Business Financial Planning With Microsoft Excel [1 ed.] 1032534419, 9781032534411

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BUSINESS FINANCE

PLANNING WITH

MICROSOFT EXCEL ®

®

BUSINESS FINANCE

PLANNING WITH

MICROSOFT EXCEL ®

Gavin Powell

Boca Raton and London

®

First edition published 2023 by CRC Press 6000 Broken Sound Parkway NW, Suite 300, Boca Raton, FL 33487-2742 and by CRC Press 2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN © Gavin Powell CRC Press is an imprint of Taylor & Francis Group, LLC Reasonable efforts have been made to publish reliable data and information, but the author and publisher cannot assume responsibility for the validity of all materials or the consequences of their use. The authors and publishers have attempted to trace the copy­ right holders of all material reproduced in this publication and apologize to copyright holders if permission to publish in this form has not been obtained. If any copyright material has not been acknowledged please write and let us know so we may rectify in any future reprint. Except as permitted under U.S. Copyright Law, no part of this book may be reprinted, reproduced, transmitted, or utilized in any form by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying, microfilming, and recording, or in any information storage or retrieval system, without written permission from the publishers. For permission to photocopy or use material electronically from this work, access www .copyright.com or contact the Copyright Clearance Center, Inc. (CCC), 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400. For works that are not available on CCC, please contact [email protected] Trademark notice: Product or corporate names may be trademarks or registered trade­ marks and are used only for identification and explanation without intent to infringe. Library of Congress Cataloging‑in‑Publication Data A catalog record has been requested for this title. ISBN: (hbk) 978-1-032-53441-1 ISBN: (pbk) 978-1-032-00806-6 ISBN: (ebk) 978-1-003-17583-4 DOI: 10.1201/9781003175834 Typeset in Avenir LT Pro and Adobe Garamond Pro by DerryField Publishing Services

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Contents

List of Figures and Worksheets

xi

About the Author

xix

Introduction

xxi

Chapter 1 In the Beginning

1

1.1

From Problem to Solution

2

1.2

Introducing the Case Study: BDaaSB

4

1.2.1 Where to Begin

6

1.2.2 Competitors

6

1.2.3 Loading and Analytics

7

1.2.4 Value in Presentation

7

1.2.5 Flexibility and Added-Value Spin-Offs

7

1.2.6 A Problem to Solve

9

1.2.7 Security

12

1.3

Tools, Processes, and Flow in This Book

14

1.4

Conclusion

18

Chapter 2 Your Business Goals

21

2.1

Mission and Vision to Core Business Values

22

2.2

Core Business Values to SWOT Matrix

25

2.3

SWOT Matrix to SWOT Matrix Response

28

2.4

SWOT Matrix Response to Strategic Goals and SMART Objectives

29

2.4.1 Mapping Strategy over Time

31

vii

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Business Finance Planning with Microsoft® Excel ®

2.4.2 SMART Objectives Is a Schedule of Events

35

2.4.3 Executing and Achieving SMART Objectives

39

2.5

Conclusion

39

2.6

The Spreadsheet So Far

43

Chapter 3 Predicting Expenses with SMART Objectives

45

3.1

Revisiting SMART Objectives

46

3.2

Assessing Labor Costs

46

3.2.1 Business Cycle Timeline Structure

48

3.2.2 Specific Labor Requirements and Labor Costs

51

3.3

Equipment and Fixed-Asset Costs

60

3.3.1 Adding to Financial Statements

61

3.4

General Costs and Expenses

64

3.4.1 Legal Costs and Requirements

64

3.4.2 Other Expenses

66

3.4.3 Adding to Financial Statements

67

3.5

Conclusion

74

3.6

The Spreadsheet So Far

74

Chapter 4 Predicting Sales Using Your Competitors 4.1

4.2 4.3

Generating Pricing Strategy with Marketing Analysis Tools

75

76

4.1.1 STEEP (Competitive Market Industry) Analysis

76

4.1.2 Porter’s 5 Forces

78

Competitors—Who and Why?

81

4.2.1 Competitors for the BDaaSB Case Study

81

Marketing Strategy and The 4 Ps

84

4.3.1 Product, Price, and Sales Revenue Forecasting

85

4.3.2 Promotion, Place, and the Beginnings of

Marketing Expenses

100

4.4

Conclusion

104

4.5

The Spreadsheet So Far

104

Chapter 5 Predicting Marketing Costs

105

5.1

5.2

Market and Industry Segmentation

105

5.1.1 Market Segmentation

106

5.1.2 Industry Segmentation

110

Marketing Costing and Budgeting

115

5.2.1 Sales-Lead Generation Cost

115

5.2.2 Continuing Sales Forecasting from Chapter 4

115

5.2.3 Marketing Costs Estimate

118

Contents ix

5.3

Conclusion

131

5.4

The Spreadsheet So Far

131

Chapter 6 Formal Financial Planning and Budgeting 6.1

Startup Balance Sheet

133

134

6.2

Schedule of Startup Expenses

137

6.3

Proforma Income Statement

137

6.3.1 Quarterly One-Year Proforma Income Statement

140

6.3.2 Quarterly Two-Year Proforma Income Statement

140

6.3.3 Annualized Five-Year Proforma Income Statement

140

6.4

Proforma Balance Sheet

142

6.4.1 Adding to the Balance Sheet

143

6.5

Returning to the Income Statement

152

6.6

Proforma Cash-Flow Projection

157

6.6.1 What’s in the Cash-Flow Projection?

157

6.6.2 Quarterly Two-Year Proforma Cash-Flow Projection

158

6.6.3 Annual Five-Year Proforma Cash-Flow Projection

158

6.7

Final BDaaSB Financial Statements

159

6.8

Final Financials for Your Business Idea

161

6.9

Conclusion

164

6.10 The Spreadsheet So Far

170

Appendix A

Case Study

171

Appendix B

Your Business

181

Appendix C

Tools and Additions

187

Marketing Return on Investment (ROI)

187

Customer Acquisition Cost (CAC)

188

Credit Policy Costs

189

Trend Analysis

190

Ratio Analysis

199

List of Figures and Worksheets

Chapter 1 Figure 1.1

General process flow sections used in this book

17

Figure 1.2

Detailed process flow sections used in this book

18

Business planning tools used in this book

15

Worksheet 1.1

Chapter 2 Figure 2.1

Flowing from Core Values to SWOT Analysis Strengths

26

Figure 2.2

Phase 1 (Prototyping): A one-year GAP analysis representation from planning to startup phases

32

Phase 2 (Cloud Based): A three-to-five-year GAP analysis representation from startup to growth phases

33

A blank GAP analysis diagram for you to begin projecting into the future

34

Creating core business values for a modern Software as a Service for the BDaaSB case study

23

Worksheet 2.2

Creating core business values

24

Worksheet 2.3

BDaaSB SWOT

27

Figure 2.3 Figure 2.4

Worksheet 2.1

xi

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Business Finance Planning with Microsoft® Excel ®

Worksheet 2.4

Creating your SWOT

27

Worksheet 2.5

Responding to the BDaaSB SWOT matrix

28

Worksheet 2.6

Responding to your SWOT with the beginnings of planning

30

Worksheet 2.7

A strategy map to establish strategic goals for BDaaSB (3–5 years)

31

Create your strategy map to establish strategic goals for your business idea

31

BDaaSB five-year management and organizational strategy

34

Worksheet 2.8 Worksheet 2.9

Worksheet 2.10 Creating a five-year management and organizational strategy

35

Worksheet 2.11 Breaking down strategic goals into multiple SMART objectives

36

Worksheet 2.12 Creating your own SMART objectives

38

Worksheet 2.13 Executing and achieving BDaaSB one-to-three-year SMART objectives (continues on next page)

40

Worksheet 2.14 Executing and achieving your own SMART objectives

42

Chapter 3 Figure 3.1

The beginnings of the income statement part of the financial statements for BDaaSB

58

Worksheet 3.1

Finding expenses in SMART objectives

47

Worksheet 3.2

What needs to be funded for BDaaSB over time

49

Worksheet 3.3

Planning funding of the separate phases of your new venture

50

Forecast staffing requirements and labor costs (lead roles only) for BDaaSB

52

Forecast staffing requirements and labor costs (lead roles only) for your business

52

Multiple phase forecast employee-only staffing requirements and labor costs for BDaaSB

54

Multiple-phase forecast employee-only staffing requirements and labor costs for your business

54

What we get from analyzing labor costs and where we are going to put it for BDaaSB

55

Worksheet 3.4 Worksheet 3.5 Worksheet 3.6 Worksheet 3.7 Worksheet 3.8

List of Figures and Worksheets xiii

Worksheet 3.9

What we get from analyzing labor costs and where we are going to put it for your business

56

Worksheet 3.10 Fitting in labor costs to the income statement for BDaaSB

57

Worksheet 3.11 Fitting in labor costs to the income statement for your business

58

Worksheet 3.12 BDaaSB case study initial expenses on hardware and software

61

Worksheet 3.13 Converting BDaaSB equipment expenses into a financial statement compatible format

62

Worksheet 3.14 BDaaSB expenses plugged into the income statement

62

Worksheet 3.15 Mapping out your business’s initial equipment expenses

62

Worksheet 3.16 Reformatting your business’s equipment expenses projections into the future

63

Worksheet 3.17 Projecting your business’s income statement expenses from Worksheets 3.15 and 3.16

63

Worksheet 3.18 Beginning to build startup expenses for the BDaaSB case study

65

Worksheet 3.19 Beginning to build startup expenses for your business

67

Worksheet 3.20 BDaaSB case study general costs and expenses in the income statement for the first year

68

Worksheet 3.21 BDaaSB case study general costs and expenses in the income statement for the second year

69

Worksheet 3.22 BDaaSB case study general costs and expenses in the income statement for the first five years

70

Worksheet 3.23 Your business general costs and expenses in the income statement for the first year

71

Worksheet 3.24 Your business general costs and expenses in the income statement for the second year

72

Worksheet 3.25 Your business general costs and expenses in the income statement for the first five years

73

Chapter 4 Figure 4.1

Porter’s 5 Forces and competitive advantage for BDaaSB

79

Figure 4.2

Porter’s 5 Forces and figuring out the competitive advantage of your business

80

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Business Finance Planning with Microsoft® Excel ®

A STEEP analysis for assessment of strategic change with the BDaaSB case study

77

A STEEP analysis for assessment of strategic change on your busines

78

Worksheet 4.3

BDaaSB competitor functional matrix

83

Worksheet 4.4

Creating a competitor functional matrix for your business

84

Worksheet 4.5

Estimated pricing information for Doopex.com where BDaaSB uses only $747 per month

87

Estimated pricing for Google Cloud pricing, where $326 per month applies to BDaaSB

88

Estimated pricing information for Oracle BDaaSB is not the same market

90

A simple calculation of average competitor monthly revenues for your business

91

Projected revenues out for five years based on expected customer counts for BDaaSB

92

Worksheet 4.1 Worksheet 4.2

Worksheet 4.6 Worksheet 4.7 Worksheet 4.8 Worksheet 4.9

Worksheet 4.10 General revenue stream for BDaaSB for four quarters of 2018

94

Worksheet 4.11 General revenue stream for BDaaSB for four quarters of 2019

95

Worksheet 4.12 General revenue stream for BDaaSB from 2018 to 2022

96

Worksheet 4.13 Projecting potential revenues out for five years based on expected customers

97

Worksheet 4.14 Projecting revenues out for five years based on expected customer

97

Worksheet 4.15 Projecting revenues out for five years based on expected customers for a restaurant

98

Worksheet 4.16 Projecting revenues out for five years based on expected customers for a car company

98

Worksheet 4.17 General revenue stream for your business over four quarters of the first year

99

Worksheet 4.18 General revenue stream for your business over four quarters of the second year

100

Worksheet 4.19 General revenue stream for your business projected over five years

100

Worksheet 4.20 Sales-lead generation service options as of 2017

102

List of Figures and Worksheets xv

Chapter 5 Figure 5.1

Breaking down market segmentation into four groups

107

Figure 5.2

Sales-lead generation service options as of 2017

116

Figure 5.3

How the BDaaSB marketing costs are calculated in detail

119

Figure 5.4

BDaaSB uses different levels of customer-conversion ratios in different quarters

120

BDaaSB and how the different numbers are connected to each other

123

Figure 5.5

A STEEP analysis for assessment of strategic change with the BDaaSB case study

107

Filling in a blank market segmentation map for your business idea

109

Industry segmentation/market segmentation by industry (partners excluded)

111

Industry and market segmentation by industry as a blank canvas

112

BDaaSB sales forecast projections per month and per year (repeat of Worksheet 4.9)

117

Projecting revenues out for five years from customers and sales forecasting (Worksheet 4.13)

117

Projecting revenues out for five years based on expected customers for a restaurant (Worksheet 4.15)

118

Worksheet 5.8

Estimated marketing costs to get BDaaSB started

118

Worksheet 5.9

Estimating the cost for a BDaaSB sales-lead generation service

119

Worksheet 5.1 Worksheet 5.2 Worksheet 5.3 Worksheet 5.4 Worksheet 5.5 Worksheet 5.6 Worksheet 5.7

Worksheet 5.10 A guess at estimated marketing costs to get your own business started (a restaurant)

121

Worksheet 5.11 BDaaSB quarterly estimates for the various marketing activities

122

Worksheet 5.12 BDaaSB quarterly and annual estimates for the various marketing activities

122

Worksheet 5.13 Plugging into the BDaaSB 2018 quarterly income statement

124

Worksheet 5.14 Plugging into the BDaaSB 2019 quarterly income statement

125

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Business Finance Planning with Microsoft® Excel ®

Worksheet 5.15 Consolidating into the BDaaSB five-year proforma income statement

126

Worksheet 5.16 Quarterly and annual estimates for the various marketing activities for your business idea

127

Worksheet 5.17 Plugging into the BDaaSB 2022 quarterly income statement

128

Worksheet 5.18 Plugging into the quarterly income statement for your business idea

129

Worksheet 5.19 Consolidating for your business idea into a five-year proforma income statement

130

Chapter 6 Figure 6.1

Current SBA loan rates and limitations

147

Figure 6.2

Increasing the debt load in order to get a positive cash flow for BDaaSB in Year 1

160

Worksheet 6.1

Starting balance sheet for the BDaaSB case study

134

Worksheet 6.2

Starting balance sheet for your business idea

135

Worksheet 6.3

A blank starting balance sheet for your business idea

136

Worksheet 6.4

Schedule of startup expenses for the BDaaSB case study

137

Worksheet 6.5

Schedule of startup expenses for your business idea

138

Worksheet 6.6

Proforma income statement in quarters for 2018 for the BDaaSB case study

141

Proforma income statement in quarters for 2019 for the BDaaSB case study

142

Five-year proforma income statement for the BDaaSB case study

143

Five-year proforma balance sheet for the BDaaSB case study

144

Worksheet 6.7 Worksheet 6.8 Worksheet 6.9

Worksheet 6.10 Leaders’ labor costs showing shares for wages for the balance sheet

149

Worksheet 6.11 Plugging interest and taxes into the BDaaSB 2018 quarterly income statement

154

Worksheet 6.12 Plugging interest and taxes into the BDaaSB 2019 quarterly income statement

155

Worksheet 6.13 Consolidating interest and taxes into the BDaaSB five-year proforma income statement

156

List of Figures and Worksheets xvii

Worksheet 6.14 Two-year cash-flow projection in quarters for BDaaSB

159

Worksheet 6.15 Five-year cash-flow projection for BDaaSB

159

Worksheet 6.16 Final proforma income statement for the BDaaSB case study

162

Worksheet 6.17 Final proforma balance sheet for the BDaaSB case study

163

Worksheet 6.18 Proforma cash flow for the BDaaSB case study

164

Worksheet 6.19 Quarterly Year-1 income statement for your business idea

165

Worksheet 6.20 Quarterly Year-2 income statement for your business idea

166

Worksheet 6.21 Five-year income statement for your business idea

167

Worksheet 6.22 Five-year proforma balance sheet for your business idea

168

Worksheet 6.23 Quarterly two-year cash flow for your business idea

169

Worksheet 6.24 Five-year cash flow for your business idea

169

Appendix A This appendix presents a more precise version of the financial statements for the case study built sequentially throughout the chapters of this book, includ­ ing explanations of some line items.

Appendix B This appendix presents a more precise version of the financial statements for your business built sequentially throughout the chapters of this book, including explanation of some line items.

Appendix C Figure C.1

Cash on hand for BDaaSB

191

Figure C.2

Sales revenue for BDaaSB

191

Figure C.3

Cash and Sales for BDaaSB

192

Figure C.4

Long-term debt (long-term liabilities) for BDaaSB

192

Figure C.5

Cost of sales—e.g., expenses and debt for BDaaSB

193

Figure C.6

Gross profit (EBITDA) for BDaaSB

193

xviii

Business Finance Planning with Microsoft ® Excel ®

Figure C.7

Net income/loss for BDaaSB

194

Figure C.8

Multiple values comparison for BDaaSB

194

Figure C.9

Cash on hand for your business idea

195

Figure C.10 Sales revenue for your business

196

Figure C.11 Cash and sales for your business

196

Figure C.12 Long-term debt (long-term liabilities) for your business

197

Figure C.13 Cost of sales—e.g., expenses and debt for your business

197

Figure C.14 Gross profit (EBITDA) for your business

198

Figure C.15 Net income/loss for your business

198

Figure C.16 Multiple values comparison for your business

199

Projected customer acquisition cost and lifetime value per customer for the BDaaSB case study

187

Worksheet C.2 Projected customer acquisition cost and lifetime value per customer—e.g., a restaurant

188

Worksheet C.3 Projected customer acquisition cost and lifetime value per customer for the BDaaSB case study

188

Worksheet C.4 Projected customer acquisition cost and lifetime value per customer—e.g., a restaurant

189

Worksheet C.5 Trend analysis comparison calculations pull from financial statements for BDaaSB

190

Worksheet C.6 Trend analysis comparison calculations pull from financial statements for your business

195

Worksheet C.7 Projected customer acquisition cost and lifetime value per customer for the BDaaSB case study

200

Worksheet C.8 Projected customer acquisition cost and lifetime value per customer—for example, a restaurant

201

Worksheet C.1

About the Author

Gavin Powell MBA, BSc Computer Science, Oracle Certified Professional

Author Gavin Powell is a professional database subject matter expert with 30 years’ experience as an IT professional, working in fields such as database architecture, operational administration, performance tuning, troubleshooting teaching, data warehousing, leadership, and development. Gavin has also built and run a small software business creating accounting software. Gavin has authored the following books: • • • • •

Working with Oracle GoldenGate 12c Database Modeling Step by Step Oracle SQL Jumpstart with Examples (with Carol McCullough-Dieter) Oracle Performance Tuning for109Rz Oracle Data Warehouse Tuning for 10gR2

xix

Introduction

Welcome! In this book I will show you how to visualize, plan, and put into motion your idea for a start-up company. We’ll use Microsoft ® Excel ® as a tool that makes it easier to build a business financial planning process for your new business venture. The road map for the book flows as a process from (1) presenting a case study of a business start-up, after which we proceed onto the process itself: (2) create your goals and objectives, (3) figure out your expenses from those goals and objectives, (4) make a guess at your potential sales revenue based on what your competitors charge their customers, (5) predict marketing costs, and (6) finalize your financial analysis and presentation from your set of financial statements. This book is written around an IT startup case study and presents a host of Excel worksheets describing the case study along with accompanying blank forms for your business, so that you can build parts of your own business plan as you go. This is intended to be a practical guide that teaches and demonstrates by example, in the end presenting you with a usable financial model for you to build and tweak your financial plan in a set of customizable Excel worksheets. The only caveat is that you have to be aware that changes to the worksheets will affect worksheets further on, and certain types of structural changes to the worksheets may involve your having to change dependent worksheet structures as well. So, as a first pass through, try to use the model without adding or deleting columns or rows in the worksheets; the worksheets are yours to modify later on to experiment with different scenarios to match your new business idea.

xxi

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Business Finance Planning with Microsoft® Excel ®

Chapter 1 covers the process of going from problem to solution; we intro­ duce the case study for this book; the tools we use and how to use them; and the business-planning flow process. Chapter 2 describes the importance and development of a mission and vision statement for the case study and for your business idea; the identifica­ tion or creation of core business values; the SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis and matrix and how they work; develop­ ing and setting strategic goals; and how to use SMART (Specific, Measurable, Achievable, Relevant, and Time-Bound) objectives to link together your goals. Chapter 3 dives into the expenses you might expect—and not expect—in the case study and your business idea. These include labor costs, equipment and fixed-asset costs, and general costs and expenses. Chapter 4 turns to income and how you can work out your pricing strategy based on research on your competitors; we explore marketing analysis tools such as STEEP (Social, Technological, Economic, Ecological, and Political/Legal) Analysis; Porter’s 5 Forces (Barriers to New Entrants, Exit Barriers, Supplier Bargaining Power, Buyer Bargaining Power, and Substitutes); and The 4 Ps (Place, Product, Promotion, and Price). Chapter 5 digs deep into developing and budgeting for a marketing plan, forecasting sales, and plugging marketing costs into your financial statements. Chapter 6 will tie all these financial statements into a single cohesive pic­ ture, allowing you to see your financial statements as a whole. The income statement, the balance sheet, and the cash-flow statement are fully filled out, and you have a picture to present to investors that shows you have done your research and fully analyzed the viability of your business idea. As an aid to readers, please refer to the List of Figures and Worksheets (beginning on page xi) for where to find descriptions and illustrations of all the various tools and forms used throughout the book.

