The Roles of Business Planning

in
Successful Business Growth

Jack Derby
Professor of the Practice, Tufts University
Head Coach, Derby Management
Venture Partner, Converge Ventures
 Jack Derby
– 25 year successful track record of coaching over 400 companies.
– 17 year successful track record in medical devices as Executive Vice
President of Becton Dickinson Medical Systems, CEO of Datamedix
Corporation and President of Litton Medical Systems.
– 3 years as President of CB Sports
– Co-founded 14 companies
– Raised over $840 million in venture and private equity
– Current Director: AIM, Aviant Healthcare, Brainshark, Rome
Snowboards, Loci, and Reiser
– Professor, Tufts University, Marketing, (Teacher of the Year in 2015)
– Activities…
• Partner, Converge Venture Partners
• Past Chair, Common Angels
• Past Chair, Association of Corporate Growth
• Past Chair, MIT Enterprise Forum- Distinguished Service Award
• Past Vice Chair, SBANE- Pro Bono Publico Award
• Past United States Peace Corps volunteer
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 Class 5…

• What’s in the Financial Section of a Business Plan?

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 A Business Planning Architecture

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 One more preparation task…

• Analysis of financial assumptions…

Financial Plan Venn Diagram
(c) Carl Richards.

– Internally, what do we want for…

• Revenue, margin and profit growth rates
• Cost of goods
• Sales acquisition costs & Sales channel models
• Hiring rates and ramp speed
• Technology investment rates
• Product costs & expected margins
• G&A expense % @ various stages
• Receivables, payables, and financing costs

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 Now, you can start writing…

What you need…

– A quiet place and time. Executive drawing idea network

on whiteboard © Clarion
– All of your data easily available. Consulting, 2010
– Start writing by yourself. Not a team effort.
– Get the content down quickly.
– Send a first rough draft to others quickly.
– Write draft after draft after draft after…..

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 So What Do I Do Now?

Simple…
Executive drawing idea network
on whiteboard © Clarion
Consulting, 2010
• Read Writing the Winning Business Plan

• For the financials, if you are not fluent in how to do thi

get expert help !
– Experts who have written financial plans for
successful businesses
– Part time CFOs with experience
– Not accountants or auditors or tax people
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 Building Assumptions & Projections
Revenue is #1, #2 & #3
• Spend the majority of your time figuring out the revenue path
• What are the exact target markets
• What are the exact persona definitions
• What are our “Value Propositions”
• Marketing funnels to get qualified leads
• Sales funnels, processes and tools
• Sales hiring and retention plans
• Customer Success & Retention Plans

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 Assessing Your Margins…
• Gross margin plan must be bottoms up % of Sales comments

– Labor, Materials, Overhead

Revenue $ 100 Revenue Recognition - keep it clean!!!!!

This should reflect ALL costs associated with producing the product or service
watch out for hidden costs in R+D and elsewhere that belong here
what can be outsourced cheaper at equal or better quality?

Costs of Sales $ 55 55%

Gross Profit $ 45 45% The % is called Gross Margin.
** represents premium your customer pays you over doing it themselves
** dictates the type of sales and marketing organization that will fit

Operating Expenses
Sales and Marketing $ 13 13% Gross margin provides constraints on sales model - see calc below

• Operating costs
Gen and Admin $ 10 10% G+A runs between 9% and 11% until you become very large

Research and Development $ 10 10% In high-tech, generally runs 8% to 12%; lower in other industries
** investment in R+D should return minimum 10X in future sales
** Great entrepreneurs know when further product line investment is no longer warranted

– Benchmark whenever possible

Constant Make vs. Buy // and Core competencies discussion
Total Operating Expenses $ 33 33%

Operating Profit $ 12 12% Target should be 10% to 15%, when get close to 20%, credibility is strained

– Build manpower plan functionally

Interest
Taxes: Federal and State

Net Income

– Compensation & benefits will represent 70% of costs

• So plan headcount carefully
– Spend a modest amount of time on the remaining costs
– Cash flow is all about timing
– Plan to pay fast & collect slow, execute the opposite

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 Building Assumptions & Projections
The Balance Sheet…

• Define very conservative A/R and A/P days.

• Consider level of inventory and capital expenditures

required to support sales projections.

• Investor ( and yours) focus:

– Demonstrate fiscal restraint
– Hire the best people !!!
– Limit capital expenditures (consider renting / leasing)
– Save money for marketing and selling expenses.

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 Building Assumptions & Projections
Statement of Cash Flows…

• Figure out the level of funds required to achieve all milestones

• Mirror timing of funding requirements as stated in plan
• Investor focus:
– Be conservative
– No surprises !
• Get to cash breakeven quickly

Very important to make a realistic forecast so that funding

covers capital needs until critical milestones are achieved

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 Sensitivity
Analysis…

Models must be able to quickly assess cash impact of…

• What happens if sales are +/- 20%?

