Developing Financial
Projections for a
Business Plan
Dave Ziler
February 10, 2016
Agenda
• Basic Income Statement formats
• Testing the business concept
• Tying data & assumptions to the financial projections
• Developing Year 1
• Projecting Years 2 & 3
Three Disclaimers
• There is no “right way”. What is contained in this
presentation is a proven approach. It may not be
consistent with courses you’ve taken or approaches
expressed by other business professionals.
• The method shown to account for cash is not proper
accounting. It’s simply an approach to help think through
the use of the funds.
What Is An Income Statement?
A financial statement that reports revenues and expenses for a
fiscal period as a means of determining how well a company has
performed in creating profit.
Definition
+ Revenue
The amount a company expects to receive upon the
sale of goods and/or services
-
Costs directly associated with generating revenues
Variable Cost
= Contribution Margin
Revenue minus Variable Cost
-
The sum of all direct and indirect selling expenses and
all general and administrative expenses of a company
Sales, General, &
Administrative
(SG&A)
= Operating Profit*
Contribution Margin minus SG&A
+ Earned Interest
Interest earned on investments
-
Corporate tax
Taxes
= Net Income
Income retained by the company
* Also known as Earmings Before Interest & Taxes (EBIT)
Income Statement Example
2015 Operating Plan ($K)
Q1
Q2
Q3
Q4
2015
Revenue
637
640
544
663
2,485
Variable Cost
Cost of Goods Sold-Hdwe
Variable Labor Cost
Sales Commission
Total Variable Cost
19
86
32
136
19
86
32
137
22
100
27
149
7
33
33
73
67
304
124
495
Contribution Margin
CM%
501
79%
504
79%
395
73%
590
89%
1,990
80%
SG&A
Compensation & Benefits
Salary
Taxes
401K
Health/Life Insurance
Total Personnel Exps
212
24
10
22
269
206
23
10
22
262
194
24
10
22
250
281
25
11
22
340
895
96
42
88
1,120
Operating Expenses
Facility Cost
General Insurance
IT
Professional Fees
Travel Expenses
Depriciation & Amort
Marketing
Other Operating expenses
Total Operating Exps
61
9
8
33
17
11
4
11
155
61
9
8
20
17
11
4
11
142
61
9
8
20
17
11
4
11
142
61
9
8
20
17
11
4
11
142
245
36
32
94
67
45
15
46
580
Operating Profit
OP%
78
12%
100
16%
3
1%
109
16%
290
12%
Comments
Key variable cost line items
• Parts & supplies to produce the product
• Labor to build equipment
• Sales commissions
Compensation & Benefits
• Usually the largest SG&A component
• OK to estimate benefits
• For startups
• ~1.10 * salaries w/o benefits
• ~1.25 * salaries w/benefits
Operating Expenses
• Consider applicable line items
• Minimize costs to the extent practical
• Avoid “Other” in your business plan
Summary of Income Statements
• Demonstrates profitability
• Typically used for two purposes:
• Results…..up and running businesses
• Projections…..your focus for the BYOBB
• Vary from business to business at the detailed level
• Projections must be tied to valid & logical assumptions
• Don’t get sidetracked on Variable Cost vs. SG&A
• Be thorough on all projected costs
• There is no “standard” format for a type of business
• There are some items that will be the same (marketing, facilities, etc)
Testing The Business Concept
An approach to the “back of the envelope Excel test”
1.
Assume you are going to win the BYOBB ($40K cash)
2.
Assume $0 revenue for year 1…. unless you already have sales
3.
Start the income statement by listing all cost line items
• Don’t be concerned about variable vs. SG&A
• Be exhaustive….salaries, channel costs, marketing, & more
4.
How much cash is remaining after year 1?
5.
Can you generate enough revenue in year 2 to break even?
6.
Will you be profitable in year 3?
Aligning the Plan With The Financials
Include a summary statement that describes the use of the funding
Quantitative Examples
Qualitative Examples
• Win BYOBB = $40K cash
• Target market segment
• Market share
• Resource additions
• Development costs
• Channel partners
• Hosting costs
• Marketing approach
• Office equipment & supplies
• Advertising approach
Developing Year 1
Beginning Cash
Revenue
Variable Cost
Cost 1
Cost 2
Cost 3
Total Variable Cost
2015
$ 40,000
2016
2017
Beginning Cash
• Assumes winning the BYOBB Grand Prize
Variable Costs
• Zero in Year 1 unless there are sales
Contribution Margin
CM%
SG&A
Salaries & Benefits
Advertising & Marketing
General Insurance
Professional Fees
Cost 4
Cost 5
Cost 6
Cost 7
Total Operating Exps
Operating Profit
OP%
Taxes
Net Income
Sales, General, & Administrative
• These 4 are the most common
• Be thorough
• Include all lines….even if Y1 = 0
Net Income
• A Y1 loss is acceptable
Estimating Years 2 & 3
Beginning Cash
Revenue
Variable Cost
Cost 1
Cost 2
Cost 3
Total Variable Cost
Contribution Margin
CM%
SG&A
Salaries & Benefits
Advertising & Marketing
General Insurance
Professional Fees
Cost 4
Cost 5
Cost 6
Cost 7
Total Operating Exps
Operating Profit
OP%
Taxes
Net Income
2015
$ 40,000
2016
2017
Cash Estimates (does not consider cash flow)
• Y2 = $40K + Y1 Net Income
• Y3 = Y2 Beginning Cash + Y2 Net Income
• Don’t forget about taxes!
• May assume that you acquire additional funding
Revenue
• Tie to price & market share assumptions
• Must be realistic
Variable Costs
• Consider channel costs & sales commission
• Raw material examples:
• Ingredients for a restaurant
• Materials to make clothing
• Inventory for a beauty supply shop
Sales, General, & Administrative
• Tie resource add timing to assumptions
• Plan for ongoing costs
Net Income
• Profitability in Y2 or Y3
• May be negative if additional funding is raised
Summary
• Be thorough when considering costs…the best place to start
• Assumptions to construct the financials need to be consistent
with the business plan
• Financial projections need to be consistent with the
assumptions
• They are estimates……do they make sense?