Chapter 1

In the Beginning

As an entrepreneur, if you do not know where to begin, then plan or guess; but start or you may never. —Anonymous Beginning at the beginning, this chapter introduces a number of subject areas that will be covered throughout this book, which is driven throughout the process by two case studies to develop a process and to show that process in action by example, step by step. This book is not intended as a reference and definitely should not be assumed to match every situation 100%, given that thinking through and planning a business is a fluid process that is never an exact science. Every business idea is different, and the intention of this book is to help get you started. The act of beginning can sometimes be the biggest step to take, especially when you have no idea which piece comes first in a sequence of events. Starting a new venture requires courage and persis­ tence, and this book can help you discover as well as plan out your finan­ cials a little more systemically than you might have done without it. Given that your business could be your life’s work, a little extra help with planning and thinking through your idea will help you in time.

1

2

Business Finance Planning with Microsoft® Excel ®

This chapter covers: • • • •

From problem to solution The case study for this book Tools used in this book The business-planning flow process in this book

Why are you reading this book? Because it might help. Or you don’t know where to start. Or you are wondering about one or even a number of busi­ ness ideas and whether they are good ideas or not. This book might help you answer these questions. And I am not intending to be sarcastic, but this book is not a box of tricks written by a magician—only you can make your business idea work. At a minimum, this book may get you started, where getting started can be the biggest step.

1.1 From Problem to Solution Entrepreneurs are most often problem solvers who look for problems to solve, as opposed to inventing a solution that does not yet have a problem. Do you have a problem without a solution, or do you have a solution with­ out a problem? Think about this question before attempting to turn your next wild idea from a business idea into a feasible business opportunity, and then read this book. Reading this book can do three things for you: • Figure out how to plan your idea and map it into a financial calculator, which tells you how much money you need to fund your opportunity • Demonstrate a systematic approach in presenting your financial requirements to those who might be interested in investing • Help you decide if you have a viable business opportunity In short, you do need to do all your homework, and this book can help— it presents a systematic approach to help you think logically and unemo­ tionally about a business idea, where you can apply your entrepreneurial drive to process all the wild ideas and then work like crazy. A book like this one can help to keep you grounded firmly in reality as you cross each bridge into uncharted territory.

In the Beginning 3

If there is one thing I have learned well, it is to not waste my time on things that do not matter to me or will not deliver value to others. Also note that value is not always motivated by profit, because you should always consider a non-profit for an option as an entrepreneur—sometimes a cause can be a powerful motivator, and building a functioning, productive organi­ zation does not always have to involve a profit motive; it does not have to be about money. I discovered during the course of business planning a number of my own entrepreneurial ideas that I could take the tools I had developed in Microsoft® Excel® to create a financial plan driven by a step-by-step busi­ ness planning process, and that I could produce an adaptable and flexible process that could allow any entrepreneur to build an effective financial plan for their business—it is a little like financial modeling but without all the long words and complexities involved in figuring out how to organize yourself well enough to run all the numbers for a business opportunity your­ self and without having to hire a trained finance professional to help you. For any entrepreneur, it is sensible, pragmatic, and prudent to under­ stand that cash flows through a business operation, and that positive cash flow is what can help you get finance to fund your business. Also, a pro­ cess presented with standard business planning tools that makes you think about functions, in addition to planning the finances, can get you going in the right direction when you start your new business venture. A process that helps you to analyze a business opportunity from the perspective of is it going to generate revenue? is really a make-or-break tool for deciding whether to turn your idea into a business—or not. In short, analyzing your business idea from a systematic, pragmatic, finan­ cial perspective is a little complex, but it is also a great exercise in common sense for making your business idea look as good on paper as it would verbally pitching it to investors. It shows you have a well-planned thought process. And this entire process can be applied to any business opportunity: as an entrepreneur you’re not limited to a single business idea—analyze more than one if you want to, even if it is only for practice. So this book will include standard business planning tools to drive the systematic process of building a financial plan that looks well planned and feasible. Following is a case study of one of my entrepreneurial business

4

Business Finance Planning with Microsoft® Excel ®

ideas that, after analysis using my method and much deliberation, I decided was probably not as good an idea as I had initially thought. There is noth­ ing wrong with deciding that an idea is not a good option—there’s always another idea. The case study will drive the entire process throughout the book and show how these planning tools led to the final decision not to pursue it.

Someone once told me that buying a car was not like buying a boat because the car can get me to work and back, and the boat is a hole in the water for pouring money into because I am not a fisherman. If your idea feels like you might dig yourself into a hole, then it is useful to plan it out, and after one planning process at least your next idea will be easier to assess, even if it is not better, until eventually you hit on a good one that makes more sense than all the rest.

1.2 Introducing the Case Study: BDaaSB The new venture is called BDaaSB LLC (BigData as a service for Small Businesses), providing BigData to smaller-scale customers who otherwise could not afford the capital investment in a BigData database. In addition, analytics and visualization will be part of the service that will help to get the new venture started.

Regardless of the tenses I use when discussing the case study, as the reader we should be thinking into the future, where the sun is out and the sky is blue, and believing that anything is possible.

In the Beginning 5

What is BigData? What is its mission and vision? What does BDaaSB intend to do, and where does it expect to be in the future? BigData in its simplest form is a far larger form of data warehousing, which is already big as databases go. In the past data warehouses were used to project trends for a specific organization, such as expected annual sales based on pat­ terns of past data. BigData goes much further than data warehouses of the past by allowing for a far more comprehensive and also far more detailed picture to be discovered. BigData is a little like data warehousing’s really big and far more intel­ ligent brother—where data warehouses of the past could only project and statistically predict trends, BigData can now find and utilize exact patterns to help determine the course of human actions, even contain­ ing enough information accessible at enough speed to help drive arti­ ficial intelligent systems like self-driving cars. BigData is just that—Big! However, BDaaSB as a business is also a niche service inside that much larger IT service industry. BDaaSB will create value for its customers by providing a BigData data­ base storage service that in addition includes analytical processing, pre­ diction and trending reporting, and visualization services, all for multiple small-sized business customers who can gain by access to BigData tech­ nology but cannot afford their own individual BigData installations. The size and scope of the opportunity will be localized at the beginning but will eventually have value for customers on a national and even an inter­ national scale. Targeting small businesses allows for acquisition of a large number of rinse-wash-repeat type customers, avoiding dependence on a single cus­ tomer for whom the same process and tools can be applied without further work to hundreds if not thousands of customers. BDaaSB is all about data and anything related to data, and BDaaSB is intended to make owning that data easier and cheaper . . . data aggregation is the future of the internet. Services can be on demand or subscription based, where on-demand pric­ ing charges as the customer uses server resources, and subscription-based pricing charges a flat fee regardless of resource amounts used. On demand tends to generate more revenue, but subscription based provides a recur­ ring revenue model, which allows for more predictable growth planning,

6

Business Finance Planning with Microsoft® Excel ®

and that is good for business. There is a limited risk that subscription-based models can develop problems, including customers who overuse or abuse the subscribed service to the point that other multitenant customers are adversely affected, and thus the business is adversely affected. An option to alleviate problems resulting from troublesome customers is to provide separate systems for demanding customers and charge a much higher rate, while maintaining the key to BDaaSB profitability, which is reusable software that can be repeated over and over again for many small customers.

1.2.1 Where to Begin BDaaSB for this new venture is defined as being the operational storage and management architecture of a large, shared BigData database envi­ ronment, prototyped in the founder’s basement and subsequently relo­ cated into a Cloud service, such as Amazon Web Services (AWS ®), Microsoft Azure® or Google®. Future options could include owning, building, and operating rented or owned machines inside a managed services facility, but it makes sense to use a cloud-based service provider in order to offer a cloud-based data­ base as a service to small businesses from multiple perspectives, includ­ ing cost and all-important security. The purpose of the initial build-out in the founder’s basement is that a product can be prototyped at very low initial cost.

1.2.2 Competitors There are competing BDaaSB providers in existence, but they appear to be large-scale companies with complex and expensive platforms, such as IBM ® Netezza ® and Google BigQuery®, and they target large-scale organizations on a more customer-specific basis. It is therefore a sensible assumption that large-sized companies offering BDaaSB-like products on very expen­ sive platforms would very likely not be looking at servicing many small companies, at least not yet, and perhaps BDaaSB could be built with an exit strategy as an attractive potential acquisition for a much larger company.

In the Beginning 7

1.2.3 Loading and Analytics BDaaSB as a product will provide both data loading and analytical process­ ing services to customers. Loading of data gives your BDaaSB product some data to work with for each customer, and analytics—the processing side of BDaaSB—can dig out meaning and purpose to data, leading to potential trending and pattern matching that can help small businesses. There are many tools involved in loading and analyzing data, but BDaaSB will be able to provide much of that functionality for customers. Data aggregation, data integration, data personalization, data consolidation, and BigData are a huge and untapped marketplace, and this is all part of a BigData as a Service soft­ ware that can give value to many customers for many years into the future.

1.2.4 Value in Presentation There are many different tools that can be used to present post-analytic pro­ cessed data in a meaningful way, yielding very clear visual pictures (visualiza­ tions) of a customer’s data, which rapidly and succinctly present complex data that is easily readable by busy business people. For subscription-based customers, BDaaSB would use a common visualization tool. There is a real danger in lack of standardization, but given that customers are not yet won, it is unknown what standardizations customers will accept; the best choices can be made during (and even beyond) development of a prototype, based on ease of development, software licensing costs, hardware costs, perfor­ mance, customer preferences, available skills, and so on.

1.2.5 Flexibility and Added-Value Spin-Offs An entrepreneur should always be on the lookout for any potentially lucra­ tive spin-offs, and quite often a business plan is just a planning tool where flexibility in approach can reap rewards in the rapidly evolving world of data­ bases and information technology: • Customization after the prototyping phase using more specialized visu­ alization tools or even custom-built visualizations selected by specific

8

Business Finance Planning with Microsoft® Excel ®

customers as on-demand options. Cost would have to be passed directly to those customers to cover licensing and the technical skillsets required for development. • There is a potential industry-level and market-segment disruptive capac­ ity for BDaaSB customers and the creation of intersections with other data that is available online in a cost-effective way—for example, by allowing BDaaSB small-business customers to build their businesses rapidly and by combining their data with geographical and demo­ graphic data sources that potential BDaaSB small-business customers can benefit from. • BDaaSB can utilize BDaaSB infrastructure, expand a successful BDaaSB implementation into a larger operation that caters to specific indus­ tries, and then perform its own data intersections to create more value to target new customers in those specific industries. For exam­ ple, insurance or agricultural risk versus climate change is an interest­ ing place to begin, either within the same database or intersecting with one or more databases, including freely available data sources, in addition to purchased data sources and feeds. Once a BigData database and analytics structure with a team of competent people is built, it is technically sensible to duplicate into new spin-off ideas and create multiple streams of far more profitable income within the same startup organization, or as spin-offs which could become more profitable than the initial business idea. • BDaaSB as a service provider to customers and as a provider of data should be flexible enough to enable experimenting with potential disruptive data possibilities that can provide better service to custo­ mers, as well as win new customers, and even become its own cus­ tomer by servicing itself in a specific industry or market segment. After BDaaSB has gotten started, it can create a flexible model for plugging in profitable ideas. For example, BDaaSB could use financial data and the types of restaurants people are likely to eat at in specific towns across America, which could be useful for marketing, advertis­ ing, franchising, eating habits, and a host of other things. BDaaSB could provide a publicly available website using publicly available informa­ tion, such as potential global flood risk, storm risk, even insurance risk

In the Beginning 9

event possibilities. One could even sell and attach results to websites such as Zillow® and Realtor® for people looking to buy a house—local school information is already attached to these sites, and so why not add things like crime statistics and flood risk directly? Why not add a host of other useful things? No list is endless, and the quantity of opportunities for joining different datasets together is only limited by the imagination—and of course usefulness in generating revenue for BDaaSB. After BDaaSB is up and running, more can be gained using existing infra­ structure to expand, adding lucrative connections among multiple types of information to associate disparate data sets together in creating added value for customers—but always keep in mind the long-term objective of adding value to existing and potential customers because customers gen­ erate revenue, whereas products require customers to generate revenue. And yes, focus is important, but if better options and more useful busi­ ness opportunities are uncovered, then one should maintain flexibility from an entrepreneurial perspective and be able to change direction a little to take advantage of new, better, and perhaps more lucrative and productive possibilities.

1.2.6 A Problem to Solve The problem is finding small-business customers who cannot afford BigData and giving them access to valuable data, then repeating it over and over for many small business customers, which is the very reason the BDaaSB idea was devised. What do we need to solve within this general paradigm? • There is a huge quantity of data in cyberspace, both collected and not collected, and by organizations that do not use it. Where do we find it? How do we use it? • Small companies cannot afford large and complex BigData installa­ tions. How do we make it affordable for them? • Data is precise, but what we do with it can be ambiguous. Can we define the ambiguities so that we can present value with proof-of­ concept exercises?

10 Business Finance Planning with Microsoft® Excel ®

BDaaSB will store data, analyze it, visualize it, even intersect customer data with other multifarious types of data that is collected from a multitude of sources, both free and paid. All of these functions are a part of creating and maintaining a BigData installation. In the world of BigData, creativity must experiment to realize value, and part of the problem is being flexible enough, while not necessarily knowing what data to experiment with or how to experiment with it. As a new venture, BDaaSB has to be ready to adapt to constant growth and variety in data sources and be poised to exploit new opportunities in a rapidly evolving landscape where the data may not yet exist and is still to be discovered and collected. For example, huge quantities of uncollected data exist in the Internet of Things (IOT), and the IOT is in its infancy—a wealth of new information sources will become available online in the future. There is a huge capac­ ity of untapped value in utilizing, gathering, connecting, and intersecting different pieces of data. Flexibility in a high-growth field such as BigData could be an opportunity that is too good to miss—one in which the gain could exponentially outweigh the risk. Again, looking at some specific examples, one could merge something like household income data with the type of restaurants that people are likely to eat at within specific towns across the United States, which could be valuable for all sorts of reasons, including potential franchising, as in where to put a new restaurant that will draw enough customers to turn a profit. Another example could be providing a visualization of climatic, demo­ graphic, and geographical data through an interface such as ARCGIS ®, where users could be charged a small flat fee to get a risk assessment on a location, such as for a residence or a business—risks could include flooding potential by intersecting climate data, demographics, geographi­ cal locations, past weather patterns, past events, or sea wall defenses. This option could even be expanded to less likely events such as earthquakes and volcanoes. The point is that there is a huge amount of untapped information that small-business customers do not have the expertise to utilize, along with how all that information interrelates and intersects, and finally to extract monetizable and/or marketable meaning from that information. And it will

In the Beginning 11

not be expensive because we can perform a process once and then repeat it over and over again for many customers and still charge the same low fee, generating enough revenue out of quantity. As another example that demonstrates the flexibility and possibilities with this business opportunity, a small company might make washing machines with built-in chips that collect data, but they cannot store and analyze the data because they make washing machines and know nothing about BigData databases—the washing machine company can cost-effectively outsource BigData functionality to BDaaSB.

1.2.6.1 A Solution to the Problem BDaaSB offers a solution to this problem of lots of unused data that small companies cannot afford to use by applying an abstracted, repetitive approach to many small customers, which can remain flexible enough to evolve into greater flexible profitability over time. Smaller customers can afford a smaller investment in a shared service managed by experts for many customers, opening up the world of BigData to a new group of pay­ ing customers. Companies such as Facebook® (now Meta) have become the biggest companies in the world by using millions of volunteers (Facebook users in this instance) to collect data for them, and then target market that same user population with precision. The result is that Facebook sells highly effective advertising and marketing capacity with very healthy results for Facebook shareholders, as well as customers who pay for that advertising. So, the solution does not need to be specifically defined. Thus, BDaaSB will build an abstract framework, collect and store data, provide visualization, and allow the data and its representations to build value from the customer perspective. BDaaSB customers will ask the same questions they might have asked of a legacy data warehouse after it was built, such as, Can it do this? Can it do that? And what else can it do? The answer is often yes, and much more—when large data stores with many disparate data set options for analyzing concepts are built, customers begin to ask a lot more questions of that data, generating more revenue for service providers like BDaaSB.

12

Business Finance Planning with Microsoft® Excel ®

The technical details form a solution that starts by building a framework that begins as a low-cost prototype, optionally giving the product to early adopter customers for free for a short period, then progressing to a costfriendly cloud-based environment when funding is available. The objective is to house a BigData database, process it analytically, and represent it visually—all for a large number of small-scale customers. The target mar­ ket is not a specific industry but more of a generic approach to many lowcomplexity industries, where data is to be housed, analyzed, and visualized for a large number of small-company clients.

1.2.7 Security When thinking about BDaaSB and customer data security, there are three separate areas to cover: (1) isolating customer data sets from all other custom­ ers, (2) protecting customer data from potential threats outside of BDaaSB, and (3) protecting the ideas, concepts, and software that support BDaaSB as a company.

1.2.7.1 Isolating Customers from Each Other From a security perspective, a BDaaSB multitenant database does not com­ bine or interconnect customer data—separation and security is tightly main­ tained between separate customers. A customer’s data is different to an external data set, such as freely available demographic information or stock trades from Yahoo® Finance. So for security reasons we do need to separate customer data, but we can find ways of sharing and intersecting customer data with outside sources, and at the same time not compromising individual customer security or overall data security. Multiple customers can be clearly separated from each other through security methods and privilege hierar­ chies using tools available at both the hardware and the software levels.