• What if unit sell ramp is slower?
• What if average sell price is 20% less than planned?
• What if we accelerate Sales hiring?
• What if product development is delayed?
• What if management change is necessary?
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 Typical Finance Presentation Formats

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 Presentation of Forecasts
Start-Up, Inc.
Income Statement

(in thousands) Year 1 Year 2 Year 3 Year 4 Year 5

Product Sales $ 1,197 $ 3,699 $ 7,500 $ 16,685 $ 37,349

Service Revenue 81 572 1,509 2,499 3,934
Total Revenue 1,278 4,271 9,009 19,184 41,283

Cost of Sales
Product Cost 638 1,699 3,330 6,390 14,365
Service Cost 41 286 755 1,250 1,967
Total Cost of Sales 679 1,985 4,085 7,640 16,332

Gross Margin 599 2,286 4,924 11,544 24,951

Operating Expenses
Research & Development 270 462 618 1,158 1,958
Sales, General & Administrative 1,816 2,489 3,759 5,914 10,142
Total Operating Expense 2,086 2,951 4,377 7,072 12,100

Income (Loss) Before

Interest and Taxes (1,487) (665) 547 4,472 12,851

Interest Expense - - - - 5
Interest Income 33 21 44 118 340

Income (Loss) Before Taxes (1,454) (644) 591 4,590 13,186

Tax Expense - - - 1,231 5,268

Net Income (Loss) $ (1,454) $ (644) $ 591 $ 3,359 $ 7,918

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 Presentation of Forecasts
Start-Up, Inc.
Balance Sheet

(in thousands) Year 1 Year 2 Year 3 Year 4 Year 5

Assets
Cash $ 365 $ 657 $ 548 $ 363 $ 2,332
Accounts Receivable, Net 256 1,452 2,152 5,522 10,991
Inventory 211 910 1,317 2,782 6,777
Total Current Assets 832 3,019 4,017 8,667 20,100

Property, Plant & Equipment, Net 50 87 133 215 324

Other Long-Term Assets, Net 3 1 - - -

Total Assets $ 885 $ 3,107 $ 4,150 $ 8,882 $ 20,424

Liabilities and Stockholders' Equity

Accounts Payable 114 282 473 999 2,609
Accrued Expenses 201 349 534 890 1,401
Taxes Payable - - - 308 1,317
Short-Term portion of Long-Term Debt - - - - 20
Total Current Liabilities 315 631 1,007 2,197 5,347

Warranty Reserve 24 74 150 333 747

Long-Term Debt - - - - 60

Total Liabilities 24 74 150 333 807

Stockholders' Equity:
Preferred Stock 15 40 40 40 40
Common Stock 5 5 5 5 5
Additional Paid-In Capital 1,980 4,455 4,455 4,455 4,455
Retained Earnings (1,454) (2,098) (1,507) 1,852 9,770
Total Stockholders' Equity 546 2,402 2,993 6,352 14,270

Total Liabilities and

Stockholders' Equity $ 885 $ 3,107 $ 4,150 $ 8,882 $ 20,424

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 Presentation of Forecasts
Start-Up, Inc.
Statement of Cash Flows

(in thousands) Year 1 Year 2 Year 3 Year 4 Year 5

Cash Flows from Operating Activities

Net Income (Loss) $ (1,454) $ (644) $ 591 $ 3,359 $ 7,918
Adjustments to net loss to net operating cash
Depreciation/Amortization 16 38 66 100 151
Changes in assets and liabilities
Accounts Receivable, Net (256) (1,196) (700) (3,370) (5,469)
Inventory (211) (699) (407) (1,465) (3,995)
Other Long-Term Assets (5) - - - -
Accounts Payable 114 168 191 526 1,610
Accrued Expenses 201 148 185 356 511
Taxes Payable - - - 308 1,009
Warranty Reserve 24 50 76 183 414
Net Cash (Used In) Provided By
Operating Activities (1,571) (2,135) 2 (3) 2,149

Cash Flows from Investing Activities

Capital Expenditures (64) (73) (111) (182) (260)
Net Cash Used in Investing Activities (64) (73) (111) (182) (260)

Cash Flows from Financing Activities

Proceeds from Long-Term Debt - - - - 100
Repayment of Long-Term Debt - - - - (20)
Equity Investment 2,000 2,500 - - -
Net Cash Provided By Financing Activities 2,000 2,500 - - 80

Net change in Cash 365 292 (109) (185) 1,969

Cash, Beginning of Year - 365 657 548 363

Cash, End of Year $ 365 $ 657 $ 548 $ 363 $ 2,332

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 Presentation of Forecasts
(for inclusion in Executive Summary)
Start-Up, Inc.
Summary Financial Forecast

(in thousands, except units) Year 1 Year 2 Year 3 Year 4 Year 5

Headcount 10 17 30 55 100

Unit Sales Forecast 42 137 300 710 1,690

(the following figures are in thousands)

Unit Price $ 28.5 $ 27.0 $ 25.0 $ 23.5 $ 22.1

Product Revenues 1,197 3,699 7,500 16,685 37,349

Service Revenues 81 572 1,509 2,499 3,934
Total Revenues 1,278 4,271 9,009 19,184 41,283

Unit Cost 15.2 12.4 11.1 9.0 8.5

Unit Margin 13.3 14.6 13.9 14.5 13.6

Product Cost 638 1,699 3,330 6,390 14,365

Service Cost 41 286 755 1,250 1,967
Total Cost 679 1,985 4,085 7,640 16,332

Gross Margin 599 2,286 4,924 11,544 24,951

Income (Loss) Before

Interest and Taxes (1,487) (665) 547 4,472 12,851

Net Income (Loss) $ (1,454) $ (644) $ 591 $ 3,359 $ 7,918

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