EIA2017Italy - Marco Cantamessa - Startup Financials KPIs

EIA2017Italy - Marco Cantamessa - Startup Financials KPIs

• 1.
  Financials for startups… the basics Marco Cantamessa
• 2.
  Objectives • This isNOT a course on accounting and finance (go take one, seriously) • This is JUST a presentation on key financial variables that matter in startups Helping the "clueless" survive in the EIA program Directing "those who know" to the right stuff
• 3.
  But…. are entrepreneurshipand startups all about money? …or is it about…. But, if it is about impact, why should we be speaking of money and financials? Because your stakeholders care about money Because money measures what happens in business impact?
• 4.
  If you werein an established firm, things would be (relatively) easy In an existing business Therefore … Business activities are more or less stable Small growth rates, no particular investment required Products and services are established and subject to incremental change Revenue model and cost structure are given and stable Products and services are profitable (i) At the least, the Contribution Margin CM > 0 where CM = Unit Price – Variable Cost  Sales support the recovery of fixed costs Products and services are profitable (ii) Overall revenues are higher than total costs and expenses  The company makes a profit, to be reinvested and/or distributed as a dividend Size of the business and relationships with customers and suppliers are relatively stable Taking into account actual inflows and outlays, the Cash Flow from operations is positive Additional money might be required to fund - investments supporting growth, with foreseeable outcomes - working capital It is relatively easy to define business cases and business plans and explain them to investors (for raising equity) and creditors (banks or bondholders, for raising debt)
• 5.
  The main focuswould be on three main documents • Profit and Loss (focuses on flows of revenues and costs during a fiscal year) • Balance Sheet (focuses on stocks of assets and liabilities at the end of a fiscal year) • Financial Statement (focuses on actual inflows and outflows of money) These documents can be related • to the past (tells shareholders and stakeholders about the performance of the business during the last fiscal year, with comparisons over the previous years) • to the future (tells shareholders and stakeholders about your plans for the future 3-5 years)
• 6.
  The Profit &Loss statement Profit & Loss How do you calculate it (people, services, stuff and assets) + Sales Unit price x volume of different goods - Costs of Goods Sold Direct costs of material and labor going into products and services = Gross margin (or Gross profit) - Operating expenses Compute and sum expenses due to Sales, Research & Development, General & Administrative. = EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization) - Depreciation Compute annual depreciation of fixed assets being used by the firm (this is not a cash flow!) - Non operating items Add non-operating income or expenses = EBIT (Earnings Before Interest and Taxes) + Financial income – financial expenses Compute financial gains and interest paid for outstanding debt = EBT (Earnings Before Taxes) - Taxes Compute relevant taxes = Net Profit Part of the net profit will be paid as a divident, part as retained earnings going to the balance sheet
• 7.
  The Profit &Loss statement Balance sheet How do you calculate it ASSETS (what the company OWNS) Current assets Cash, temporary receivables, inventory, supplies Investments Financial investments Property, land and equipment Value of fixed assets minus cumulated depreciation Intangible assets Goodwill, trade names, etc. Other assets LIABILITIES (what the company OWES) Current liabilities Short-term debt to any stakeholders (suppliers, banks, government, etc.) Long-term liabilities Long-term debt outstanding (banks and bondholders) STOCKHOLDERS’ EQUITY (what the owners of the company OWN) Common stock Paid-in capital at par value (founders) + additional paid-in capital (by investors) Retained earnings Stock of retained earnings from previous years Remember STOCKHOLDERS EQUITY = ASSETS – LIABILITIES The balance sheet is a snapshot taken at a given instant in time
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  The Profit &Loss statement Cash flow statement How do you calculate it Cash flow from operating activities Cash collected from customers – cash paid to suppliers and employees – cash paid for interest and taxes (roughly equates to what you see in the P&L, but with differences due to terms of payment) Cash flow from investing activities Cash invested in equipment or other investment (you will see it in the balance sheet as fixed assets and in the P&L as depreciation) Cash flow from financing activities Cash received from equity holders and bondholders – dividends paid out Net variation of cash during the year = Cash flow from operating activities – investments + financing Remember The financial statement shows the actual flow of money in and out of the firm Cash is King (and possibly «more important than your mother»)
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  Indicators • Profitability indicators •ROS (operating profits / sales) • ROI (net income / investment made in the firm) • ROE (net income / shareholders’ equity) • Balance sheet indicators • Current and quick ratio (checks the short-term financial situation) • Cash conversion cycle (days to collect from sales + days of inventory - days to to pay for goods) • Turnover (sales / working capital)
• 10.
  But you areworking in a startup! In a startup Therefore … Business activities are anything but stable High growth rates, requiring significant investment Products and services are not established and subject to both incremental and radical change Revenue model and cost structure are continuously subject to experiments Products and services are not profitable (i) Contribution margins might be negative, given the need to achieve growth, reach critical mass, and potentially gain from first-mover advantage Products and services are not profitable (ii) Overall revenues are usually lower than total costs, given the significant investments Size of the business and relationships with customers and suppliers are not stable The cash flow from operations is usually negative, not counting investments to be made Additional money might be required to fund - investments supporting growth, with foreseeable outcomes - working capital Business cases and business plans to be shown cannot rely on prior experience
• 11.