1.2.7.2 Protecting Customer Data There is a lot that can be done to protect data, and the founder of BDaaSB has worked in multiple secure environments, including the medical field, where

In the Beginning 13

HIPPA laws and SOC security apply. Modern security is a set of interlocking layers that is very similar to a highly effective military defense-in-depth strat­ egy, where an attacker must locate, negotiate, and defeat multiple layers of defense in succession, which involves both automated software and systems and skilled people. In computer security each layer acts as an attrition detection and moni­ toring layer that can also bring people resources to bear (fingers at key­ boards) in the event that automation is not foolproof. Cloud-based service providers furnish much of the security required in a modern BigData data­ base installation, and in reality, the concentration of security and adminis­ tration personnel skills and tools inside a cloud-based service provider is much more secure than an on-premises or managed-services installation. The large size of a BigData database inhibits copying information across the internet, given that copying a paltry size of a few Tbs can take days or even weeks, and BigData databases can be 50Tbs and up, even Pbs and larger. Large malicious copying operations will be obvious and can be auto­ matically monitored for, intercepted, and terminated. A recent Equifax® breach copied a very small amount of data in one or a few logical tables and very likely copied less than 1Gb of data, which does not even begin to com­ pare to copying a 50Tb database, which is 50,000Gb—fifty thousand times bigger. In addition, encryption of data also makes it impossible to read data even if it has been copied by a thief.

1.2.7.3 Protecting the Business Opportunity from Competitors The biggest vulnerability would be theft from an internal source (employees), and a company can be protected by non-compete agreements (NCAs) and non-disclosure agreements (NDAs), and even to some extent by criminal law in some states in the USA (international laws will differ). Tools such as virus scanning tools, multi-layered password protection, and other security-hardening features are available to help secure against theft. Also, virtual private networks (VPNs) can be used to obscure the source of servers as well as protect from unencrypted access. All emails in and out can be encrypted. All customers can access information at the encrypted level or can be handed only responses to queries through applications that

14 Business Finance Planning with Microsoft® Excel ®

provide analytical reports or interactive imagery, as opposed to direct access to data; however, a danger in this approach, as stated before, is that cus­ tomization for specific customers must be handled internally, which is a lot of work, requires a bigger team, and generates higher costs.

Servers can be encrypted at the hardware or the software levels, or both, and much of that layer at the server level will be provided by a large-scale cloudbased provider such as AWS, Azure, or Google.

1.3 Tools, Processes, and Flow in This Book The central theme of this book is a demonstration of a process that can be applied to any business, where a group of tools and a set of Excel spread­ sheets can be used to create and generate financial business planning for any type of business. There is specific extra work for you involved in building a unique plan for each unique business, but the intent of this book is to provide a tools-based framework flow and process that will allow any busi­ ness idea to be analyzed and mapped out into a cohesive, systematic, and well-thought-out financial plan. The clear objective is to give a picture of the viability of a business idea into a business opportunity for the person hoping to start the business, as well as a tool that can be used to help win financial support and investment in that business. The truth behind the process of entrepreneurship is that it can be much less haphazard than just an idea and that, as a potential business owner, you can analyze and vet your ideas as any capable MBA or financial plan­ ner can do. Worksheet 1.1 shows a list of the tools used to implement a business planning process in this book and generalized map of where we begin with our business planning process.

There still are many more of these types of business tools available that you can read up on and use if you so wish.

Marketing with Place, Product, Promotion, and Price that helps to lead to competitor pricing data, which can help to generate your organization’s pricing tables, and thus sales and revenue forecasting

Organizational external competitive analysis to environmental analysis in order to strategically map between Sociological, Technological, Economical, Environmental, and Political factors Porters 5 Forces

Define the business of the organization. What does it do? What is the reason for its existence? What is its mission to exist? Where does the organization expect to be in the future? How do you want to address your mission and accomplish your vision in order to gain and maintain a good reputation? Strengths Weaknesses Opportunities Threats analysis Take advantage of strengths, compensate for weaknesses, exploit opportunities, mitigate threats Small number of general goals driven from the SWOT More detailed Specific, Measurable, Achievable, Relevant, and TimeBound objectives (also known as a Schedule of Events or a Strategy Map of Strategic Goals)

Business planning tools used in this book [continues on next page] Attempt to divide market of potential customers into segments Divide potential customers into industries and apply possible variable Industry Segmentation strategies within each industry Sales Lead Generation Hire an outsourcer that specializes in generating sales leads Marketing Costs Financial estimate generated from marketing tools Customer Acquisition Costs How much does it cost to acquire each customer? Marketing Return on Investment Revenue less marketing cost

Marketing Worksheet 1.1 Market Segmentation

The 4 Ps

Porter's 5 Forces

STEEP Analysis

Marketing and Competitors

SMART Objectives

Strategic Goals

SWOT Response

SWOT

Core Business Values

Vision Statement

Mission Statement

Strategy

In the Beginning 15

Beginning asset and liability value Beginning expenses to startup a new company

Cash flow projected over the first 4 quarters

Balance sheet projected 5 years ahead

Income & expenses projection 5 years ahead

Trend Projections Multiple

Worksheet 1.1

[continued] Business planning tools used in this book

Multiple visualizations of financial trends over time

Five-Year Annual Proforma Cash Flow Projection Cash flow projection over the first 5 years

Five-Year Proforma Income Statement Proforma Balance Sheets Annual Five-Year Proforma Balance Sheet Proforma Cash Flow Projections Quarterly Two-Year Proforma Cash Flow Projection

Quarterly Two-Year Proforma Income Statement Income & expenses projection 2 years ahead

Quarterly One-Year Proforma Income Statement Income & expenses projection 1 year ahead

Sales Lead Generation Marketing Costs Customer Acquisition Costs Marketing Return on Investment Startup Finances Startup Balance Sheet Schedule of Startup Expenses Proforma Income Statements

Industry Segmentation

Attempt to divide market of potential customers into segments Divide potential customers into industries and apply possible variable strategies within each industry Hire an outsourcer that specializes in generating sales leads Financial estimate generated from marketing tools How much does it cost to acquire each customer? Revenue less marketing cost

Marketing with Place, Product, Promotion, and Price that helps to lead to competitor pricing data, which can help to generate your organization’s pricing tables, and thus sales and revenue forecasting

The 4 Ps

Marketing Market Segmentation

Porters 5 Forces

Porter's 5 Forces

16 Business Finance Planning with Microsoft® Excel ®

In the Beginning 17

Core Business Values

SWOT Matrix

Operational Plan

SWOT Response

SMART Objectives Schedule (Execution)

Competitors

GAP Analysis Organization & HR

Competitors & Sales Forecasting

Strategic Goals & SMART Objectives

Competitor Pricing Strategy

Marketing Plan

Market Segmentation

Customer Acquisition Cost

Industry Segmentation

Marketing Costs

Sales Lead Generation

Sales Revenue Forecasting

Marketing ROI

Other Expenses Bureau of Labor Statistics

Labor Costs

Financial Plan

Crowd Funding Personal Finances

Income Statement Startup Expenses

Legal Costs Other Costs

Starting Balance Sheet

Equipment Costs

Figure 1.1

Balance Sheet

Trend Prediction Cash Flow

General process flow sections used in this book

Figure 1.1 shows a simplistic picture of the flow of processing and sys­ tematic building of a business financial plan throughout this book. Figure 1.2 (on next page) provides a more detailed version of the image in Figure 1.1, showing some flow of information between tools. Do not worry about the details in these rather complex diagrams for now, as these details are what you will learn in this book, and you can use these images to refer to as you go through the book. To illustrate how things may change along the way while you use these processes, as I write this book, I may change the flow and content of this diagram a little (but not so much as to make it confusing). If I think of a bet­ ter way to do something, I want to retain the option of flexibility to change course a little, because as an entrepreneur you are going to want to do just that—change course when it is a good idea. For example, I have decided to move the Customer Acquisition Cost and the Marketing ROI into an appendix and not keep it as part of the flow of financial calculations. Also,

18

Business Finance Planning with Microsoft® Excel ®

Core Business Values

SWOT Matrix

SWOT Response Strategic Goals & SMART Objectives

Operational Plan

Competitors

Market Segmentation

Competitor Pricing Strategy Sales Revenue Forecasting

Industry Segmentation

SMART Objectives Schedule

Marketing Plan Customer Acquisition Cost

Executing SMART Objectives GAP Analysis

Marketing Costs

Sales Lead Generation

Organization & HR Marketing ROI

Bureau of Labor Statistics

Crowd Funding

Financial Plan

Labor Costs

Legal Costs

Startup Expenses

Other Costs Equipment Costs

Income Statement

Personal Finances Trend Prediction

Balance Sheet Starting Balance Sheet Cash Flow

Figure 1.2

Detailed process flow sections used in this book

I completely removed personal financing because we should be discreet about sharing the details of our personal net worth. A plan is a great tool in itself, but it must be flexible here and there in real time to help you respond to circumstances. You have to get used to a little ambiguity to take advantage of opportunities and avoid potential pitfalls, which you cannot always anticipate when planning ahead of time. One of the dangers of planning and thinking for an entrepreneur is that we can get bogged down in planning and never get our business idea off the ground.

1.4 Conclusion The information presented in this chapter is important because it starts the thinking process for a new venture (entrepreneurial or otherwise) and describes a case study used to explain how to present the subject matter

In the Beginning 19

of this book by example in a step-by-step fashion. I have found in the past, as an author, that this process of step-by-step example demonstration is a very good way for explaining technical concepts to readers, and it makes perfect sense to continue with a method that appears to work. This chapter covered: • • • • • • •

From problem to solution The difference between problem and solution The case study for this book Why the case study is explored as a business idea A brief analysis of the case study business in this book Business tools used in this book Pictures of how the business planning process flows in this book

The next chapter will examine the process of defining and building goals for an organization, with the case study as the focus, and the very begin­ nings of a business plan and a financial plan as the result to be built on later on in the book.

Chapter 2

Your Business Goals

You will never reach an objective you don’t have. — Dr. Ruediger Mueller, CTP The previous chapter highlighted the importance of starting a new venture with a healthy, systematic approach, in addition to introducing a case study that will be used in examples throughout this book. The overall goal of this chapter is to help you to figure out the steps that you will have to take to get your business up and running over a five-year period. You will begin the process of analyzing a business idea with the objective of helping you to decide if it shows promise as a viable business opportu­ nity. The steps presented in this chapter are very important in the process of creating a business financial plan because they define the basic elements from the top down, which will help you build out the financial plan later on in this book. This chapter covers: • • • • •

Mission and vision statements Core business values SWOT matrices Strategic goals SMART objectives

21

22

Business Finance Planning with Microsoft® Excel ®

2.1 Mission and Vision to Core Business Values A company mission is a goal for that organization as a whole, which defines the business of the organization and the reason for its existence.

The mission of BDaaSB is to provide small companies with an end-to-end packaged BigData service, allowing customers to avoid the high cost of BigData and enable those same customers to compete with larger competitors in marketing, advertising, distribution, trend prediction, and accuracy.

A company vision is a projection into the future and where the founders expect or hope for that organization to be in that future, such as five years from now.

The vision of BDaaSB is to provide value-added

end-to-end BigData services to more than

500 small businesses within five years.

The organization’s mission and vision statements can then be used to help generate a list of core business values that an organization uses to define and refine itself, which is intended to be used to determine and direct how the company will operate. So now let us think about how we could generate a list of core business values based on the above mission and vision state­ ments for the BDaaSB case study.

“Vision is about purpose and mission is about goals.” —Anonymous

BDaaSB plans to reach profitability within three to five years. Services and initial customer base can be in place within one year, depending on the

Your Business Goals

23

available team, as well as response from early adopters who will be given the product for free to begin with. The business philosophy will be for-profit, where later spin-offs can be both for-profit and not-for-profit (to generate goodwill), and potential spin­ offs can be exploited after getting started as a BigData service for small companies. Giving away the product for free initially to early adopters can work to acquire a loyal customer and referral base, which can help to build the business over time.

In the online world referrals are everything. Core values for the business are as shown in Worksheet 2.1, where all of these values will help to build and operate a more productive business, which will attract the talented help needed and thus be more likely to pro­ duce exceptional results.

Put employees first and they will take care of customers Be sales focused Conduct all business with integrity Be energetic Be collaborative as a team internally Be collaborative with customers Be self-disciplined to produce results Institute a productive work–life balance to make team members more productive Lead remote team members persuasively with empathy and as empowered contributors Flat management structure produces productive horizontal and vertical collaboration Collaboration across functional silos creates inclusive collaboration and not exclusion PUT EMPLOYEES FIRST FROM Mission and Vision Statement

Worksheet 2.1 Creating core business values for a modern

Software as a Service for the BDaaSB case study

I find it interesting that in the field collaboration is good, but in non-entrepreneurial organizations it can lead to a lot of sluggishness in development of software in the IT world.

24

Business Finance Planning with Microsoft® Excel ®

Why is this? It is possible that too much collaboration to

remove functional silo separation can inhibit the creativity

and productivity of highly specialized engineering skills

and can yield poor long-term results, which may not matter

in a profitable business, but you may find it becomes

harder to recruit much-needed engineering talent, as

they don’t feel significant to the business as a whole.

Worksheet 2.2 contains the blank that you can begin to think about fill­ ing in for your own business opportunity.

FROM Mission and Vision Statement Worksheet 2.2

Creating core business values

Blank and semi-blank worksheets for your business idea will be included in a spreadsheet as website downloads. See page 43, The Spreadsheet So Far, for the URL. Bear in mind that a new entrepreneurial organization should seek to define its core business values before the first person is hired. Also, you should understand that in defining your core business values from the mission and vision, there is a fair amount of thought and creativity that goes into generating these items, and even though this step seems simplistic, in

Your Business Goals

25

a step-by-step systematic process where each step depends on the next, all steps are important, especially the seemingly simple ones like this one. Take this seriously, as these seemingly simplistic steps will pay you divi­ dends down the road in your future entrepreneurial success. Start to think about the core values for yourself and your business oppor­ tunity. Give yourself time to think about it and even incubate your thoughts subconsciously over many days, or even weeks and months, and write down the values you want your business to have and represent. Huge, successful corporations take these very simplistic steps very seriously in order to define themselves by mission, vision, and values for the very good reason that it forms the basis of function and operation and can help you to clearly under­ stand your entrepreneurial urge to create this business in the first place. Organizations are lead from the top down, and the values of leaders will determine the culture of an entire organization, from which everything else follows. Sometimes the hardest step is the first one, and sometimes it is the simplest—but do not neglect the easy steps at the beginning as they form the foundation of your business opportunity. Take the time to define your intent because any new venture is hard, and if you do not understand, con­ trol, and own your motivations then you could handicap yourself from the very beginning. And think big! If you’re trying to get finance from investors for a startup company, then you are already thinking big.

2.2 Core Business Values to SWOT Matrix A SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis examines a business opportunity based on both the things you can control (strengths and weaknesses) and the things you cannot control (opportunities and threats). Bear in mind that you can take advantage of opportunities and mitigate threats where possible, but you can’t control either of them. In keeping with the step-by-step process, a SWOT analysis is generated from the mission and vision statements and your statement of core values. Figure 2.1 shows the loose connections between the core values list and the strengths in the SWOT analysis in order to demonstrate a general creative flow from one step to the next. To reiterate, and I am deliberately repeating because it is important, you need creative thought for your particular business opportunity because every business has a scope and perspective different

26

Business Finance Planning with Microsoft® Excel ®

to many other businesses. What you are learning here is largely about avail­ able tools that you can use, as well as how to link those tools together in aid­ ing you to progress through a cohesive, systematic, logical, and unemotional step-by-step thought process, which should lead you to a realistic and usable business and financing plan for your business opportunity. Put employees first and they'll take care of customers Be sales focused Be collaborative with customers

Highly targetable email sales campaign → B2B lists make marketing easier Public service can become paid consumer Public service can service partner services

Be collaborative as a team internally Work-life balance Remote team members Flat management structure Collaboration across functional silos: inclusion not exclusion Empowered contributors

Low labor costs Low initial development costs → Low initial equipment costs Exploit high-talent value virtual teams Exploit lower-cost virtual teams Home-based remote work

Figure 2.1

Flowing from Core Values to SWOT Analysis Strengths

Worksheet 2.3 shows a SWOT analysis for the BDaaSB case study, based on mission and vision statements plus core values, which defines where BDaaSB is going and why it exists as a good business idea. Worksheet 2.4 contains a blank SWOT that you can fill in for your busi­ ness opportunity. Remember, take your time to think about and incubate your ideas. Work through attributes for yourself as an entrepreneur and a human being as well your business, and remember to take breaks to allow your creativity to incubate subconsciously—sleep on it perhaps. It’s incred­ ible what you can come up with when you’re doing something else—allow your creative subconscious mind to do some of the work. In my experience, good ideas can be brainstormed but not forced. Allow yourself to relax, or even do something different or something fun; when you switch mental gears, you can get the creative part of your brain working better. In truth, anyone can be creative—creativity even can be learned with practice—it is a mental process, and anyone can train their brain to be creative by repetition. That might sound ridiculous, but the more you allow yourself to come up with new ideas, the better you will get at it, as your brain’s neurons begin to rewire themselves bit by bit. It’s like learning to ride a bike, ski, play soccer, or drive a car—learn by doing and get better with practice; you can if you think you can, and you will improve as you do.

Your Business Goals

Internal (Controllable) Strengths Weaknesses Low labor costs Relatively high initial founders' salary cost Low initial development costs Hard to justify relative marketing cost Low initial equipment costs No startup funding Low-cost email CRM sales campaign Small companies are low revenue per customer Highly targetable email sales campaign B2B lists make marketing easier Exploit high talent value virtual teams Exploit lower-cost virtual teams Reusable installed architecture Home-based remote work Good access to credit Public service can become paid consumer Public service can service partner services External (Less Controllable) Opportunities Threats High spin-off potential Competitors adopt the same business model Public service attracts talent Competing products taking market share Public service attracts crowd funding Outsourcing reduces quality and long-term value Public service creates customer goodwill Public service attracts voluntary talent FROM CoreBusinessValues

Worksheet 2.3 BDaaSB SWOT Internal (Controllable) Weaknesses

Strengths

External (Less Controllable) Threats

Opportunities

FROM CoreBusinessValues

Worksheet 2.4

Creating your SWOT

27

28

Business Finance Planning with Microsoft® Excel ®

2.3 SWOT Matrix to SWOT Matrix Response In response to the SWOT analysis, leverage your strengths both to take advan­ tage of opportunities and overcome weaknesses and to help mitgate threats to your business opportunity. Worksheet 2.5 shows that a SWOT analysis can help you determine what to do about strengths, opportunities, weakness, and threats. In general, it is better to improve strengths and exploit oppor­ tunities rather than to improve on weaknesses and combat threats. Strengths Develop and capitalize on Strengths Leverage Strengths to overcome Weaknesses and mitigate Threats Opportunities Invest Strengths into new Opportunities Leverage Strengths to capture Opportunities Remote work from home helps to attract talent and makes people more productive A reusable architecture implemented once can be reused for new customers as well as to exploit other opportunities in the public-service arena Public-service options give customers more value in data intersections Additional public-service functions can attract better talent Additional public-service functions can build goodwill and reputation Public-service options can be turned into profitable consumer services and partner services for other service providers Weaknesses Shore up Weaknesses as Opportunities to be exploited Leverage Strengths to overcome Weaknesses Remote work reduces costs Lower startup costs using in-the-basement-based hardware and open source software, or cheaper cloudbased solutions Low cost email B2B lists and CRM campaigns can reduce the need for expensive marketing in the initial phases of operating the business Well tested email lists are useful in locating small company leads Threats Identify Threats Leverage Strengths to mitigate Threats Remote work is cheaper, more productive and reduces the threat of short term investor driven outsourcing that denigrates the long term operational viability of a business Reusable architecture allows for rapid implementation of new customers to help ward off competitors

FROM SWOTMatrix

Worksheet 2.5 Responding to the BDaaSB SWOT matrix

Your Business Goals

29

Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire somebody without integrity, you really want them to be dumb and lazy. —Warren Buffett

As an entrepreneur dreaming up a business venture, be it a startup or a new initiative as a part of a larger organization, it might be less time-consuming to focus on what you can do well and find talented people who can fill in for the things that you cannot do quite as well. Many great leaders and entrepre­ neurs surround themselves with talent who can help to improve the overall strength of the team. So perhaps do not waste too much time spinning your wheels on your weaknesses and focus more on contributing to the whole with your strengths, and thus investing in collaboration and empowerment of others with differ­ ent talents to those that you have yourself—after all, if your startup is suc­ cessful, most of your time might end up being spent on getting finance or perhaps selling the business. The chances are that as the business grows, there will be too much for you to do yourself—nobody is an island. For example, if you are good leader with excellent communication skills, then you could discover that you have a talent for recruiting people who will contribute more than you ever thought possible. As to the BDaaSB SWOT response shown in Worksheet 2.5, BDaaSB will be best served by doing what it does best—focusing on providing value and service to its small-business customer base. Worksheet 2.6 is a blank form for you to begin thinking about how you will respond to your SWOT analysis, in the form of a SWOT response to your previously constructed SWOT analysis.

