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EIA2016 Turin - Rick Rasmussen. P&L Statements

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Finalizing Business Model and P&L Statements

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EIA2016 Turin - Rick Rasmussen. P&L Statements

  1. 1. This presentation is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this presentation are the sole responsibility of Rick Rasmussen and do not necessarily reflect the views of USAID or the United States Government. Building a Financial Model 1
  2. 2. The Financial Model Investors don’t put their money into ideas. They put their money into businesses… Your financial model is your ‘real’ business plan Revenues Profits Cash needs Hiring plans Runway Plus a sensitivity analysis 2
  3. 3. Philosophy Build your models to answer questions such as: Is this a real business? Can it make money? Will it scale? Proof Points. Show evidence and traction Your results to date Comparable companies in the market Investors will test every line item Revenues Margins Expenses Cash flow
  4. 4. A typical timeline 4 Cash flow positive
  5. 5. Revenue timeline varies by market type… Existing Market Re-Segmented Market New Market Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
  6. 6. Basic Financial Statements Income Statement: Also referred to as a profit and loss statement (P&L) Revenues – expenses = profits Stated over a series of reporting periods Balance Sheet: A "snapshot of company's financial condition” Assets = liabilities + owner's equity Cash Flow Statement: Shows how changes in balance sheet accounts affect cash Operations, Investment and Financing activities
  7. 7. Investors expect: 5-year Income Statement CEO should build first Income Statement Get to know the format and numbers intimately Yearly in the presentation Detailed breakdown for due diligence Year 1-2 are Quarterly (or even monthly) Year 3-5 are annual
  8. 8. Income Statement: Basic Structure Revenue - Cost of Goods Sold (Variable costs) = Gross Profit (Rev – COGS) Gross Profit - Expenses (Fixed Costs) R&D Sales and Mktg General and Administrative (G&A) = Net Profit [Gross Profit - Expenses] +/- Other Income (expense) = Net Income
  9. 9. Building your financials bottom-up Begin with things that are easy for you, fill in the rest as you go i.e. if you know your headcount or expenses best, start there List out your key assumptions Revenues by product line Cost of goods sold Headcount (Salaries) Overhead (Rent, Legal…)
  10. 10. Revenues Work from your time line Break out every one of your products or services List assumptions Units sold per period Estimate ASP (avg selling price) Length of sales cycle Channels and commissions Churn, Returns, etc. Each company’s business model will differ Benchmark vs. Competition Make sure that it passes the “common sense” test
  11. 11. Company Timeline Q3Q1 Q2 Q7Q6 Q8 Cash Flow Positive Series B $7M Started company MVP Full Production Q9 Series A $2M Second prototype Closed Beta 1st alliance signed Seed $100K Q4 Q5 Employees: 4 6 9 10 11 14 18 22 24 Q10 1M Users
  12. 12. Our example business: NewCo Two product lines with a services component First Product Line: Fast growing “existing product” Sales starting month 2 Lower margins à high COGS Second Product Line: Slower growing “new product” 7 month design cycle to MVP Slow to get traction but high growth. high profit Services business: Scales with headcount
