Creating Financial ProjectionsWhat Must Be IncludedThree Types of ProjectionsMost Critical Requirement—RealismThe Revenue ModelThe Revenue Model (cont.)Factoring in A/RExpensesExpenses (cont.)For Each Set of ProjectionsStartup Capital RequiredFinancial Projections—ResultsSlide 13Creating Financial ProjectionsDr. Stan AbrahamMHR 423Spring 2005What Must Be Included•Two years of projections (in Excel)–Project cash flow, not income statements or balance sheets–By month, with subtotals for each year–Of revenues (and components of revenues)–Of expenses (all that are likely)–All subtotaled•Assumptions as to how the numbers were derived (in Word)–In detail, accounting for every number in the projections (do line by line)Three Types of Projections1. Most likely case - Contains your very best estimates - Forms the basis of your operating plan2. Worst-case scenario - Proves you can survive a disastrous start - Useful for calculating capital required and B/E 3. Best-case scenario - Useful for anticipating problems of higher-than-expected demand and too-rapid expansion - Will not be required this quarter Most Critical Requirement—Realism•Anyone can string together “numbers”•Unrealistic numbers can be spotted easily•All credibility is lost•Using realistic numbers•Requires research•Requires experience•Requires resisting making them look better than they are•The numbers used also reflect how you will manage the company•How you will drive revenues (targets to achieve)•How you will control costs and expenses (budgets to be adhered to)The Revenue Model•Include a separate line for each component of revenue, and one for “Total Revenues,” e.g.,•Sales of main product•Sales of accessories•Sales from consulting and service calls•This comes from what you have already done in your marketing plan •Remember to write down how all the numbers were derived (include only cash receipts, not accounts receivable)The Revenue Model (cont.)•If you have reason to believe that you will get paid according to a pattern, e.g., 50% within 30 days, 30% 60 days, 10% 90 days, 5% 120 days, and 5% never, then cash receipts must take into account this pattern (see next slide)•This is how accounts receivable are factored into a cash projectionFactoring in A/RMonth >>> 1 2 3 4 5 6Revenues 150 250 350 500 700 950Factoring in the pattern 50-30-10-5-5 introduced earlier:150 Revenues 75 45 15 8250 Revenues 125 75 25 13350 Revenues 175 105 35 18500 Revenues 250 150 50 25700 Revenues 350 210 70950 Revenues 475 285Total Revenues 75 170 265 388 548 753 etc.Expenses•Include every kind of cash expense your company will possibly incur, e.g.,SalariesTravel and entertainmentWages BrochuresBenefits Advertising & promotionEquipment Coupons and discountsSupplies Consulting/accounting servicesTelephone Legal servicesHardware/software Insurance (pay only when due)Leases (autos, equipment) Website development/maintenanceRent (or mortgage payments) TrainingCommissions Conferences/trade shows, etc.Expenses (cont.)•You may need supplemental schedules•These contain details that would clutter the main projections•Only the totals from these schedules are transferred to the main projection•For example, numbers of people hired at different times and at different salaries (only the total salary line is transferred to the projections)•Remember to build in benefits (typically 15% for partial and 25% for full, as a percent of someone’s salary; hourly-wage earners don’t get benefits)•Remember to allow for raises or other increases (e.g., bonuses) in costs from year 1 to year 2For Each Set of Projections•Include a row called “Monthly Surplus (Loss)” which is monthly total revenues less monthly total expenses•Note that these numbers are not profit numbers (yet)•Under that, include a row called “Cumulative Surplus (Loss)” which is the sum, in any one month, of all previous “surplus (loss)” figures•This cumulative surplus line will initially be negative for several months•The month in which it becomes permanently positive, in the most likely case, is called the BREAKEVEN MONTHStartup Capital Required•This is derived from the worst-case scenario•The most negative number in the “cumulative surplus (loss)” row is the startup capital required–“If, say, $1.5M is the startup capital required as determined above, then were you to start off with that amount of capital, you could survive the worst times you could imagine for this business”Financial Projections—Results•You will be able to give the following results or objectives to an investor from your financial projections•Est. total revenues, Yrs 1 and 2 (from ML case)•Est. profit (EBIT), Yrs 1 and 2 (from ML case)•Startup capital required (from worst case)•Breakeven month (from ML case)•Return on investment, Year 2, assuming the investment is the startup capital and the profit earned is the sum of Years 1 and 2 (ML case)Any