2.4 SWOT Matrix Response to Strategic Goals and SMART Objectives The idea of using a SWOT analysis in this process is to utilize the contents of the SWOT matrix to generate realistic, quantifiable, and actionable goals, which is projected over a set time period, such as three to five years. This step

30

Business Finance Planning with Microsoft® Excel ®

Strengths Develop and capitalize on Strengths Leverage Strengths to overcome Weaknesses and mitigate Threats Opportunities Invest Strengths into new Opportunities Leverage Strengths to capture Opportunities

Weaknesses Shore up Weaknesses as Opportunities to be exploited Leverage Strengths to overcome Weaknesses

Threats Identify Threats Leverage Strengths to mitigate Threats

FROM SWOTMatrix

Worksheet 2.6

Responding to your SWOT with the beginnings of planning

will help to drive this process from the top down, systematically building understanding of what a business will do and how it will go about doing it. This next step begins with the big picture and uses the results of the SWOT analysis to generate strategic goals which help to drive an organization. The principal value of BDaaSB is to provide a service to customers in a way that will allow for flexibility as well as to grow and to leverage further future innovations. BDaaSB strategic goals are drawn from the SWOT analysis in Worksheet 2.3 and the SWOT response in Worksheet 2.5, yielding in this case a small set of strategic goals presented as a strategy map, which is as shown in Worksheet 2.7. As shown in Worksheet 2.7, the strategic goals are driven from the SWOT in combination with four primary strategic areas of focus—people, internal, customers, and financial—leading to the next step in the form of SMART

Your Business Goals

People

Build a first-class virtual organization

Internal

Build simplistic reusable products

Customers Financial

Build a large customer base of small-scale clients Founder based funding, to crowd funding, to investor based funding

31

Worksheet 2.7 A strategy map to establish FROM SWOTResponse strategic goals for BDaaSB (3–5 years)

objectives. SMART (Specific, Measurable, Achievable, Relevant, and TimeBound) objectives present a more comprehensive, well-thought-out expan­ sion on the strategic goals. People

Strategic Goal 1

Internal

Strategic Goal 2

Customers Financial

Strategic Goal 3 Strategic Goal 4 Worksheet 2.8 Create your strategy map to establish FROM SWOTResponse strategic goals for your business idea

Worksheet 2.8 provides you with a blank form to fill out your strategy map with the strategic goals for your business opportunity; take your time and think because at this big-picture level, the strategy you create drives all ideas and activities subsequent to this step—as said before, it is doubly important to take the beginning steps seriously, as they will affect all further steps in that process.

2.4.1 Mapping Strategy over Time Building on what has already been devised, there are tools you can use to facilitate analysis into the future; in the BDaaSB case study I used a GAP analy­ sis. A GAP analysis is intended to give a comparison between actual and desired performance, or projected performance at different points in time.

A GAP analysis is also a way to assess a solution against a problem.

32

Business Finance Planning with Microsoft® Excel ®

For the BDaaSB case study I used a one-year projected GAP analysis (see Figure 2.2), which is then extended into a three-to-five-year projected GAP analysis (see Figure 2.3). The two GAP analyses in Figures 2.2 and 2.3 show comparisons of BDaaSB at two points in time. Figure 2.2 shows where BDaaSB is projected to be a year from now, between the current business planning phase and the initial prototyping startup phase. Figure 2.3 shows a further projection of BDaaSB into the future, between prototype and three to five years into the future. The objective of doing these two effortless GAP analyses is to help you as an entrepreneur to understand in detail where you are and where you want or expect to be. Keep thinking about the details of your business idea in small nuggets, and plan as much as you can for all possibilities. You may be amazed at all the ideas and new facts you come up with as you go through this process. There is always something you will discover that you have not thought about, as you slowly, step by step build up a thorough

Structure No hierarchy Founders + small team

Strategy Planning Prototype & Startup

Systems No operation ? Superordinate Goals (Shared Values) Prototype focus Sales & customer focus

Skills Single technical founder Acquire Founding Partners

Style Single Remote Founder Founding specialists

Staff Single founder Remote talent

Hard elements Soft elements

Figure 2.2 Phase 1 (Prototyping): A one-year GAP analysis representation from planning to startup phases

Your Business Goals

33

Structure No hierarchy Founders + small team Leadership

Strategy Planning Prototype & Startup Growth

Development, Operations, Sales, Marketing, Finance, HR (outsourced)

Superordinate Goals (Shared Values) Prototype focus Sales & customer focus Skills Single technical founder Acquire founding partners Recruit structural teams

Systems No operation Operations Operations, DevOps & Development

Style Single Remote Founder Found specialists Persuasive & empathetic remote leadership Staff Single founder Remote talent Remote & collocated collaborative teams

Hard elements Soft elements

Figure 2.3 Phase 2 (Cloud Based): A three-to-five-year GAP analysis representation from startup to growth phases

understanding of what you are planning to do with your business idea and how you are going to execute on it and build a successful organization. Figure 2.4 (on page 34) gives you a blank canvas for a Gap analysis, which will be provided as a PowerPoint® slide available to download from the link provided on page 43. In a five-year projection, some questions can be put to the new venture as it starts up, grows, and matures, as a management and organizational strategy shown in Worksheet 2.9 (on page 34). We are looking for a stra­ tegic approach that (1) looks ahead, (2) can potentially spin off into multiple possibilities, (3) can evolve into something different, (4) can cease to exist, (5) can acquire or be acquired, and (6) can provide an exit strategy. There must always be a clearly thought-out exit strategy for an entrepreneur, even if it is years into the future; entrepreneurs are often better at and get more joy out

34

Business Finance Planning with Microsoft® Excel ®

Structure

Strategy

Systems

Super Ordinate Goals (Shared Values)

Skills

Style

Staff Hard elements Soft elements

Figure 2.4 A blank GAP analysis diagram for you to begin projecting into the future

Questions About BDaaSB? 5 years from now Split into multiple operations

Answer Healthy customer base between 3 and 5 years Profitable between 3 and 5 years After Phase1 or Phase2 Create disparate dataset intersections Public service and/or monetized consumer service

Evolve into one or more different operations

Maintain flexibility to pursue better options Avoid denial of executing failing business model

Spin off, sell or cease to operate under-performing operations Acquire vs. build

Less viable options should be spun off, sold, or discarded. If viable, cost-effective and fundable Failing companies with obvious fixes are good acquisition targets IPO Strategic partner sale When a capital gain can be realized 5 years

Exit strategy Time scale for exit

Worksheet 2.9 BDaaSB five-year management and organizational strategy

Your Business Goals

Questions About BDaaSB? 5 years from now Phase-1

35

Answer Healthy customer base between 3 and 5 years Profitable between 3 and 5 years

Phase-2 Phase-3 Exit strategy Time scale for exit

IPO Strategic partner sale When a capital gain can be realized 5 years

Worksheet 2.10 Creating a five-year management and organizational strategy

of building businesses rather than operating them when they are profitable. Worksheet 2.10 gives you a blank canvas spreadsheet for creating a five-year management plan and organizational strategy for your business opportunity.

2.4.2 SMART Objectives Is a Schedule of Events Goals are linked together using SMART objectives in order to tell a story about strategy, which supports the vision of the business idea, as in the case study for this book provides BigData service to smaller companies. SMART objec­ tives are generated as a drilled-down, detailed picture of your strategic goals (as in Worksheet 2.7) expanded into specific goals for each strategic goal, as shown for BDaaSB in Worksheet 2.11 (next pages). Remember SMART goals are Specific, Measurable, Attainable, Relevant, and Time-Bound—they are detailed, not big-picture abstractions or gener­ alizations. The SMART goals shown in Worksheet 2.11 for BDaaSB are much more specific tasks within each strategic goal and are all descriptive with a specific task in mind. This process can help to maintain focus on the busi­ ness idea described in the BDaaSB opportunity; it is important to avoid wasting time on things that are unimportant.

The Kickoff date, set to January 1, 2018, can be changed. [Text continues on page 38]

15 15 27 27

Recruit 1-person Marketing team by 31 Mar, 2019

Recruit 1-person Sales team by 31 Mar, 2019

Recruit operational administration team by 31 Mar, 2020

Organizational dynamics can be continually improved by working on employee performance (Human Resources MBA) through constant online training courses, beginning in 31 Mar, 2020

9 12 24

36

Employ a single visualization tool by 30 Sep, 2018

Deploy operational system to Cloud service starting 1 Jan, 2019. Takes 1 quarter to deploy

Begin researching conversion from open-source to vendor-supported software (may become redundant) 1 Jan, 2020. Takes at least 2 quarters to deploy

Begin research feasibility of vendor-supported software to squeeze operational costs with offshore outsourcing, by 31 Dec, 2020

31 Dec, 2020

1 Jan, 2020

1 Jan, 2019

30 Sep, 2018

30 Jun, 2018

31 Mar, 2018

31 Mar, 2020

31 Mar, 2020

31 Mar, 2019

31 Mar, 2019

31 Mar, 2019

31 Mar, 2020

After business is started up, begin addition of public-service spin-off tools and Worksheet 2.11 Breaking down strategic goals into multiple SMART objectives [continues 36on next31page] Dec, 2020 intersections by 31 Dec, 2020 Build a large

6

Build test analytical demo product by 30 Jun, 2018

3

15

Recruit 1 Developer by 31 Mar, 2019

Build simplistic reusable products Build an in-the-basement-database storage prototype by 31 Mar, 2018

27

Recruit HR Lead founder by 31 Mar, 2020

30 Sep, 2018

30 Jun, 2018

6 9

Target

1 Jan, 2018

Months

1-Jan-18

Recruit Finance Lead founder who can work productively from home by 30 Sep, 2018

Strategic Goal SMART Objective Build a first-class Recruit Sales & Marketing Lead founder who can work productively from home by virtual organization 30 Jun, 2018

Kick-Off Date 36 Business Finance Planning with Microsoft® Excel ®

36

After business is started up, begin addition of public-service spin-off tools and intersections by 31 Dec, 2020

Worksheet 2.11

6

[continued] Breaking down strategic goals into multiple SMART objectives

Begin investment funding search by 1 Jul, 2018

1 Jul, 2018

31 Jan, 2018

31 Dec, 2022

1

60

Expand to 500+ customers by 31 Dec, 2022

31 Dec, 2022

31 Jan, 2018

60

Expand customer base with reusable architecture to profitability by 31 Dec, 2022

31 Mar, 2019

31 Dec, 2018

1

15

Hire a sales-lead-generation service 31 Mar, 2019

Founder based Support prototype development by beginning crowd-funding process by 31 Jan, funding, to crowd 2018 funding, to investor If crowd funding fails, begin process of acquiring small business loans and founder based funding credit options by 31 Jan, 2018

12

31 Mar, 2018

3

Acquire first 25 early adopter (one or more for free/test) customers by 31 Dec, 2018

30 Jun, 2018

31 Jan, 2018

31 Jan, 2018

31 Jan, 2018

31 Dec, 2020

31 Dec, 2020

1 Jan, 2020

6

1

Begin CRM activities with B2B list using Insightly by 31 Jan, 2018

Begin social network and general marketing and advertising activities by 30 Jun, 2018 Begin specialized print magazine advertising by 31 Mar, 2018

1

Segment B2B list to extract most useful contacts by 31 Jan, 2018

1

36

Begin research feasibility of vendor-supported software to squeeze operational costs with offshore outsourcing, by 31 Dec, 2020

Build a large Purchase B2B email and phone contact lists by 31 Jan, 2018. Development and customer base of understanding of customer requirements will create a better product small-scale clients

24

Begin researching conversion from open-source to vendor-supported software (may become redundant) 1 Jan, 2020. Takes at least 2 quarters to deploy

Your Business Goals 37

38

Business Finance Planning with Microsoft® Excel ®

SMART objectives for BDaaSB in Worksheet 2.11 show a detailed pic­ ture, built as a scheduled and attainable set of tasks to be done in order to turn a business idea into a business opportunity. Worksheet 2.12 provides a blank canvas for you to begin thinking about your own business idea and how to begin the process of turning it into something concrete. Effectively what you are doing is creating a schedule based on all the analysis pre­ sented so far in this chapter, and this schedule will eventually help you to begin building your financial plan with scheduled tasks later on. As shown in Worksheet 2.12, this is the point in your business and finan­ cial planning where you have to figure out not only what you are going to do, but also how you are going to do it in detail, and by when. Thus Worksheet 2.12 is a mapping of strategic goals spread out into SMART objectives over a projected period of time. Remember that SMART objectives are Specific, Measurable, Achievable, Relevant, and Time-Bound, and each objective’s description must match all the SMART criteria: Kick-Off Date Strategic Goal SMART Objective People Objective 1 Objective 2 Strategic Goal Objective 3 1 Objective 4 Objective 5 Internal Objective 6 Objective 7 Strategic Goal Objective 8 2 Objective 9 Objective 10 Customers Objective 11 Objective 12 Strategic Goal Objective 13 3 Objective 14 Objective 15 Financial Objective 16 Objective 17 Strategic Goal Objective 18 4 Objective 19 Objective 20

##### Month

FROM StrategicGoals

Worksheet 2.12 Creating your own SMART objectives

Target

Your Business Goals

• • • • •

39

An example of a specific goal is “Win a marathon.” A measurable form of that objective is “Win a 26-mile marathon.” Making it achievable (keeping it realistic) is “Finish a 26-mile marathon.” Relevance is “An amateur runner can aspire to finish a 26-mile marathon.” Finally, a time-bound metric that describes specifically when you intend to do the task is “An amateur runner can aspire to finish a 26-mile mara­ thon by the age of 25.”

2.4.3 Executing and Achieving SMART Objectives Worksheet 2.13 (on pages below) shows clarification and definition of stra­ tegic goals for BDaaSB, in addition to SMART objectives, plus a description of execution that describes one or more SMART objectives. Worksheet 2.14 (on page 42) presents a blank diagram to fill in your busi­ ness idea in the same way as Worksheet 2.13 does for the BDaaSB case study. When carefully filling out Worksheet 2.14, you may find that you have more or fewer actions—every business idea will be specific, so even though this book presents a thorough analytical process, you still have to think creatively and analyze systematically and come up with your own ideas and solutions.

2.5 Conclusion The information presented in this chapter gives you a process for building your business plan from the top down, from strategy to how you will want to execute on SMART goals. This is important because the tools and the process presented in this chapter create the foundation of all subsequent business and financial planning as presented in the rest of this book. This chapter covered: • • • •

Mission defines an organization’s purpose. Vision projects into the future. Mission and vision statements generate core business values. Core business values define who and what your organization is to be and represent. • Core business values can help to create a SWOT matrix (Strengths, Weaknesses, Opportunities, and Threats). [Text continues on page 43]

SMART Objective

Execution

Direct recruitment using online recruiting companies

Direct recruitment using online recruiting companies

Requires a team of IT professionals

Initial founder is highly experienced IT database expert, developer and technical author

After business is started up, begin addition of public-service Experimentation joining different datasets and working with 2.13 Executing and achieving BDaaSB one-to­ spin-off tools and intersectionsWorksheet by 31 Dec, 2020 different visualization tools three-year SMART objectives [continues on next page] Purchase B2B email and phone contact lists by 31 Jan, 2018.

Begin researching conversion from open-source to vendorsupported software (may become redundant) 1 Jan, 2020. Begin research feasibility of vendor-supported software to squeeze operational costs with offshore outsourcing, by 31 Dec, 2020

Deploy operational system to Cloud service starting 1 Jan,

Employ a single visualization tool by 30 Sep, 2018

Build test analytical demo product by 30 Jun, 2018

Build an in-the-basement-database storage prototype by 31 Mar, 2018

Organizational dynamics can be continually improved by working on employee performance (Human Resources MBA) Training courses through constant online training courses, beginning in 31 Mar, 2020

Recruit operational administration team by 31 Mar, 2020

Recruit 1-person Sales team by 31 Mar, 2019

Recruit 1-person Marketing team by 31 Mar, 2019

Recruit 1 Developer by 31 Mar, 2019

Recruit HR Lead founder by 31 Mar, 2020

Recruit Sales & Marketing Lead founder who can work productively from home by 30 Jun, 2018 Recruit Finance Lead founder who can work productively from Recruit from personal contacts and colleagues home by 30 Sep, 2018 40 Business Finance Planning with Microsoft® Excel ®

Needs a finance expert

Initial founder can do this

nittiiaall ffo ounder under ccaan n do do ba bassed ed o on n ssum umm maarryy iin n tthi hiss bus busiines nesss pl plaan n IIni

Worksheet 2.13 [continued] Executing and achieving

BDaaSB one-to-three-year SMART objectives

upporrtt pr pro otto ottyype pe dev devel elo opm pment ent by by beg begiinni nning ng ccrro ow wdd-ffundi unding ng SSuppo p r o c e s s b y 31 J a n , 2018 process by 31 Jan, 2018 If crowd funding fails, begin process of acquiring small business loans and founder credit options by 31 Jan, 2018 Begin investment funding search by 1 Jul, 2018

Requires a team of IT professionals

Lead acquisition to feed through to a sales team

Hire a sales-lead-generation service 31 Mar, 2019

Expand customer base with reusable architecture to profitability by 31 Dec, 2022 Expand to 500+ customers by 31 Dec, 2022

Needs a sales professional and/or sales team OR an outsourced sales lead generation service

Initial founder can do based on summary in this business plan

Experimentation joining different datasets and working with different visualization tools

Acquire first 25 early adopter (one or more for free/test) customers by 31 Dec, 2018

Begin specialized print magazine advertising by 31 Mar, 2018

Begin social network and general marketing and advertising activities by 30 Jun, 2018

Begin CRM activities with B2B list using Insightly by 31 Jan, 2018

Segment B2B list to extract most useful contacts by 31 Jan, 2018

Purchase B2B email and phone contact lists by 31 Jan, 2018. Development and understanding of customer requirements will create a better product

After business is started up, begin addition of public-service spin-off tools and intersections by 31 Dec, 2020

Begin research feasibility of vendor-supported software to squeeze operational costs with offshore outsourcing, by 31 Dec, 2020

Your Business Goals 41

Worksheet 2.14

FROM SMARTObjectives

Objective 20

Objective 19

Objective 18

Objective 17

Objective 16

Objective 15

Objective 14

Objective 13

Objective 12

Objective 11

Objective 10

Objective 9

Objective 8

Objective 7

Objective 6

Objective 5

Objective 4

Objective 3

Objective 2

Objective 1

SMART Objective

Executing and achieving your own SMART objectives

Execution

42 Business Finance Planning with Microsoft® Excel ®

Your Business Goals

43

• SWOT generates SMART objectives (Specific, Measurable, Attainable, Relevant, and Time-Bound). • An execution sequence of SMART objectives are the beginnings of a business plan. The next chapter will examine the SMART objectives established in this chapter in order to dig out any possible expected venture startup expenses that will require funding, thereby beginning the process of financial analysis using Microsoft ® Excel®.