  13. 13. NewCo Short-Term Revenue Assumptions Yr 1 Q1 Yr 1 Q2 Yr 1 Q3 Yr 1 Q4 Yr 2 Q1 Product 1 Units Sold 150 600 2400 9600 12000 ASP $15 $20 $25 $25 $25 Total $K $2.25 $12 $60 $240 $300 Product 2 Units Sold 25 75 100 ASP $0 $50 $75 Total $K $0 $3.75 $7.5 Services and Maintenance Total $K $5 $10 $20 $40
  14. 14. NewCo 5 year Revenue Assumptions Year 1 Year 2 Year 3 Year 4 Year 5 Product 1 K Units 12.75 50 200 500 750 ASP $24.65 $25 $20 $16 $14 $K $314 $1250 $4000 $8000 $10500 Product 2 K Units 0.1 5 25 100 1000 ASP $62 $75 $60 $50 $40 Total $K $3.75 $375 $1500 $5000 $40000 Services and Maintenance $35 $750 $2250 $3500 $5500 Total $K $353 $2375 $7750 $16500 $56000
  15. 15. Cost of Goods Sold (COGS): Unit economics Variable costs change if you produce more or fewer units Physical products: Cost of manufacture, shipping, … Service based: Cost of services (hours) Virtual based: customer acquisition costs Gross Margin = Revenue – COGS Gross margin % = (Revenue – COGS) / Revenue
  16. 16. Product 1: 5 year Costs and Margins Year 1 Year 2 Year 3 Year 4 Year 5 Product 1 K Units 12.75 50 200 500 750 ASP $24.65 $25 $20 $16 $14 $K $314 $1250 $4000 $8000 $10,500 Unit Cost $20 $18 $15 $12 $10 COGS $255 $900 $3000 $6000 $7500 Gross Margin $59 $350 $1000 $2000 $3000 % 9.8% 28.0% 25% 25% 28.6%
  17. 17. Product 2: 5 year Costs and Margins Year 1 Year 2 Year 3 Year 4 Year 5 Product 2 K Units 0.1 5 20 100 1000 ASP $62 $75 $60 $50 $40 Total $K $3.75 $375 $1200 $5000 $40000 Unit Cost $55 $40 $30 $22 $18 COGS $K $5.5 $200 $600 $2200 $18000 Gross Margin $K ($1.75) $175 $600 $2800 $22000 % (46.7%) 53.3% 50% 44% 45%
  18. 18. Services: 5 year Costs and Margins Year 1 Year 2 Year 3 Year 4 Year 5 Services and Maintenance Gross Income $35 $750 $2250 $3500 $5500 COGS $5 $25 $100 $150 $200 Gross Margin $30 $725 $2150 $3350 $5300 Margin % 85.7% 96.7% 95.6% 95.7% 96.4%
  19. 19. Expenses: Where to start • Fixed Cost expenses occur independent of units produced • Salaries • Start with a hiring chart by dept. • Whom do you need & when • State expected salary • In the US add ~22% for payroll taxes, benefits, overhead • Major line items are listed by “department” – Research & Development (R&D) • Engineering and development – Sales & Marketing • Salaries, commissions, expenses – General & Administrative • Management, finance, overhead, rent
  20. 20. Headcount: Product Line 1 -- Existing Product $K Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5 Dir. Engr 150 1 1 1 1 1 1 1 1 Des Engr 120 1 2 2 3 3 2 1 1 Prod Engr 110 1 1 2 2 3 3 3 Apps Engr 100 1 2 3 3 2 Mkg 100 1 1 2 2 2 2 2 1 Sales 100 1 1 2 2 1 1 Support 70 1 1 1 1 1 Staff 50 1 1 1 1 Headcnt 3 5 7 11 14 15 13 11 Salaries $K $93 $150 $200 $300 $1450 $1540 $1320 $1120
  21. 21. Headcount: Product Line 2 – New Product $K Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5 Dir. Engr 150 1 1 1 1 1 1 1 Des Engr 120 1 2 2 3 3 4 6 8 Prod Engr 110 1 2 2 3 3 3 Apps Engr 100 1 2 3 4 5 Mkg 100 1 1 1 1 2 2 2 3 Sales 100 1 2 2 2 3 Support 70 1 1 1 1 1 Staff 50 1 1 1 1 Headcnt 2 4 5 10 14 17 20 25 Salaries $K $55 $123 $150 $275 $1450 $1780 $2120 $2660