  But you areworking in a startup! Initial development Product / market development Expansion time The key lies in understanding cumulated cash flow Seed funding Early stage funding Late stage / expansion funding Operating cash flow turns postive Cash flow turns postive You break even
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  …and you needfinance • Why are investments done in stages, from seed to expansion? • What do investors look for when deciding on an investment? • Strength of value proposition, attractiveness of market, quality of team • But how can they measure this? • Evidence from the past  metrics showing "the business is ticking" (regardless of overall profitability) • Projections for the future  the financials section of a business plan • Why are metrics important? • Because they are real • Because they can be compared • Because they define realistic assumptions for a business plan
• 13.
  Financial startup metrics •Cash burn rate = how much money you are spending every month • Runway = how much time do you have before you run out of cash (cash position / burn rate) • % use of funds = what proportions of cash expenditure are respectively used to fund technical development and marketing (and other stuff) • Costs per specific items (especially fixed costs) • how much money does each worker cost? • how much are you spending for real estate?
• 14.
  Marketing startup metrics •You acquire customers in four main ways • Direct sales / highly targeted advertising • Advertising broadcast to target segment • Virality (spontaneous or with incentives) • Customer Acquisition Cost = the average cost required to acquire a new customer (look out for time lags) • Conversion rates = % of users that move from one stage to another in the sales process (e.g., prospects accepting to be visited by salesperson, free users switching to premium, etc.) • Virality = number of new customers that spontaneously join in per each existing customer in a given time frame • Churn rate = % of existing customers who leave in a given time frame • Growth rate of customer base • Sales cycle = time it takes for a customer to sign up
• 15.
  Profitability startup metrics •Average Revenue per User = average revenue per time unit accruing from each customer • Cost To Serve = average cost spent on serving a customer per time unit (direct costs + CRM) • Credit terms = payment delays granted to customers • Commissions spent on distribution
• 16.
  A quick simulationcan show you how sensitive a startup can be Virality 0.025 new users per user per month Churn 4%per month % going to mkt 35% CAC 10€/user CTS 2.5€/usermonth ARPU 5€/usermonth Runway 12months Sales cycle 1month Trade credit 1months Total amount raised (M€) 25.6 Million customers 0.269 -€ 5 € - € 5 € 10 € 15 € 20 € 25 € 30 1 60 Millions Month Cash injections Cash available Cash flow from operations 0 100 200 300 400 500 1 60 Thousands Users
• 17.
  A quick simulationcan show you how sensitive a startup can be Virality 0.025 new users per user per month Churn 4%per month % going to mkt 35% CAC 10€/user CTS 2.5€/usermonth ARPU 5€/usermonth Runway 12months Sales cycle 1month Trade credit 1months Or trade credit climbs to 3 months Total amount raised (M€) 6.4 Million customers 0.071 -€ 5 € - € 5 € 10 € 15 € 20 € 25 € 30 1 60 Millions Month Cash injections Cash available Cash flow from operations 0 100 200 300 400 500 1 60 Thousands Users
• 18.
  Financial statement Y1Y2 Y3 Y4 Y5 + Sales - Costs of Goods Sold = Gross margin - Operating expenses = EBITDA - Depreciation - Non operating items = EBIT + Financial income – financial expenses = EBT - Taxes = Net Profit How can you build a 3-5 year projection of your business? Start from worksheets and feed your projected P&L, balance sheet and financial statement from there Base your assumptions on your metrics Work at a fine level of detail (quarterly or monthly) in the short term, but not in the long term Balance sheet Y1 Y2 Y3 Y4 Y5 + Sales - Costs of Goods Sold = Gross margin - Operating expenses = EBITDA - Depreciation - Non operating items = EBIT + Financial income – financial expenses = EBT - Taxes = Net Profit Profit & Loss Y1 Y2 Y3 Y4 Y5 + Sales - Costs of Goods Sold = Gross margin - Operating expenses = EBITDA - Depreciation - Non operating items = EBIT + Financial income – financial expenses = EBT - Taxes = Net Profit
• 19.
  Top line Y1Y2 Y3 Y4 Y5 Product line 1 Unit sales Price Revenue COGS Product line 2 Unit sales Price Revenue COGS Personnel Y1 Y2 Y3 Y4 Y5 Headcount Type 1 Type 2 Costs Type 1 Type 2 Other costs Y1 Y2 Y3 Y4 Y5 Cost 1 Cost 2 Cost … Investments Y1 Y2 Y3 Y4 Y5 Investment 1 Investment 2 Investment … At the minimum, you need worksheets for - Production - Personnel - Other expenses - Investments Watch out for underestimation of costs Watch out for underestimation of time
• 20.
  Conclusions • You don’tneed to be a professional accountant to run a startup • You need to know something about • Basic financials (P&L, balance sheet, cash flow statement) • Startup-specific metrics • Fine-tuning the value proposition and the sales strategy is both an art and a science • In the world of startups, success has to do with the capability to execute this fine-tuning better than competitors (having brilliant ideas and being a first-mover often are not enough)