2.6 The Spreadsheet So Far Please download the relevant worksheets and PowerPoint files from oracle troubleshooter.com/business-finance-planning/ch2

Chapter 3

Predicting Expenses with SMART Objectives Be flexible and plan, but don’t dig yourself into a hole by over‑planning and losing flexibility. — Anonymous The previous chapter pushed you to analyze and understand what your busi­ ness idea is, where you want it to go, and how you want to go about getting it there. This chapter will dig into some of the more detailed aspects of your business planning process, suggesting where you might find expenses in a new venture that to a novice might be unexpected. This chapter is the beginning of the journey where you start uncovering and detailing real financial numbers and comparing potential incomes or revenues with expenses—the part that really counts because in the long term without finance and the ability to acquire financial support of one form or another, and without a solidly detailed well-thought-out plan, you will have difficulty find­ ing financial support to bring your business opportunity into existence. You have to prove to other people that your idea is worth their spending their money on. Your objective is to build a business with other people’s money and risk as little of your own money as possible. This chapter covers: • Labor costs

45

46

Business Finance Planning with Microsoft® Excel®

• •

Equipment and fixed-asset costs General costs and expenses

3.1 Revisiting SMART Objectives To begin, let us revisit the SMART objectives that were listed out for the BDaaSB case study in the previous chapter, in order to find potential costs and areas of cost and expense that we might expect to have when assessing and starting up a new business opportunity. Given that we are not yet very interested in when things occur but more in finding what things or expenses might occur, we can thus settle for simple SMART objectives that exclude scheduling information that is present in Worksheet 2.11 from Chapter 2. Instead, we will focus on a less detailed list of items shown in Worksheet 2.13 in order to unearth and generate potential expense categories. So we are building on Worksheets 2.11 and 2.13 as repeated here in Worksheet  3.1, showing clarification and definition of strategic goals for BDaaSB, in addition to SMART objectives that are Specific, Measurable, Achievable, Realistic, and Trackable over time. In addition, there is a description of execution that is a drill down into detail by each execution process for each SMART objective. Worksheet 3.1 can allow us to deduce some of both the obvious as well as often overlooked and less obvious costs, which for BDaaSB includes costs for recruiting, training, general labor, machinery (computers in this case), IT software licensing, utilities, consulting, outsourcing and contracting, public service or free offers, marketing and sales costs, customer management costs, online and offline advertising, lead generation, and finally financial acquisition costs (it costs money to borrow money). In addition, there will always be incidentals or unexpected expenses that should be allowed for. BDaaSB will focus on its core business and will out­ source functions such as Human Resources to a company like ADP (there are less expensive options to ADP). In addition, sales lead generation and possibly even sales functions can be outsourced, given enough funding.

3.2 Assessing Labor Costs Labor costs can differ depending on the type of business; some businesses depend on labor far more than others do, but it is a common thread in the

Initial founder is highly experienced IT database expert, developer and techincal author

Training courses

Direct recruitment using online recruiting companies

Recruit from personal contacts and colleagues

Execution

Print magazine advertising costs

Social networking costs

CRM software costs

Multiple vendor software options

B2B contacts list

Public service spin off costs and benefits

Outsourcing costs

Deployment costs

Software licensing costs

Software development costs

Server costs either on premise or in the cloud

Online employee training

Labor costs

Employee training

Direct recruiters

Online automated recruiters

Direct recruiting

Potential Expenses

Lead acquisition to feed through to a sales team

Worksheet 3.1

Finding expenses in SMART objectives

Finance investment acquisition

Finance research and acquisition costs

Crowd funding research

Needs a sales professional and/or sales team OR an outsourced sales lead generation service Sales lead generation service

Founder based funding, Initial founder can do based on summary in this business plan to crowd funding, to investor based funding Initial founder can do this Needs a finance expert

Build a large customer base of small scale clients

Initial founder can do based on summary in this business plan

Experimentation joining different datasets and working with different visualization tools

Build simplistic reusable products Requires a team of IT professionals

Build a first class virtual organization

Strategic Goals

Predicting Expenses with SMART Objectives 47

48

Business Finance Planning with Microsoft® Excel®

business world that labor is often the largest expense. The BDaaSB case study business idea is an online cloud-based service that initially begins as a single founder-employee operation, which as it grows will morph into a busi­ ness that does not require a large head-count labor force; however, most of the labor is highly trained technically, and thus their cost for each individual is relatively high. One way to approach a breakdown of expected labor needs in a business, including the BDaaSB case study, is to break the future company down into its business structural components and assess its organizational structure, which will help to devise a more accurate and predictable number for labor costs over time.

3.2.1 Business Cycle Timeline Structure Begin by thinking about who manages the business. For the BDaaSB case study, initially this business will be an in-the-basement, one-person proto­ typing operation that will build a framework for a service, find the best way to implement and provide that service while saving on costs. There has to be a viable business to seek finance for, and the technical side can all be placed and secured with a cloud service after prototyping is complete, even as early as when aquiring the first early-adopter customers. The task during the prototyping phase is to figure out how to build and implement a service, as well as to make the business a viable startup. The structure of the BDaaSB business follows a number of distinct phases, all of which could impact labor costs: 1. In-the-basement prototype implemented by the initial founder, with two possible additions of individuals or teams comprising: (1) sales or marketing functions, and (2) finance functions. 2. Post-prototype technical implementation into a cloud service provider or into a more stable and reliable equipment structure using a man­ aged colocation service. 3. Subsequent large-scale growth phase where BDaaSB would possibly split computer services into cloud based, on premises, and even as-a­ service (managed services) models, cutting costs by relying on other IT cloud-based service models to perform functions closer to the busi­ ness model. In addition, growth implies larger teams of people and teams with more specialized functions.

Predicting Expenses with SMART Objectives

49

It is very important with a new venture that you should think very care­ fully about breaking your business idea into separate phases, as shown by the three separated steps above, where you can then drill down further and more meticulously analyze and detail all the parts and pieces of not only your business idea as a whole, but also of your business in each separate phase as you build your new company over time.

3.2.1.2 Organizational Structure You have to figure out and architect an imagined structure for your future business, such as the departments you might have, even if the business is started with only one or two founders—this will help you to map out and pre­ dict not only your future labor costs but also other costs such as equipment and assets you might need to acquire. All of these things cost money, and accounting for them clearly and precisely is all part of the planning process. For the BDaaSB case study, the initial organizational structure will be one or more founders in key roles, all likely organized as company directors of a single LLC and working for a mixture of pay and shares. The various steps in the funding sequence for BDaaSB are shown in Worksheet 3.2, which is a good jumping-off point to start analyzing how you are going to fund each stage in the business cycle timeline. For BDaaSB, virtual teams with remote employees working from home offices will increase the talent level into a much larger, more enthusiastic, geo­ graphically unrestricted talent pool. In addition, a wide geographical spread is an advantage later on when operationally supporting a global customer base by providing robust customer support around the globe 24/7 every day of the year. Virtual teams also reduce costs with lower employee financial expecta­ tions, people are happier and stay in the company longer, and they work Product Development Phase

Funding Stage

Give Away Service to Early Adopters

Crowd Funding

Internal Funding

X

Prototype

In-The-Basement

X

X

Commercial

Cloud Based

X

X

Commercial

Managed Services (As A Service)

Worksheet 3.2

What needs to be funded for BDaaSB over time

External Funding Seed

Round-A

X

X

X

X

50

Business Finance Planning with Microsoft® Excel®

harder and are willing to invest longer hours in an organization that they feel values them more by giving them more trust and flexibility.

Maybe it’s just my experience, but younger millennial-era managers tend to be highly capable at empathetically managing and leading remote employees. Worksheet 3.3 gives a blank canvas to allow you to start planning your own business idea, breaking it down into separate phases, and cross refer­ encing how you are going to fund each of those phases. Always think about funding, because without financial support to at least pay your monthly bills as you build a garage- or in-the-basement-based business, you will not even get off the ground.

Series A, B, C Funding: How It Works, for startup ventures: https://www.investopedia.com/articles /personal-finance/102015/series-b-c-funding -what-it-all-means-and-how-it-works.asp

Product Development Phase Funding Stage

Give Away Service to Early Adopters

Crowd Funding

Internal Funding

External Funding Seed

Phase1

New product prototype

Phase2

Build a team

Phase3

Get Finance

Phase4

Acquire customers

Phase5

Get Finance

Phase6

Growth, growth, growth

Series-A

Series-B

Phase7 Phase8 Phase9 Phase10

Exit strategy

Worksheet 3.3

Planning funding of the separate phases of your new venture

Series-C

Predicting Expenses with SMART Objectives

51

Try to make these spreadsheet diagrams and tables easy to understand as plans by not being too abstract, using the easy-to-read language of business with specifics, in order to enable everyone to understand you. You want some­ one to look at a picture or a spreadsheet and be able to understand quickly what you are aiming at, why, and how you are going to go about accomplishing it. Use numbers, but use succinct (short) but descriptive strings of characters with easily readable single words and very short phrases—you want a loan decision-maker or investor to glance at your numbers presentation and get it straight away; people are busy, and they want to spend their time on things that look, sound, and feel worth it to them. You have to create presentations that make sense to other people as well as to yourself. Think very carefully about how other people will interpret what they see—put yourself in their shoes, imagine yourself being someone else looking at your spreadsheets and numbers and diagrams, and try to imagine if what you are presenting is easily understandable. You have to adjust your presentation somewhat in relation to your audience.

3.2.2 Specific Labor Requirements and Labor Costs You can do a general assessment of labor requirements by beginning with the funding plan as shown in Worksheet 3.3, matching each junction or X (refer to Worksheet 3.2) in the two-dimensional matrix of Product Develop­ ment Phase (top left) and Funding Stage (far left) in order to devise a set of staffing, labor, or people skills functions that fill in those boxes. So now let us think about the BDaaSB case study. For BDaaSB, the initial technical founder’s skills can be augmented by the addition of high-level sales skills, plus someone with the ability to get finance, where initially the first founder can cover some of those functions during initial prototyping. Recruiting a technical team will have to be delayed as it will require financing to scale upwards, because hired help costs money and thus requires solid financial backing. If we think about potential long-term sales forecasts, spe­ cific staffing requirements beyond that of the founders would include a num­ ber of teams including: (1) IT development, (2) IT operations, (3) IT support, (4) sales and marketing, (5) HR and finance. Worksheets 3.4 and 3.5 show the general staffing requirements over the long term, projected over different phases where the first phase is largely covered by the principal technical founder of BDaaSB. In future phases the

Cost/yr $112,500 $103,763 $104,790 $90,158

33% $75 75%

3 $215,105

2018 $75,375 $69,521 $70,209

Phase1 Prototype Shares $37,125 $34,242 $34,581

Cost/yr $150,000 $138,350 $139,720 $145,740 $107,060 $90,158

33% $100 75%

5 $504,309

Phase1 Prototype Shares 2018 $49,500 $100,500 $45,656 $92,695 $139,720 $48,094 $97,646 $35,330 $71,730

Worksheet 3.5 Forecast staffing requirements and labor costs (lead roles only) for your business

Shares for wages ratio (Founding partners only) Hourly rate of initial founder of BDaaSB Remote employees are cheaper

Lead Role (Founding Partner) Initial Founder (CEO) Marketing and Sales Managers Financial Managers Computer and Information Systems Managers Industrial Production Managers Human Resources Managers Employee count Annual Labor Cost

Worksheet 3.4 Forecast staffing requirements and labor costs (lead roles only) for BDaaSB

Shares for wages ratio (phase 1 only) Hourly rate of initial founder of BDaaSB Remote employees are cheaper

Lead Role (Founding Partner) Initial Founder (CEO) Marketing and Sales Managers Financial Managers Human Resources Managers Employee count Labor cost

Phase2 Seeded 2019 $150,000 $138,350 $139,720 $145,740 $107,060 $90,158 6 $773,047

Phase2 Cloud 2019 $112,500 $103,763 $104,790 $90,158 4 $411,210

52 Business Finance Planning with Microsoft® Excel®

Predicting Expenses with SMART Objectives

53

original founder’s principal role should shift from a technical role through to one of focusing on sales and the acquisition of funding. The number of roles (personnel) shown in Worksheets 3.4 and 3.5 can be used to estimate potential personnel costs across various phases of the life cycle of BDaaSB. Worksheet 3.4 assumes one person in each founder or leadership role. Worksheet 3.4 extracts values from salary estimates contained in deri­ vations of Excel sheets in the BDaaSB setup for this book in a worksheet called JobWages, where numbers for estimated salaries in Worksheets 3.4 and 3.5 have been collected from the Bureau of Labor Statistics Occupa­ tional Employment Statistics. The only exception to this rule is the initial founder (CEO) of BDaaSB, who has an annual salary cost calculated from an hourly rate, which is multiplied with a standard number of 2,000 work hours per year. There is also a Shares For Wages factor that subtracts a portion of the salary for each role from the Cost Phase1 item, with the intention of substituting that amount with shares, currently at 33%, which can be changed; not everyone wants to swap shares for wages. Also note that Worksheet 3.4 shows an Employee count column, mean­ ing that there are one of each of the lead role founding partners, and thus if there are multiples the compensation numbers will increase.

Excel spreadsheet tables like the one shown in Worksheet 3.4 are the beginnings of generating numbers that will be automatically plugged into financial statements described later on in this book.

Worksheet 3.5 shows the same type of lead roles as shown for BDaaSB in Worksheet 3.4, except that this time some more generic roles have been placed in there, so you can use this format to begin the process of analyzing the recruits that you will want to hire in key leadership roles for your new business venture. Worksheet 3.6 extends the lead roles compensation expectations by cov­ ering non-lead role (employee) compensation requirement predictions, and in the case of BDaaSB looks forward into later phases of business develop­ ment as more employees are needed to help the business grow.

54

Business Finance Planning with Microsoft® Excel®

Employee Role

Cost/yr

Database architect Database developer Database administrator Analytics developer Visualization developer Developer Systems administrator Network administrator Computer security administrator Customer support Marketing team Sales team Finance team Human resources team Employee count Labor cost

$67,313 $65,348 $65,348 $75,060 $54,113 $63,885 $67,313 $63,375 $72,030 $39,825 $52,965 $69,683 $57,173 $48,585

Phase 1 Prototype

Phase2 Cloud

Phase3 Managed Services

2018

2019

2020

1

1 1 1 2

0 $0

1 1 1

1 2

3

4 $256,215

11 $706,568

Worksheet 3.6 Multiple phase forecast employee-only staffing requirements and labor costs for BDaaSB Employee Role

Cost/yr

Secretaries and Administrative Assistants Financial Specialists Accountants and Auditors

$30,248 $60,525 $57,548

Employee count Labor cost

Phase1 2022

Phase2 2023 1 1

Phase3 2024 1 2 3

0 $0

2 $90,773

6 $323,940

Worksheet 3.7 Multiple-phase forecast employee-only staffing requirements and labor costs for your business

Predicting Expenses with SMART Objectives

55

Note that on Worksheets 3.4 and 3.5 the lead roles were assumed to be individuals and that employee roles (not lead roles) are not necessarily indi­ viduals, and also assumed to not have the option of working for a percent­ age of shares—you do not want to dilute your share equity too much over time, but your business could be different, and you may have to rearrange the worksheets like these in order to suit your own business plan. In Worksheet 3.7 you get a format that you can use for your own business venture, where some examples have been included just to get you going.

3.2.2.1 Adding to Financial Statements Worksheet 3.8 contains the BDaaSB numbers generated from Worksheets 3.4 and 3.6, which is a preconstructed worksheet that will be used to plug num­ bers into the income statement later on. Worksheet 3.8 shows an estimate for HR (human resources) outsourcing costs, including payroll administration costs, as an estimate of the cost of out­ sourcing payroll to ADP for a small business of 5 to 15 employees, at approxi­ mately $150 a month per employee, which are the Outsourced Payroll items at the bottom of Worksheet 3.8. The Payroll Outsourcing Cost numbers shown in Worksheet 3.8 are a multiple of the number of employees (founding leads and

Payroll / Labor Costs Payroll Outsourcing Costs

2018 $215,105 $5,400

2019 $1,239,965 $14,400

Payroll / Labor Costs Payroll Outsourcing Costs

Mar $53,776 $1,350

Jun $53,776 $1,350

Payroll / Labor Costs Payroll Outsourcing Costs

Mar $309,991 $3,600

Jun $309,991 $3,600

2020 $1,239,965 $14,400

2021 $1,239,965 $14,400

2018 Sep $53,776 $1,350

Dec $53,776

$1,350

2019

Outsourced payroll Monthly cost Outsourced payroll Quarterly cost Outsourced payroll Annual cost

Sep $309,991 $3,600

Dec $309,991

$3,600

$150 $450 $1,800

Worksheet 3.8 What we get from analyzing labor costs and where we are going to put it for BDaaSB

2022 $1,239,965

$14,400

56

Business Finance Planning with Microsoft® Excel®

employees), divided into quarterly values (Outsourced Payroll Quarterly Cost), based on an estimated cost per employee for an HR and payroll outsourcing company like ADP at $150 per month per employee (leads and employees). The numbers in Worksheet 3.8 are obviously specific to the BDaaSB case study, presenting a brief glimpse at where you are headed in this pro­ cess as you read and study through this book. Worksheet 3.9 gives you the same diagram as BDaaSB’s summary as shown in Worksheet 3.8, but Worksheet 3.9 shows you the results generated from the generic numbers created in the non–case study version for you as the reader, generated and linked from Worksheets 3.5 and 3.7. You can use Worksheet 3.8 for your own business opportunity, changing it as suits your purpose. As you change the leads and employees, the idea is that the numbers generate into the worksheet structure as shown in Work­ sheet 3.9, which will propagate automatically into financial statements such as the income statement that you will see later in this chapter. The objec­ tive is a semi-automated process where you can change numbers that will change in all the subsequent financial statements automatically. You will get copies of all worksheets from the link on page 74, so that you can learn to create your own business models as well—the intention is accu­ racy, automation, and also flexibility within the restrictions that Excel allows. 2022

2023

Payroll / Labor Costs Payroll Outsourcing Costs

$607,987 $12,600

Payroll / Labor Costs Payroll Outsourcing Costs

Mar $126,077 $3,150

Jun $148,770 $4,950

Payroll / Labor Costs Payroll Outsourcing Costs

Mar $284,034 $5,400

Jun $284,034 $5,400

2024

$1,136,137 $1,136,137 $21,600 $21,600

2025

2026

$1,136,137 $21,600

$1,136,137

$21,600

2022 Sep $207,062 $2,250

Oct $126,077

$2,250

2023

Outsourced payroll Monthly cost Outsourced payroll Quarterly cost Outsourced payroll Annual cost

Sep $284,034 $5,400

Oct $284,034

$5,400

$150 $450 $1,800

Worksheet 3.9 What we get from analyzing labor costs and where we are going to put it for your business

Predicting Expenses with SMART Objectives

57

The model is flexible enough that you can change items, adding new items or even new processes to adapt to your own business idea; however, Microsoft Excel can be a little picky about referenced cells called from other worksheets when adding rows and columns, and you can cause errors in your subsequent worksheets when making structural changes—so be careful with that.

Figure 3.1 (begins on page 58) shows the connection between the analy­ sis of the numbers of staffing costs and how those numbers eventually help to drive the financial statements, which in the case of Figure 3.1 is a small portion of the BDaaSB income statement. Note a number of points in Figure 3.1: • Note the years linked together in Figure 3.1 connecting 2018 and 2019. • Note how the last table at the bottom right of Figure 3.1 has the data for 2018 and 2019 combined. Worksheet 3.10 shows part of the income statement with the same numbers highlighted in both Worksheet 3.10 and Figure 3.1. In later chapters you will see the financial statements, such as the income statement, broken down into estimates over quarters, and Worksheet 3.10 shows an income statement snippet for years, not quarters. Quarters are typically Jan-Mar, Apr-Jun, Jul-Sep, Oct-Dec.