  22. 22. Headcount: Services and Maintenance $K Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5 Dir. Svrcs 120 1 1 1 1 1 1 Mgrs 90 1 2 2 2 3 Cust Srvc 60 1 2 3 3 3 Engrs 80 1 1 2 2 2 3 Staff 50 1 1 1 1 Headcnt 2 4 8 9 9 10 Salaries $K $50 $88 $630 $690 $690 $780
  23. 23. Headcount: General & Administrative $K Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5 CEO 150 1 1 1 1 1 1 1 1 COO 120 1 1 1 1 CFO 110 1 1 1 1 Controller 100 1 1 1 1 1 1 1 Finance 70 1 1 1 2 4 4 5 5 VP Ops 110 1 1 1 1 Operations 70 1 3 5 7 8 Staff 50 1 1 2 4 4 4 Headcnt 2 3 4 6 14 18 21 22 Salary $K $55 $80 $98 $133 $1200 $1440 $1650 $1720
  24. 24. Building out Salaries Q1 Q2 Q3 Q4 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 R & D 97 222 250 337 906 1860 2080 2300 2740 Sales & Mktg 50 50 130 194 524 1360 1420 1320 1510 G & A 55 80 98 133 366 1350 1590 1800 1870 Overhead X 1.22 R & D 119 271 305 411 1105 2269 2538 2806 3443 Sales & Mktg 61 61 195 237 639 1659 1732 1610 1842 G & A 67 98 120 162 446 1647 1940 2196 2281 Salaries 247 430 620 810 2190 5575 6210 6612 7566
  25. 25. Non-Salary Expenses R&D Subcontractors and outsourced engineering Non-depreciated tools, servers Marketing and Sales Trade shows Mktg campaigns G&A List IP, legal, accounting expenses Large expenses like rent, legal, travel Either put into G&A or divide among departments as a % overhead
  26. 26. Adding in other expenses Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5 Rent 2 3 4 4 20 30 40 50 Travel 1 1 2 3 20 40 50 60 Legal 10 5 8 8 40 60 80 100 Accounting 5 3 3 4 20 30 40 50 IT 5 5 5 5 20 25 30 35 Consultants 2 4 6 40 50 60 70 Marketing Campaigns 2 8 20 20 100 100 100 100 Reserves 10 10 15 15 100 150 200 300 Total 35 37 51 65 360 485 600 765
  27. 27. NewCo Profit & Loss Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 5% Revenues Product Line 1 $314 $1250 $4000 $8000 $10500 18.8% Product Line 2 $4 $375 $1500 $5000 $40000 71.4% Srvcs & Maint $35 $750 $2250 $3500 $5500 9.8% Total Revenue $353 $2375 $7750 $16500 $56000 100% Cost of Sales $265 $1125 $3700 $8350 $25700 45.9% Gross Income $88 $1250 $4050 $8150 $30300 54.1% Expenses R&D $411 2269 2538 2806 3443 6.1% S&M $237 1659 1732 1610 1842 3.3% G&A $162 1647 1940 2196 2281 4.1% Other $65 360 485 600 765 1.4% Net Income (787) (4685) (2645) 938 21969 39.2%
  28. 28. Questions: Is this a venture fundable business? What is the likelihood of an exit? Was it reasonable to run three separate product lines?
  29. 29. Later on: For Due Diligence: Business Plan Balance Sheet Business Plan Cash Flow statement Growth assumptions and monies projected for next round(s)
  30. 30. Financial Traps • Underestimating marketing and sales expenditures – Especially while “Crossing the Chasm” – Engineers: I’m speaking to you • Underestimating time to: – Raise money – Hire key personnel – Collect Accounts Receivable • Underestimating cash burn
  31. 31. Financial Team Timing Bootstrap Revenues/seed Series A/B exit CPA setup You or part-time bookkeeper CPA and Attorney Review Full-time Bookkeeper or Controller Controller and Part-Time CFO Hire CFO
  32. 32. A Word of Caution This material is not sufficient to run your day-to-day operations If you haven’t already… It’s worth taking a basic accounting course Focus on Financial Statements, Reporting, Auditing Be Smart. Money is Important..!

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