Operating Expenses $210K $2.4M $9.5M
Operating Profit (EBITDA) $6K $1.2M $5.1M
Operating Profit % 3% 32% 32%

18. Summary Version
Year 1 Year 2 Year 3
Revenue $241K $3.8M $15.6M
Gross Margin $216K $3.6M $14.5M
Gross Margin % 90% 94% 93%
Total Operating Expenses $210K $2.4M $9.5M
Operating Profit (EBITDA) $6K $1.2M $5.1M
Operating Profit % 3% 32% 32%

19. Things to Remember (avoid the red flags)
• High tech companies should have gross
margin % of between 80% and 95%
• G&A should not be more than 15% of total
revenue (or sb good reason)
• High tech costs initially, then S&M kick in to
flip with R&D
• EBITDA % should grow each year but not
greater than 45% (unless your Google @37%)

20. Overhead
The additional costs associated with employees
other than salary.
Taxes - (6.2% FICA – on the first $107K, Medicare 1.45% - on all,
Fed UI .8% - on the first $7K, State UI 8.6% - on the first $9K)
Benefits (health, dental, vision)
401K matching (optional)
Add 23% to the cost of all salaries
$50K salary x 1.23% = $62K salary + overhead

21. Top Down Forecast
Pick and number and then justify it.
Grow revenue by 20% next year
$250K x 20% = $50K so new revenue is $300K
Expenses to grow 10% next year
Bottoms Up Forecast (always the best)
Do the math – don’t be lazy
Sell 1,000 widgets at $29 each per month x 12
months = $348K
Salaries and expenses per employee, etc.

22. Cash Flow Forecast
Future look at your checkbook.
Monthly Burn Rate
The total amount of money you are spending
each month.

23. Key Performance Indicators (KPI’s)
• The metrics that drive your business
• Something that can look at to get a sense of how the
business is doing
• Set goals and benchmarks
• Look at often
• Share them with employees, potential investors, etc.

24. Be careful about your metrics…
“CSOI” Listener Hours
Adjusted Consolidated “Bookings”
Segment Operating Income Virtual revenue if all Total listener hours
recognized at time of sale for the period
Excludes costs not indicative
of future earnings
Q1 - $81.6M vs. ($98M)

25. Timeline Slide (Milestones)
3.5K 28K 67K
Subscribers Subscribers Subscribers
Month 3 6 12 18 24 30 36
Funding & Launch Profitable
Build team
Avg. monthly burn rate Yr. 1: $72K

26. Ask Slide
• $500K raise
Use of Funds
$309K marketing, promotion & sales
$112K product development
$79K working capital & debt repayment

27. Tech Company Valuations
It’s simple. Forget the confusing math.
By Revenue: 3-5 X trailing 12 mo. Revenue
By Operating Profit: 9-11 X trailing 12 mo.
operating profit
Good “real world” high-tech start-up valuation tool:
http://www.caycon.com/valuation.php

28. Additional Resources:
Simple Forecasting Model (36 months)
• Widgets (selling products)
• Subscriptions (selling monthly subscriptions)
Excel spreadsheets
Available on the website

29. Thanks
Graham McFarland
gmcfarland@strictlytalent.com
@grahamcfarland