Bigdata as a Service for Small Businesses (BDaaSB)

Mar 0

SALES REVENUE

COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Worksheet 3.10 Fitting Managed Services Hardware, Software, Support OPERATING EXPENSES Marketing and Advertising

in

Income Statement as of End of Quarter 2018 Jun Sep Dec 0 0 0

55126 53776 1350 0 labor0 costs 0 10250 0

55126 53776 1350 0 0 to the 0 10000 0

2018 0

55126 55126 220505 53776 53776 215105 1350 1350 5400 0 0 0 0 0 income0 statement for BDaaSB 0 0 0 10000 10000 40250 0

0

0

58

Business Finance Planning with Microsoft® Excel®

Items are removed from financial statements in this book that have not yet been covered in order to help you as the reader learn step by step. Thus, I have removed SALES REVENUE items from the income statement snippet shown in Worksheet 3.10.

Figure 3.1 The beginnings of the income statement part of the financial statements for BDaaSB [continues on next page]

Worksheet 3.11 shows the same income statement portion, but this time for the more generic version of the numbers and not for the BDaaSB case study, which you will be able to generate with your own numbers. The important point to note is that the numbers in Worksheets 3.10 and 3.11

2022 Phase1 0

SALES REVENUE COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Worksheet 3.11 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES Marketing and Advertising

Fitting in labor

2023 Phase2 0

2024 Phase2+ 0

623887 1212737 1157737 607987 1136137 1136137 12600 21600 21600 100 0 0 0 0 costs200 to the income statement 3000 0 0 0 50000 0 0 5000 0 18745 19860 19860 0

0

0

2025 Phase+ 0

2026 Phase2+ 0

1157737 1157737 1136137 1136137 21600 21600 0 0 0 business0 for your 0 0 0 0 0 0 19860 19860 0

0

Predicting Expenses with SMART Objectives

59

Figure 3.1 [continued]

are generated from the previous worksheets, and numbers are not added manually into these tables shown in Worksheets 3.10 and 3.11. You can add numbers manually and change generated values, or you can even add addi­ tional items and values that are not precalculated, giving you the ability to plan and the flexibility to adapt that plan at will—be advised to keep it simple, otherwise you could make your plan far more complicated than it needs to be.

60

Business Finance Planning with Microsoft® Excel®

3.3 Equipment and Fixed-Asset Costs Equipment and fixed-asset costs depend substantially on the type of busi­ ness you are starting. For example, a restaurant needs all sorts of equipment, both in the customer-facing restaurant itself as well as in the kitchens, and there will be all sorts of laws to follow—it can be quite complicated. The BDaaSB case study is simplistic in this respect, in that people will work remotely and computers and computer power can be rented, even sometimes largely off the shelf for some functions. For the BDaaSB case study, the prototype-building phase covers the initial founder’s building a framework product to test and experiment with, at very low cost, using in-the-basement servers (or cheap cloud services) and free open-source software, and possibly testing out various comprehensive cloudbased services at the same time. The cloud-based phase implements the prototype using a cloud service that charges reasonable fees to rent virtual servers that include things like preinstallation and even development of software. The managed services phase moves the prototype from a cloud-based virtual platform to a rented or owned collocated server infrastructure or a more outsourced cloud-based service. Thinking about all these IT details and outsourcing, it is often better to focus on the business rather than be fully immersed in things that you can get other people—who are good at it!—to do for you. Even IT businesses such as BDaaSB can outsource, as IT is structured in many layers, and we can outsource to the cloud for layers that are not directly provided to our cus­ tomers by the BDaaSB business. The managed services phase could become necessary for one or both of two reasons: • There is no cloud service that can cater to a high capacity and high throughput BDaaSB architecture. • There is no cloud service that provides adequate security for the service, the customers, and any data in the BDaaSB multitenant environment.

I started writing this book in 2017, and it makes sense to add that both of these above scenarios are unlikely in 2022, as cloud service databases have progressed enormously since then.

Predicting Expenses with SMART Objectives

61

The prototyping phase for the BDaaSB case study focuses on early adopter customer data and selection of a good customers with very low costs, with the objective of developing useful software and winning hearts and minds for excellent customer reviews. It is also important to acquire enough customers: (1) to adapt the software prototype to a good mix of customer needs, (2) to help sell BDaaSB (or your business idea) to investors, and (3) to sell a service or product to new customers. Worksheet 3.12 shows a simplistic breakdown of asset investment for the BDaaSB case study where computer hardware, software, plus computer ser­ vices and time are planned to be purchased.

Installation

Cost/Year

Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support

$120,000 $50,000

Phase 1 Phase2 Cloud Prototype 2018

Worksheet 3.12

2019 X X

Phase3 Managed Services 2020

$225,000

X

BDaaSB case study initial expenses on hardware and software

3.3.1 Adding to Financial Statements Following on from Worksheet 3.12, Worksheet 3.13 now maps out the num­ bers into a set of quarterly sections that will ultimately be copied into the income statement. Worksheet 3.14 (page 62) shows the resulting section in the income state­ ment itself, where projected equipment expenses are shown as a part of Cost Of Goods Sold in the case of BDaaSB, as these expenses are crucial to the business model, providing services that rely fully on use of computer hard­ ware and IT services, including cloud services, managed service, and support. Worksheets 3.15–3.17 (starting on page 62) provide more generic ver­ sions of the same BDaaSB case study from Worksheets 3.12–3.14, where you are given a map of diagrams that you can use to formulate and account for your own equipment expenses that you expect to need to operate your business into the future. Note that in the worksheets such as Worksheet 3.17, once you plug numbers into the initial worksheets that help populate Worksheet 3.16, any [Text continues on page 63]

62

Business Finance Planning with Microsoft® Excel® 2018

Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support

$0 $0 $0

2019 Cloud Based $120,000 $50,000 $0

Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support

Mar $0 $0 $0

Jun $0 $0 $0

Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support

Mar $30,000 $12,500 $0

Jun $30,000 $12,500 $0

2020

2021 Managed Services $0 $0 $225,000

$0 $0 $225,000 2018

2019

Sep $0 $0 $0

Dec $0 $0 $0

Sep $30,000 $12,500 $0

Dec $30,000 $12,500 $0

2022 $0 $0 $225,000

Worksheet 3.13 Converting BDaaSB equipment expenses into a financial statement compatible format

Bigdata as a Service for Small Businesses (BDaaSB) Income Statement as of Dec 31st 2018 2019 2020 2021 2022

SALES REVENUE COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support

Worksheet 3.14

Installation Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5

Worksheet 3.15

0

Cloud Based 0

220505 215105 5400 0 0 0

1424365 1239965 14400 120000 50000 0

0

Managed Services 0

0

1479365 1239965 14400 0 0 225000

1479365 1239965 14400 0 0 225000

1479365 1239965 14400 0 0 225000

BDaaSB expenses plugged into the income statement

Cost/Year $100 $200 $3,000 $50,000 $5,000

Phase1 2022 X X X

Phase2 2023

X X

Mapping out your business’s initial equipment expenses

Predicting Expenses with SMART Objectives 2022

2023

2024

2025

2026

Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5

Phase1 $100 $200 $3,000 $0 $0

Phase2 $0 $0 $0 $50,000 $5,000

Phase2+ $0 $0 $0 $0 $0

Phase2+ $0 $0 $0 $0 $0

Phase2+ $0 $0 $0 $0 $0

Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5

Mar $25 $50 $750 $0 $0

Jun $25 $50 $750 $0 $0

Sep $25 $50 $750 $0 $0

Oct $25 $50 $750 $0 $0

Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5

Mar $0 $0 $0 $12,500 $1,250

Jun $0 $0 $0 $12,500 $1,250

Sep $0 $0 $0 $12,500 $1,250

Oct $0 $0 $0 $12,500 $1,250

2022

2023

63

Worksheet 3.16 Reformatting your business’s equipment expenses projections into the future

SALES REVENUE

2022 Phase1 0

COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES

623887 607987 12600 100 200 3000 0 0 18745

Marketing and Advertising

> Income Statement as of Dec 31st 2023 2024 2025 Phase2 Phase2+ Phase+ 0 0 0 1212737 1136137 21600 0 0 0 50000 5000 19860

1157737 1136137 21600 0 0 0 0 0 19860

Worksheet 3.17 Projecting your business’s income 0 0 0 statement expenses from Worksheets 3.15 and 3.16

2026 Phase2+ 0

1157737 1136137 21600 0 0 0 0 0 19860

1157737 1136137 21600 0 0 0 0 0 19860

0

0

General & Administrative Expenses 18745 19860 19860 19860 19860 Legal 4345 4860 4860 4860 4860 be reflected Incidentalschanges to those initial structures will 1800 2000 into the 2000subsequent 2000 work­ 2000 Utilities sheets automatically because the worksheets 1475 1500 to each 1500 1500 1500 refer other sequentially Liability Insurance 1450 1400 1400 1400 1400 the process. Therefore, 1950 you can go2000 back later2000 on and adjust Consultingthroughout Fees Paid 2000 your 2000 Website Build & Maintenance 1250 but that 1000 is a little 1000more difficult 1000 numbers, you can even add new items, to 1000 Credit/Background Check Subscription 2875 3100 3100 3100 3100 time you will become more adept Recruitingmanage—over Expenses 3600 4000 with using 4000 both Excel 4000 and 4000 GROSS PROFIT/LOSS (EBITDA) process as presented (642632) (1232597) the step-by-step in this book. (1177597) (1177597) (1177597) OPERATING INCOME/LOSS (EBIT)

(642632)

(1232597)

(1177597)

(1177597)

(1177597)

64

Business Finance Planning with Microsoft® Excel®

There is a grey area as presented in this section

in which some things may seem like expenses and other

things more like capital investments, but capital investments

are assets, not expenses. In the case of BDaaSB we are

renting computer time rather than physically purchasing

machines that can be depreciated.

An asset, on the other hand, generally implies that

something is purchased, outright or with a loan, but that

asset has tangible value that can both be liquidated (not

always with ease) and depreciated as an expense over time.

3.4 General Costs and Expenses General costs and expenses are those that would likely be standard for many types of business, but they might differ depending on the type of business as well as where the company is in the business cycle. For example, expenses to start a new business could be a little different to those in a business that is already running. In the case of BDaaSB, we have startup expenses as or before the com­ pany begins operating in addition to ongoing expenses after the company has been started up. The general costs and expenses shown as startup expenses in Worksheet 3.18 are part of what is known as operating expenses in accounting terminology, which are part of the day-to-day costs for keep­ ing a business up and running.

3.4.1 Legal Costs and Requirements Legal costs can be broken down into sections, and even those costs are not high relative to other expenses; it is important before starting a company to keep some funding aside in order to protect the business, including essentials such as non-disclosure agreements (NDAs) and non-compete agreements (NCAs). The BDaaSB business opportunity is a prototyping startup that will have its first product built from the founder’s basement; legal issues are sim­ ple until there are customers and employees, but a number of points should be noted regardless of the life cycle and state of a business opportunity like BDaaSB. Following are some of the obvious legal costs for any new venture:

Predicting Expenses with SMART Objectives

Bigdata as a Service for Small Businesses (BDaaSB) Legal LLC Creation NDA and NCA Creation Stock option contract General Legal Costs Other Expenses Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses Payroll in Qtr1 for Initial Founder (CEO) Startup Capital

2018 Qtr1 $2,250 $500 $500 $750 $500 $26,844 $2,500 $3,000 $500 $0 $2,000 $0 $0 $18,844 $29,094

65

Ongoing $500

$500 $9,500 $2,500 $3,000 $500 $500 $250 $250 $2,500

Worksheet 3.18 Beginning to build startup expenses for the BDaaSB case study

• Starting and registering a company such as an LLC or a corporation. • If starting an LLC, you might want to switch to a corporation later on when shares begin to be handed out to co-founders and as employee incentives. • Liability insurance is important and can cover you for different things. For the BDaaSB company options could include the following: o Operational errors by BDaaSB’s founder or employee (team member). o Development errors by a BDaaSB team member. o If necessary, additional liability insurance to cover potential liabili­ ties and/or theft related to remote team members. • Payroll and all its constituent parts should be outsourced to a specialist organization such as ADP; note that there are cheaper alternatives to ADP. This is not a direct legal cost, but it can become one if not done properly. Outsourced human resources can be valuable to small companies: o Limiting company exposure to liability risk for claims of discrimination or harassment, which includes conduct of employees with respect to each other and customers that cites the following: ƒ Prohibition of relationships of a romantic or intimate nature. ƒ Employment of family members. ƒ Conduct at company and public events excluding horseplay, vio­ lence, excessive alcohol consumption, or illegal drugs.

66

Business Finance Planning with Microsoft® Excel®

• NDAs and NCAs must be civilly and/or criminally enforceable and con­ structed by a reputable legal entity: o NDAs must be included at the interview stage for new team members. o NCAs must be included at the time of taking a new team member on board. Note that different states and countries have different rules. For instance, the state of Massachusetts has criminal law stat­ utes that help to protect companies from employees’ taking com­ mercial secrets with them to competitors. • Agreements between team members and the company must include access to the remote office space of team members in order to inspect for liability issues, including worker’s compensation and other similar policies. • BDaaSB is a non–investor funded startup company, and forms of pay­ ment can include cash, credit cards, or even barter in the form of tech­ nical assistance in the building and maintenance of systems. NDA and NCA agreements must be signed and enforceable. Stock options can be an incentive for new team members but should be analyzed and formalized before the first team member, other than the initial founder, is recruited. A vesting process can be used to help avoid temporary participation, but an alternative is an option for the company to buy back stock options at ex-team member cost if the team member leaves the company before a vested period of time.

3.4.2 Other Expenses You will have certain expenses such as incidentals for those little (or some­ times big) unexpected, unplanned, and surprise expenses—you must allow for them! There will always be costs such as utilities (e.g., electric and water bills); liability insurance is a must unless you want to risk your personal prop­ erty; everybody has a website these days, and it is expected; and there is always someone you might want to get help from and pay as a consultant. Even though many of these amounts are small, do allow for them, as it ensures you have less of a chance of your business’s dying due to lack of funds, and also for investors to see that you have done thoroughly detailed planning, which is important to them because it is their money that they are giving you in the form of loans and financial backing. Getting back to the general costs and expenses as a whole, Worksheet 3.19 gives you a blank for your own business so that you can fill in your expenses, and I have filled in some arbitrary guesses to make the different worksheets

Predicting Expenses with SMART Objectives

> Legal Company Legal Costs Intellectual Property Costs Stock option contract General Legal Costs Other Expenses Incidentals Utilities Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses Payroll in Qtr1 for Initial Founder (CEO) Startup Capital Worksheet 3.19

2022 Qtr1 $700 $100 $150 $200 $250 $28,275 $300 $350 $400 $450 $500 $550 $600 $25,125 $28,975

67

Ongoing per Qtr $1,215 $500 $115 $100 $500 $3,750 $500 $375 $350 $500 $250 $775 $1,000

Beginning to build startup expenses for your business

look like they flow and connect. It is up to you to change the numbers for your own business in Worksheet 3.20 as startup expenses, to allow for flow through to your own financial statements.

3.4.3 Adding to Financial Statements The source of the expenses is shown in the Startup Expenses worksheet of Worksheet 3.18 for the BDaaSB case study, and Worksheet 3.19 as a blank canvas for your own business; the startup expenses are used to generate those same General and Administrative sections in the Income Statements. Worksheets 3.20 through 3.22 (starting on next page) shows the first two years plus the first five years of inserts driven by startup expenses into the income statements for the BDaaSB case study. Worksheets 3.23 through 3.25 (starting on page 71) show the first two years plus the first five years of inserts driven by startup expenses into the income statements as blank canvasses that you can use for your own business idea; note that the values in the income statements all are referenced from previous worksheets—no manual entries at this stage. [Text continues on page 74]

(65376)

OPERATING INCOME/LOSS (EBIT)

(65126)

10000 500 2500 3000 500 500 250 250 2500 (65126)

0

55126 53776 1350 0 0 0 10000

(65126)

10000 500 2500 3000 500 500 250 250 2500 (65126)

0

55126 53776 1350 0 0 0 10000

(65126)

10000 500 2500 3000 500 500 250 250 2500 (65126)

0

55126 53776 1350 0 0 0 10000

Worksheet 3.20 BDaaSB case study general costs and expenses in the income statement for the first year

10250 2250 2500 3000 500 0 2000 0 0 (65376)

0

55126 53776 1350 0 0 0 10250

Mar 0

General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA)

Marketing and Advertising

COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES

SALES REVENUE

Income Statement as of End of Quarter 2018 Jun Sep Dec 0 0 0

Bigdata as a Service for Small Businesses (BDaaSB)

(260755)

40250 3750 10000 12000 2000 1500 2750 750 7500 (260755)

0

220505 215105 5400 0 0 0 40250

0

2018

68 Business Finance Planning with Microsoft® Excel®

(366091)

OPERATING INCOME/LOSS (EBIT)

(366091)

10000 500 2500 3000 500 500 250 250 2500 (366091)

0

356091 309991 3600 30000 12500 0 10000

(366091)

10000 500 2500 3000 500 500 250 250 2500 (366091)

0

356091 309991 3600 30000 12500 0 10000

(366091)

10000 500 2500 3000 500 500 250 250 2500 (366091)

0

356091 309991 3600 30000 12500 0 10000

Worksheet 3.21 BDaaSB case study general costs and expenses in the income statement for the second year

10000 500 2500 3000 500 500 250 250 2500 (366091)

0

356091 309991 3600 30000 12500 0 10000

Mar 0

General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA)

Marketing and Advertising

COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES

SALES REVENUE

Income Statement as of End of Quarter 2019 Jun Sep Dec 0 0 0

Bigdata as a Service for Small Businesses (BDaaSB)

(1464365)

40000 2000 10000 12000 2000 2000 1000 1000 10000 (1464365)

0

1424365 1239965 14400 120000 50000 0 40000

0

2019

Predicting Expenses with SMART Objectives 69

215105

40000 0 40000

0 40250 0 40250

Managed Services Hardware, Software, Support

General & Administrative Expenses

1000 10000

750 7500

Website Build & Maintenance

Credit/Background Check Subscription

Recruiting Expenses

(1464365)

(1519365)

(1519365)

10000

1000

1000

2000

2000

12000

10000

2000

40000

0

40000

225000

0

0

14400

1239965

1479365

0

2020

(1519365)

(1519365)

10000

1000

1000

2000

2000

12000

10000

2000

40000

0

40000

225000

0

0

14400

1239965

1479365

2021 Managed Services 0

Worksheet 3.22 BDaaSB case study general costs and expenses in the income statement for the first five years

(260755)

1000

2750

OPERATING INCOME/LOSS (EBIT)

2000

1500

(1464365)

2000

2000

Liability Insurance

Consulting Fees Paid

(260755)

12000

12000

Utilities

GROSS PROFIT/LOSS (EBITDA)

2000 10000

3750 10000

Incidentals

50000

Legal

Marketing and Advertising

OPERATING EXPENSES

0

0

Cloud Services Software Licensing

120000

0

Cloud Services Hardware

14400

5400

Payroll Outsourcing Costs

1239965

1424365

220505

COST OF GOODS SOLD

0

Payroll / Labor Costs

SALES REVENUE

2019 Cloud Based 0

2018

Income Statement as of Dec 31st

0

2022

(1519365)

(1519365)

10000

1000

1000

2000

2000

12000

10000

2000

40000

0

40000

225000

0

0

14400

1239965

1479365

Bigdata as a Service for Small Businesses (BDaaSB)

70 Business Finance Planning with Microsoft® Excel®

(159510)

4965 1215 500 375 350 500 250 775 1000 (159510)

0

154545 148770 4950 25 50 750 0 0 4965

(215102)

4965 1215 500 375 350 500 250 775 1000 (215102)

0

210137 207062 2250 25 50 750 0 0 4965

(134117)

4965 1215 500 375 350 500 250 775 1000 (134117)

0

129152 126077 2250 25 50 750 0 0 4965

(642632)

18745 4345 1800 1475 1450 1950 1250 2875 3600 (642632)

0

0 18745

623887 607987 12600 100 200

0

2022

Your business general costs and expenses in the income statement for the first year

(133902)

OPERATING INCOME/LOSS (EBIT)

Worksheet 3.23

3850 700 300 350 400 450 500 550 600 (133902)

0

Marketing and Advertising

General & Administrative Expenses Legal Incidentals Utilities Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA)

130052 126077 3150 25 50 750 0 0 3850

COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES

SALES REVENUE

Income Statement as of End of Quarter 2022 Mar Jun Sep Dec 0 0 0 0

>

Predicting Expenses with SMART Objectives 71

(308149)

4965 1215 500 375 350 500 250 775 1000 (308149)

0

303184 284034 5400 0 0 0 12500 1250 4965

(308149)

4965 1215 500 375 350 500 250 775 1000 (308149)

0

303184 284034 5400 0 0 0 12500 1250 4965

(308149)

4965 1215 500 375 350 500 250 775 1000 (308149)

0

303184 284034 5400 0 0 0 12500 1250 4965

(1232597)

19860 4860 2000 1500 1400 2000 1000 3100 4000 (1232597)

0

50000 5000 19860

1212737 1136137 21600 0

0

2023

Your business general costs and expenses in the income statement for the second year

(308149)

OPERATING INCOME/LOSS (EBIT)

Worksheet 3.24

4965 1215 500 375 350 500 250 775 1000 (308149)

0

Marketing and Advertising

General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA)

303184 284034 5400 0 0 0 12500 1250 4965

Mar 0

COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES

SALES REVENUE

> Income Statement as of End of Quarter 2023 Jun Sep Dec 0 0 0

72 Business Finance Planning with Microsoft® Excel®

(1232597)

19860 4860 2000 1500 1400 2000 1000 3100 4000 (1232597)

0

1212737 1136137 21600 0 0 0 50000 5000 19860

(1177597)

19860 4860 2000 1500 1400 2000 1000 3100 4000 (1177597)

0

1157737 1136137 21600 0 0 0 0 0 19860

(1177597)

19860 4860 2000 1500 1400 2000 1000 3100 4000 (1177597)

0

1157737 1136137 21600 0 0 0 0 0 19860

Worksheet 3.25 Your business general costs and expenses in the income statement for the first five years

(642632)

Marketing and Advertising

OPERATING INCOME/LOSS (EBIT)

0

COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES

18745 4345 1800 1475 1450 1950 1250 2875 3600 (642632)

623887 607987 12600 100 200 3000 0 0 18745

SALES REVENUE

General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA)

2022 Phase1 0

> Income Statement as of Dec 31st 2023 2024 2025 Phase2 Phase2+ Phase+ 0 0 0

(1177597)

19860 4860 2000 1500 1400 2000 1000 3100 4000 (1177597)

0

1157737 1136137 21600 0 0 0 0 0 19860

2026 Phase2+ 0

Predicting Expenses with SMART Objectives 73

74

Business Finance Planning with Microsoft® Excel®

You need the first two years in quarters plus five years of projected income and expenses to present to potential investors.

3.5 Conclusion The information presented in this chapter is important because it presents a process of how to calculate potential costs and expenses for your new busi­ ness idea or venture. What is important in this chapter is not only to figure out what expenses might be, which is specific to your business, but also— and perhaps more important—to begin the process of generating financial statements from the analysis of your potential expenses. This chapter covered: • • • • • •

SMART objectives as potential clues to expenses Labor costs over time Labor costs based on function Equipment and fixed-asset costs General costs and expenses Legal costs

The next chapter will figure out sales revenue and how you can estimate it using an analysis of your competitors, based on revenue that your competi­ tors generate for their products and services.

3.6 The Spreadsheet So Far Download the relevant worksheets at oracletroubleshooter.com/business -finance-planning/ch3

Chapter 4

Predicting Sales Using Your Competitors Build your confidence with smaller, achievable goals one at a time —Steve Jobs The previous chapter dug into analyzing your business idea and assessing basic costs, including labor costs, equipment costs, fixed-asset costs, and general expenses. Most of this chapter figures out how much revenue your new business idea can generate as a way to create a clear picture of how much your business is worth based on how much money you can bring into the company. This content is important because it allows you to present to investors, a bank, or other lenders just how much money your business can potentially make, which leads to your financial backers’ pos­ sibly making money. This chapter covers: • Pricing strategy • Marketing analysis tools • Competitors • The 4 Ps

75

76

Business Finance Planning with Microsoft® Excel®

4.1 Generating Pricing Strategy with Marketing Analysis Tools The objective in this section is to introduce and describe three standard busi­ ness-oriented tools that can be used to figure out who your competitors are and then to gradually build enough understanding to use the facts about your competitors to figure out how much revenue your new business venture might be able to generate. The three tools to be presented are as follows: • STEEP Analysis. This is a method of analyzing a business idea from five perspectives: Social, Technological, Economic, Ecological, and Political/ Legal—where and how your business fits in. • Porter’s 5 Forces. Assess competitive advantage including Entry and Substitutes (threats of rivals or competitors). • The 4 Ps. Marketing with Place, Product, Promotion, and Price, which ultimately leads to competitor pricing data, which can help to generate your organization’s pricing tables, and that leads to sales and revenue forecasting. All of these tools are designed to help you understand your business idea as a sequence of individual steps, which when added together will complement each other in subtle ways to help you build a better and more thorough understanding of what you are trying to do as a business.

4.1.1 STEEP (Competitive Market Industry) Analysis A STEEP analysis is a form of competitive market industry analysis where you do a simplistic but systematic analysis of where your business fits into an industry and with its competitors—whether known or unknown. In the case of the BDaaSB case study, Worksheet 4.1 begins the process of under­ standing what BDaaSB is as a business, what it does, and where it fits into an industry. Is there a niche for BDaaSB? This is the question I attempted to answer for BDaaSB in Worksheet 4.1. When you perform the same process with your business idea, make sure to think about your idea in the same way and start filling in the boxes. And even though this process might seem simplistic, even if it seems like common sense to you, it is always prudent to analyze and organize your thoughts into pictures and diagrams to help you make sure you are not flying blind into an opportunity. The objective is to help you to find and

International trade Taxes Inflation

Keeping up with change

Available labor during change

Available B2B support

Cost control of change

Evolving IT security threats

Software life cycle periods

Labor mobility

Remote work

Customer locational demographics

Climate change (public opinion, values, education)

Worksheet 4.1

Consumer confidence

Pace of change

Advertising

Jobs

Interest rates

E

P Political/Legal

Regulations

Carbon footprint

Energy use

Political stability

Consumer protection & liability

Data and computer security

Contractual liability

Labor laws

There is little presently obviously direct affect Operational location of between IT and the the business is affected physical and biological by political and legal ecological factors environments

Ecological

A STEEP analysis for assessment of strategic change with the BDaaSB case study

Communication Research Development

Innovation

Recession or boom

Rapid changes in technology have a big effect

Society as a whole

Economic conditions

Changes in economic conditions affect spending power of clients

E Economic

T

Technological

S

Social

Predicting Sales Using Your Competitors 77

78

Business Finance Planning with Microsoft® Excel®

S

T

E

E

P

Social

Technological

Economic

Ecological

Political/Legal

Society as a whole

Rapid changes in technology have a big effect

Changes in economic conditions affect spending power of clients

Affect of your business Operational location of on physical and the business is affected biological ecological by political and legal environments factors

Worksheet 4.2 A STEEP analysis for assessment of strategic change on your busines

understand small but perhaps crucial pieces that you might have missed. Fill in Worksheet 4.2 based on how your business fits into each category, and you may discover something that is important to your business, or per­ haps is important to you.

4.1.2 Porter’s 5 Forces Porter’s 5 Forces allows you to focus more on the business itself rather than the effect it has on strategy, as in the STEEP analysis. Using Porter’s 5 Forces, you are thinking about what you do and who you are as a business in relation to potential competitors and other business ideas. Once again, I

Predicting Sales Using Your Competitors 79

Figure 4.1

Porter’s 5 Forces and competitive advantage for BDaaSB

begin with the BDaaSB case study shown in Figure 4.1. Is there an unfilled niche market or not? A blue ocean empty of competition is not always nec­ essary, as sometimes followers can learn from the mistakes of leaders. Also, a market that has competitors indicates that there actually is a market, as long as it is not saturated with competitors. So now do the same thing for your own business idea using the blank diagram shown in Figure 4.2, using the Porter’s 5 Forces tool to gain a little more understanding. Fill in the diagram based on the headings: • Barriers to New Entrants. What are your entry barriers? What is stop­ ping you from starting your business? • Exit Barriers. What are your exit barriers, say a few years into the future when it is profitable to sell your business? • Supplier Bargaining Power. Can you bargain with your suppliers? Are they scarce or common?

80

Business Finance Planning with Microsoft® Excel®

Barriers to New Entrants Exit Barriers

Entry Barriers

Supplier Bargaining Power

Intensity of Industry Rivalry

Buyer Bargaining Power

Substitutes (Threat of Rivals)

Figure 4.2 Porter’s 5 Forces and figuring out the competitive advantage of your business

• Buyer Bargaining Power. Can your buyers bargain with you and you with them? • Substitutes. Can other people take your ideas, improve them, and kill your business? So, after thinking about your business venture based on where you fit into a market and industry, and who you will compete with and how, the next step before we move on to the next tool is to figure out who your most useful competitors are. Your most useful competitors are those whose information you can borrow in order to figure out what your future revenues might be. After you have figured out some competitors, you will get back to a little more detailed analysis using a tool called The 4 Ps.

Predicting Sales Using Your Competitors 81

4.2 Competitors—Who and Why? You can begin to figure out who your competitors are by answering a num­ ber of questions that lead you down the path to a better mental picture of your business situation—all of these questions are intended to get you thinking about your potential competition, real or imagined, currently in business or not: • Do you have any competitors? o If not, does that mean that you have a niche market? o If not, does it mean there is no market? • What is your competition doing and how can you do it better? • What frustrates you in some aspect of your life that either nobody else is solving and can you solve, or that you can solve better than others? Does that frustration have anything to do with your business? • Are you a leader (brand-new product) or a follower (improving an existing product), and are you solving things that the product leader in the field has not solved or isn’t aware of as a problem? • What is your competition not doing? Why would you want to figure out who your competitors are? First, for all the reasons above, but second, and more significant, you need to fig­ ure out how much your competitors charge their customers so that you can figure out how much to charge for your product or service, and either undercut the competition or produce a better quality or improved product with a higher price tag that wins market share. How do you figure out who your competitors are? This question is answered throughout this chapter using tools like the STEEP analysis, Porter’s 5 Forces, and The 4 Ps market­ ing analysis tools, perhaps some industry knowhow, or searching online such as with Google®.

4.2.1 Competitors for the BDaaSB Case Study BDaaSB competitors are in a new industry, so there may not be a lot of information. For other types of business there may be information online or at a library. You could also think about how you could develop a competitive advantage. Ask what is best about your business idea and why. Why would customers buy from you as opposed to your competitors? Here are the questions that we can ask to figure out what might be useful pricing models:

82

Business Finance Planning with Microsoft® Excel®

• What is BDaaSB best at? Providing BigData as a Service (BDaaSB) to small companies that cannot afford large-scale in-house or cloud-based BigData database infrastructure and development. • Why is BDaaSB best at it? BDaaSB is not necessarily best at provid­ ing BigData as a Service, but the intention is to provide a generic multitenant service to a large number of small businesses, plus all aspects of BigData including storage, analytics, and visualization— no competitor does this at the moment. • Why is BDaaSB better than its competitors? BDaaSB provides an end-to-end service allowing for complete outsourcing of BigData, ana­ lytics, and visualization. Most BDaaSB competitors appear to require clients to have at least some and perhaps a lot of technical expertise. The BDaaSB target market is small businesses that cannot afford tech­ nical help and do not have those technical skills in-house already. After much thought and a lot of online searching, I found a number of potential competitors for BDaaSB. I then proceeded to analyze what spe­ cifically BDaaSB would do as a business, then narrow down potential com­ petitors based on what they do that is the same as the BDaaSB business proposition. At the end of this analysis, it appeared that some competi­ tors provide the same product as BDaaSB, but others provide subsections thereof, or even the same product in a non-packaged and far more com­ plex format than small businesses might want due to complexity, cost, or both. As an experienced IT person, understanding and identifying BDaaSB competitors is a process of cross-referencing other companies based on research and my knowledge of the industry, as shown in the matrix of com­ petitors in Worksheet 4.3.

Industry knowledge is always useful in any business venture; some entrepreneurs may beg to differ, but that approach is likely fraught with unknown risks. I then proceeded to fill in the gaps in the matrix and decided, at the time of the analysis back in 2017, that Doopex and Google Cloud Dataproc were the closest matching BDaaSB competitors; I also decided at the time that Oracle® was just too expensive. In addition, and most important, I could physically locate realistic revenue numbers on the internet for free for these two competitors,

Predicting Sales Using Your Competitors 83

Competitor Cazena Blue Data Century Link Amazon Elastic MapReduce / HBase Amazon DynamoDB Oracle Doopex Microsoft Azure HDInsight Google Cloud Dataproc Einstein Analytics Qubole Data Service IBM BigInsights Exosol RedShift* Snowflake* DataBricks *Not BigData (these are warehouse only)

Worksheet 4.3

Collect and Process Data

Data Analytics

Visualization

Y N N N N N N N N ? N N N N N N

Y maybe maybe y N N Y Y N Y Y Y Y Y Y Y

N N N N N N N Y N N N N Y N N N

Available Pricing Information None None None None 6 months free Vague Accurate None Y None None None None

None

BDaaSB competitor functional matrix

and thus I could create revenue estimates for financial projections to some­ day present to potential investors. Note in Worksheet 4.3 how the columns across the top are based on the functions of the new venture, in this case the BDaaSB business venture, including Collect and Process Data, Data Analyt­ ics, Visualization, and Available Pricing Information. It follows from Worksheet 4.3 that you can now do something similar for your business idea in Worksheet 4.4, where you construct a matrix, figure out your competitors and the important things they do, and use the process to begin to build a revenue model for your business venture. Of course, if you already know who your competitors are, then this is not hard to figure out, but you may find it could help you to think of things you have not thought of by going through a detailed, systematic, step-by-step analytical process, which forces you to think about the details without allowing emotional content to interfere with your thought processes. Take the time to do this analysis—it will be worth it! Here’s one very good reason: I decided back in 2018 to not pursue BDaaSB as a business, given that my analysis told me that it required too much cash in loans up front, with a long time scale to generate a profit. And now at the writing of this book in 2022, I looked up Doopex as a company and found it no longer

84

Business Finance Planning with Microsoft® Excel®

Competitor

Worksheet 4.4

Function-1

Function-2

Function-3

Available Pricing Information

Creating a competitor functional matrix for your business

exists. Without this analysis process, I might have burned through what little I owned plus taken out huge loans for a business idea that my analysis gave a clear picture was not a good move as a potentially profitable ven­ ture—I have had and will have many other ideas, including writing a book about it, or even spinning off other ideas through the analysis process.

4.3 Marketing Strategy and The 4 Ps After research, thought, and filling in details for Worksheet 4.4, you should now have some idea of potential competitors, and you have found their reve­ nue information online, at a library, or perhaps even from publicly available information from somewhere like the stock market. So now let us continue with another marketing analysis tool and dig into generating pricing strategy with The 4 Ps: marketing with Place, Product, Promotion, and Price. The objec­ tive is ultimately to lead to competitor pricing data that can help to generate your organization’s pricing tables, and thus sales and revenue forecasting. In the case of the BDaaSB cloud-based case study, IT and computerization are an abstracted service that can be applied to any industry that needs this service either without the hassle or can’t afford it. For example, com­ puterizing a travel agency or a dentist’s office are completely different businesses, but from a computerization perspective, much of the internals

Predicting Sales Using Your Competitors 85

of the hardware and the software are the same—the same computers, key­ boards, services, and technical skills. Abstraction in IT is where the money is made through multiple repetitions of the same product sold to many customers, even many customers across many different industries, where you only have to build that product once.

In terms of a selected industry for your business idea, you may find that security and regulatory requirements lead to higher costs in industries such as healthcare, defense, and finance, which entails greater cost and risk. “The global BigData as a Service market is expected to grow at a com­ pound annual growth rate (CAGR) of 60.9% during the period 2016–2020. Wow! What a market to be in on for an investor at the beginning. Inves­ tors must get in now; BigData as a growing field is a good investment, has great market potential and is very much under-saturated as a market. This is the path to take with BigData and the time is now! And if IBM is doing it, then there must be money in it. BDaaSB occupies a niche that the big players do not—disruptive investments are good investments.”

That’s an elevator sales pitch that is a little verbose,

and parts of it sound good, but still there will always

berisk. Calculated, critically thought-out analytical risk

assessment is better than randomized risk. Check the water

temperature first before jumping in without falling in.

4.3.1 Product, Price, and Sales Revenue Forecasting The first two sections of The 4 Ps are Product and Price, where (1) Product defines what you will sell to customers, and (2) Price attempts to figure out what you can sell it to them for. This is where and how you get to figure out your potential sales revenue and thus get a good representation of how much money you can generate from your business idea, with a systematic approach that shows potential investors that you have done your home­ work and your due diligence.

86

Business Finance Planning with Microsoft® Excel®

4.3.1.1 Product How do you define, analyze, and interpret your product or service? Think about it and write it down in terms of the specifics of your product, bearing in mind that what you are doing in this section is defining your own business idea based on your competitors so that you can build a clear picture of how much you will be able to charge your future customers. What I will show you is how I analyzed BDaaSB, which should give you some inspiration for what will eventually lead you to the end result of a single number as a sales forecast. We will get back to BDaaSB shortly. Imagine you are planning to open a restaurant. How do you put the prices on your menu for what you intend to serve? Bear in mind that at this point you do not have to think about how much your chairs and tables will cost, your rent, or even the day-to-day food inventory you will purchase—all you are trying to do is figure out how much you can competitively charge your customers. So: • What is your product? Well-cooked and well-presented food. • Where do you find examples of finished foods? Go to restaurants, look at their menus, eat there, count their customers, and come up with average prices and average head counts—and voilà! You can quite quickly generate an estimate of monthly, weekly, or even daily rev­ enues if you eat out enough and you write things down. Give the analytical process detailed due diligence because the more data and information you gather, the better your analysis will be, and the better picture of your future business you will present to yourself and any potential investors. Setting up a new restaurant is expensive when it comes to regula­ tions and all the asset purchases that go into it, so it is best to make sure you have a good idea, a great location, and you are not just going to pour your life savings into a hole and set it on fire. Some business ideas seem simple, and many entrepreneurs just duck their heads and go for it without thinking, which does have its merits if courage is required, but also remember that discretion is the better part of valor—do your homework first, and it is also likely you will improve upon good ideas and learn to discard poor ones. So now back to the BDaaSB case study. We will explore the potential for multiple layered products that can open up multiple streams of revenue, such as an abstract multitenant BigData service, expanded to include ana­ lytics, visualization, and intersections that cater to B2B, public service, and monetizable consumer customers. The product will provide BigData as a

Predicting Sales Using Your Competitors 87

Service, Analytics as a Service, and standardized visualization to get the new venture started. Following that, we will increase customer value and keep up with the rampant progress of the BigData industry space by add­ ing on intelligent intersections between disparate data sets. BDaaSB will allow small companies to compete with larger companies that have the capital to invest in large data-collection and data-processing operations, giving small companies an edge in market share. Therefore, BDaaSB cus­ tomers would be paying for an edge in a highly competitive space that will be dominated in the future by the big players. So that is a proper but detailed and intensive analysis, with the objective in this section of creating a more thorough understanding of your product, and if some parts of this process do not seem like they make sense at first, they will over time as you systematically analyze your business idea.

DOOPEX PRICING Pay per Usage € Giga (storage) Doops (standard machine) Total Gigs + Doops / Month

€ 0.02 month € 0.33 hour of processing

Pay Per Server Type of Server Standard (minimal RAM & CPUs Memory+ Memory++ (lots of RAM ) Compute+ Compute++ (lots of CPUs ) per Giga/month Euro to Dollar Exchange Rate A Giga is assumed to be 1Gb Standard size in Tb

Estimate per Month $240

$278

$518

Per

€ per Month € 200 € 300 € 500 € 300 € 400

CPU Cost per Month $234 $351 $585 $351 $468

Size in Tb 10 20 30 20 30

Per Giga per Month $180 $359 $539 $359 $539

Estimate per Month $414 $710 $1,124 $710 $1,007

€ 0.015 $1.17 10 Weighted Average Estimated Cost per Month for Doopex

FROM Competitors

Worksheet 4.5 Estimated pricing information for Doopex.com where

BDaaSB uses only $747 per month [described on next page]

$747

88

Business Finance Planning with Microsoft® Excel®

4.3.1.2 Price BDaaSB pricing uses an average of Doopex pricing from Worksheet 4.5, combined with Google Cloud pricing from Worksheet 4.6. The BDaaSB pricing model is preferably subscription-based for small businesses that want a reusable, rinse-wash-repeat infrastructure. More selective clients wanting customization or the ability to execute analytics themselves would have to be charged on a pay-per-usage basis. The BDaaSB business model is not targeted at selective customers with specific requirements; these customers would have to be charged per usage with customizations subject GOOGLE CLOUD PRICING Virtual CPUs

Machine type

Standard machine types n1-standard-1 1 n1-standard-2 2 n1-standard-4 4 n1-standard-8 8 n1-standard-16 16 n1-standard-32 32 n1-standard-64 64 High-memory machine types n1-highmem-2 2 n1-highmem-4 4 n1-highmem-8 8 n1-highmem-16 16 n1-highmem-32 32 n1-highmem-64 64 High-CPU machine types n1-highcpu-2 2 n1-highcpu-4 4 n1-highcpu-8 8 n1-highcpu-16 16 n1-highcpu-32 32 n1-highcpu-64 64 Custom machine types Item vCPU

Memory in Gb

Price / Hour

Estimate per Month

3.75 7.5 15 30 60 120 240

$0.01 $0.02 $0.04 $0.08 $0.16 $0.32 $0.64

$7.20 $14.40 $28.80 $57.60 $115.20 $230.40 $460.80

13 26 52 104 208 416

$0.02 $0.04 $0.08 $0.16 $0.32 $0.64

$14.40 $28.80 $57.60 $115.20 $230.40 $460.80

1.8 3.6 7.2 14.4 28.8 57.6

$0.02 $0.04 $0.08 $0.16 $0.32 $0.64

$14.40 $28.80 $57.60 $115.20 $230.40 $460.80

Price / Hour per vCPU $0.01

Estimate per Month

Weighting 1 1 1 3 6 1 1 14 1 1 1 1 5 3 12 1 1 1 5 3 1 12

Weighted Average Estimated Cost per Month for Google Cloud

FROM Competitors Worksheet 4.6 Estimated pricing for Google Cloud pricing, where $326 per month applies to BDaaSB

Likely Cost 7 14 29 173 691 230 461 14 29 58 115 1,152 1,382 14 29 58 576 691 461

$326

Predicting Sales Using Your Competitors 89

to consulting fees, and possibly separate servers as well. I am not much of a cook but maybe starting a restaurant is a better idea. Worksheet 4.6 continues with the above process by detailing out Google Cloud services pricing as a comparative competitor, in view of using that information to guess at potential sales revenues based on how much you can charge for your product or service. What you see here is a laboriously long and complex process shown in Worksheets 4.5 and 4.6 simply to arrive at an average monthly sales revenue figure for BDaaSB, based on what competitors charge for the same product or service; however, this solitary string of digits is well thought out, and inves­ tors will want to see that you have taken your financial planning seriously and aren’t just guessing. After all, it is their money, and they want to maximize their potential gain whilst minimizing their potential risk. The two weighted aver­ ages for Doopex in Worksheet 4.5 and Google in Worksheet 4.6 are used to estimate BDaaSB pricing to help generate sales forecast numbers. As shown in Worksheet 4.7, Oracle was considered as a competitor but excluded from the resulting average revenue estimate because it is very expensive and probably not really useful as a competitor as BDaaSB is tar­ geting large numbers of small businesses that cannot afford the services of such an organization. For example, if you are opening a burger joint or a roadhouse, there is not much point in visiting the local Michelin-starred restaurant and paying $250 for a single plate to assess food quality and presentation—it’s not the same target market. We will get to marketing later in this book, which is another fascinating and enlightening process to understand and take full advantage of. Similar to Oracle, cloud service providers such as Amazon Web Services (AWS®), Google Cloud, or Microsoft® Azure® are not BDaaSB competitors because BDaaSB is far more specific as a service and focuses on small busi­ nesses alone. The objective of BDaaSB is a packaged service for a very specific market in a potentially saturated environment, but by filling a niche that the large cloud service providers don’t cater to, at least not yet. For example, a small-scale retail outlet might prefer a packaged BDaaSB imple­ mentation that does it all for them—we just need a lot of them. So, figuring out who your real competitors are is not quite as easy as it looks, and that assessment process determines how much you can charge your customers—they are smart and will be very careful to compare prices; they will not pay for your product or service if they can get lower cost else­ where, sometimes regardless of quality (quality is another market segment).

90

Business Finance Planning with Microsoft® Excel®

32 CPUs, 256Gb RAM, 48Tb per Node

Price per Month per Server

Price Per Usage

BigData Machine

$14,400

3 Nodes: Big Data Cloud Machine

$14,400

ADD 1 Node: Big Data Cloud Machine

$4,800

BigData Cloud Service

$14,400

3 Nodes: Big Data Cloud Machine

$14,400

$27.6497

ADD 1 Node: Big Data Cloud Machine

$4,800

$9.2166

$3,200

$3.0722

3 Nodes: Big Data Cloud Machine

$14,400

$27.6497

ADD 1 Node: Big Data Cloud Machine

$4,800

$9.2166

BigData SQL Cloud Service (Analytics) Big Data SQL Cloud Service

Estimate Per Month

$53,600

Must add BigData Cloud Service Per Server

Must add BigData Exadata Cloud Service Per Server Between $50-$300/hr per month

$36,000

FROM Competitors Worksheet 4.7 Estimated pricing information for

Oracle BDaaSB is not the same market

In short, this figuring out who your competitors are and doing that accu­ rately is actually very important to the future success of your business. Make sure to be quite realistic as to who your competitors are, based on what your business does, what those potential competitors do, and very likely the complexity and scale of their business functions, as it can determine their target market. Figure out your target market a little to understand who and what is a viable competitor. So how do you as a business owner come up with a way to map your pricing estimates into this over-detailed spreadsheet structure? Once again, this is where you have to get creative, using the tools in this book. Here are some rough draft ideas for different business types: • Restaurant. Eat in potentially competing restaurants. • Real estate rentals, sales, and management. Talk to realtors, look for a new house, pretend to look for a new house, scan their websites. Google is the best tool for getting information. BDaaSB pricing infor­ mation was all found on the internet using Google.

Predicting Sales Using Your Competitors 91

• Dog-walking service provider. Volunteer to babysit your neighbor’s dog when they go away on vacation. Utilize the local dog walking ser­ vices yourself. Look up their pricing online or call and ask them how much they charge—get a breakdown of their pricing for the various services they offer. • Tourist services. Go online and research the type of tourists’ service you are thinking about. • New airline. (Yes, I know—maybe a little large for a book like this.) Go to websites like Priceline®, Kayak®, other airline websites—narrow it down to the routes you will serve and whether you will cater to business pas­ sengers, tourists, or both—business passengers are generally much more profitable. The cost of aircraft, fuel, maintenance, and landing rights might persuade you to isolate a niche you never thought of that doesn’t involve leasing aircraft. For your business idea, what you can do in a very simplistic format is to plug your monthly revenue estimates for all of your competitors into Work­ sheet 4.8, where the average at the bottom will be passed directly into your sales forecast worksheet later on in the process. You can make this more complicated as you want to or need to—BDaaSB is complex because it offers multiple services, but then again, a dog-walking service could offer multiple Monthly Revenue Estimate

Competitor Competitor - 1 Competitor - 2 Competitor - 3

Average Monthly Revenue for all Competitors Worksheet 4.8 A simple calculation of average competitor monthly revenues for your business

92

Business Finance Planning with Microsoft® Excel®

types of service that you would have to detail out and compete with, and if you think big then you might want to expand your dog-walking service nationally as a potential franchise.

4.3.1.3 Competitor Pricing Strategy to Sales Revenue Forecasting How do we get from the analysis of competitor pricing strategy to a sen­ sible revenue forecast that allows you to guess how much you will sell (how much revenue you will generate)? This dictates how much money you will need to borrow to make your business work. For the BDaaSB case study, I have used an average from the estimated equivalent revenues shown for Doopex and Google in Worksheets 4.5 and 4.6, respectively, and then sim­ ply projected into the future for five years of sales revenue earnings based on an expected number of customers, where the results are shown in Work­ sheet 4.9. In the case of BDaaSB, this projection was created in 2017 and it is a little out of date, but the analytical process is still the same and could potentially apply to planning the finances of any kind of business venture. Note that Worksheet 4.9 shows that the first early adopters get the prod­ uct for free in 2018, therefore showing $0 total revenues for that year. Giving a service away for free is a way to win customers and get great reviews that will lead to many more customers, and where your early adopters do not necessarily have to remain with you forever. Great references and what your business can learn from and grow with real people and organizations can help your business idea turn into a really useful product or service; happy customers can do a lot for you in terms of good public relations—starting a business is hard, so it can pay to think big and think over the horizon a little.

Revenue per Customer Year Number of customers Monthly Annually

$536 $6,437

Total Revenue

Total Revenue

Total Revenue

Total Revenue

Total Revenue

2018 25

2019 50

2020 250

2021 350

2022 500

$187,732 $2,252,787

$268,189 $3,218,267

$0 $26,819 $134,094 $0 $321,827 $1,609,134 25 early adopters are Free the first 2018

Worksheet 4.9 Projected revenues out for five years based on expected customer counts for BDaaSB

Average

$123,367 $1,480,403

Predicting Sales Using Your Competitors 93

4.3.1.4 Adding to Financial Statements for the BDaaSB Case Study Now we can detail out the numbers that would be copied from the calcu­ lated projects of sales revenue in Worksheet 4.9, beginning with no rev­ enue shown as a result of 25 early adopters’ getting the BDaaSB service for free for the entire year of 2018, and the result is shown in Worksheet 4.10 (on next page) as zero revenue for the year of 2018. Worksheet 4.11 shows the next year of 2019 where there are some numbers because there are some sales shown in Worksheet 4.9 for the second year of business (2019). Note that the amounts on Worksheet 4.9 for 2019 are not precisely the same as the totals shown in Worksheet 4.11. The total annual revenue for 2019 in Worksheet 4.9 is $321,827 but in Worksheet 4.11 is $327,861; this is a rounding issue in Excel because of the way calculations are made in Worksheet 4.11—dividing and multiplying by various percentages for ball­ park values of pay per use, subscriptions, refunded subscriptions, and con­ sulting services. Note that the numbers in the financial statements are what count (income statement, balance sheet, cash flow). Let’s look at the details of each of the revenue sections mentioned above: • Pay per use vs. subscription. The BDaaSB case study is an online service business, and it is divided equally between pay per use, where a cus­ tomer is billed based on how much they use the service, or subscription, where the customer pays a lower but regular fee regardless of how much they use the service. Subscriptions can be a risk for startup businesses because some customers can overuse and even abuse the service— not every customer is a good and profitable customer. Pay-per-use and subscription incomes were set up as being half each, executed in the worksheet with the /2 (divisions by 2) in the SalesForecast/!$E$6 inter-worksheet references. Also note that in the 2019 numbers I allo­ cated 1/10 of sales to Quar ter 1, 2/10 to Quarter 2, 3/10 to Quarter 3, and 4 / to Quarter 4—this all totals 10/10, which I did to demonstrate that 10 the calculations can be changed to a more detailed level if so desired. • Refunds. These are as a result of returns on subscriptions provided to customers who cancel the service, for whatever reason, calculated as a percentage of subscriptions revenue. There is a setting at the bottom of Worksheet 4.11 called Refund estimate (subscription cancellations), which is set at 5% and can be altered as an expected percentage refund percentage. [Text continues on page 96]

Worksheet 4.10

(65126)

10000 500 2500 3000 500 500 250 250 2500 (65126)

0

(65126)

10000 500 2500 3000 500 500 250 250 2500 (65126)

0

General revenue stream for BDaaSB for four quarters of 2018

5% 10% 10%

(65376)

OPERATING INCOME/LOSS (EBIT)

Refund estimate (subscription cancellations) Consulting services Assumed effective tax rate

10000 500 2500 3000 500 500 250 250 2500 (65126)

10250 2250 2500 3000 500 0 2000 0 0 (65376)

General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) (65126)

0

0

Marketing and Advertising

SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES

Income Statement as of End of Quarter 2018 Mar Jun Sep Dec 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 55126 55126 55126 55126 53776 53776 53776 53776 1350 1350 1350 1350 0 0 0 0 0 0 0 0 0 0 0 0 10250 10000 10000 10000

Bigdata as a Service for Small Businesses (BDaaSB)

(260755)

40250 3750 10000 12000 2000 1500 2750 750 7500 (260755)

0

0 0 0 0 0 220505 215105 5400 0 0 0 40250

2018

94 Business Finance Planning with Microsoft® Excel®

Worksheet 4.11

(267733)

10000 500 2500 3000 500 500 250 250 2500 (267733)

0

(234947)

10000 500 2500 3000 500 500 250 250 2500 (234947)

0

General revenue stream for BDaaSB for four quarters of 2019

5%

10%

10%

(333305)

OPERATING INCOME/LOSS (EBIT)

Refund estimate (subscription cancellations) Consulting services Assumed effective tax rate

10000 500 2500 3000 500 500 250 250 2500 (300519)

10000 500 2500 3000 500 500 250 250 2500 (333305)

General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) (300519)

0

Mar 32786 16091 16091 (201) 805 356091 309991 3600 30000 12500 0 10000 0

Marketing and Advertising

SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES

Income Statement as of End of Quarter 2019 Jun Sep Dec 65572 98358 131144 32183 48274 64365 32183 48274 64365 (402) (603) (805) 1609 2414 3218 356091 356091 356091 309991 309991 309991 3600 3600 3600 30000 30000 30000 12500 12500 12500 0 0 0 10000 10000 10000

Bigdata as a Service for Small Businesses (BDaaSB)

(1136504)

40000 2000 10000 12000 2000 2000 1000 1000 10000 (1136504)

0

327861 160913 160913 (2011) 8046 1424365 1239965 14400 120000 50000 0 40000

2019

Predicting Sales Using Your Competitors 95

96

Business Finance Planning with Microsoft® Excel®

In the online world, pro-rated, no questions asked, up-front paid subscription refunds are essential to positive online reviews, which will drive sales; reviews are critical to success in the online sales world. •

Consulting services. This is another estimated revenue stream where BDaaSB would be able to charge consulting fees to customers as a percentage of total revenue (pay per use plus subscriptions), which is currently at 10% listed as Consulting services ratio.

A provision is provided for potentially lucrative consulting sales for servicing clients who have special requirements—this source of revenue can be lucrative but is difficult to predict, but it must be included as a value-added service that will attract more customers. Worksheet 4.12 takes quarterly revenue projections from Worksheets 4.10 and 4.11 and presents numbers for an annual projection from 2018 to 2022. Bigdata as a Service for Small Businesses (BDaaSB) Income Statement as of Dec 31st 2018 2019 2020 2021 2022 Cloud Managed Based Services SALES REVENUE 0 345964 1729819 2421746 3459637 Pay Per Use 0 160913 804567 1126394 1609134 Subscriptions 0 160913 804567 1126394 1609134 Refunds (subscriptions lost) 0 (8046) (40228) (56320) (80457) Consulting Services 0 32183 160913 225279 321827 COST OF GOODS SOLD 220505 1424365 1479365 1479365 1479365 Payroll / Labor Costs 215105 1239965 1239965 1239965 1239965 Worksheet stream for BDaaSB 14400 from 2018 14400 to 2022 14400 Payroll Outsourcing Costs 4.12 General revenue 5400 14400 Cloud Services Hardware 0 120000 0 0 0 Cloud Services Software Licensing 0 50000 0 0 0 For your business idea you would take your Average Monthly Revenue for Managed Services Hardware, Software, Support 0 0 225000 225000 225000 OPERATING EXPENSES 40250 4.8 40000 40000 All Competitors at the end of Worksheet and plug it40000 into your40000 equivalent

revenue and customer projections as shown on the blank Worksheet 4.13. 0 0 0 0 customer number will vary based on your business type 0 and model—for example, a restaurant will have far more customers—and perhaps will vary over the years depending on success and advertising, as

Marketing and Advertising Obviously, your

General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance

40250 3750 10000 12000 2000 1500 2750

40000 2000 10000 12000 2000 2000 1000

40000 2000 10000 12000 2000 2000 1000

40000 2000 10000 12000 2000 2000 1000

40000 2000 10000 12000 2000 2000 1000

Number of customers Monthly Annually

2500

2750

3000

3000

3000

$50 $600

$125,000 $1,500,000

$137,500 $1,650,000

$150,000 $1,800,000

$150,000 $1,800,000

$150,000 $1,800,000

Revenue per Customer

Total Revenue

Total Revenue

2018

2019

Year compared Number of customers Monthly Annually

$142,500 $1,710,000

Predicting Sales Total Using Your Competitors 97 Total Total Revenue

Revenue

Revenue

2020

2021

2022

Average

to, say, ship and expects 10 a company 100 that builds 1000 a rocket 10000 100000 the first three$3,500 to explode somewhere between the launch pad and $350,000,000 low earth orbit, $0 $350,000 $3,500,000 $35,000,000 $77,770,000 not attracting customers for free until it works properly. $42,000 $0 $4,200,000 $42,000,000 $420,000,000 $4,200,000,000 $933,240,000 First 10 early adopters are Free in 2018 Revenue per Customer

Year Number of customers Monthly Annually

$0 $0

Total Revenue

Total Revenue

Total Revenue

Total Revenue

Total Revenue

2018 0

2019 0

2020 0

2021 0

2022 0

$0 $0

$0 $0

$0 $0 $0 $0 $0 $0 First 0 early adopters are Free in 2018

Average

$0 $0

Worksheet 4.13 Projecting potential revenues out for five years based on expected customers

Worksheet 4.13 gives you a blank slate to simply fill in a monthly revenue number for your own business, allowing that number to be propagated into the subsequent financial calculations and statements that are to be pre­ sented later on in this book. It is better if you make specific and deliberate calculations for expected sales revenues based on a systematic approach. Yes, you could guess, but yet again you might miss something important, and you would not want a potential investor to point that out to you. Revenue per Customer Year Number of customers Monthly Annually

$1,000 $12,000 Revenue per Customer

Total Revenue

Total Revenue

Total Revenue

Total Revenue

Total Revenue

2022 25

2023 50

2024 250

2025 350

2026 500

$350,000 $4,200,000

$500,000 $6,000,000

$0 $50,000 $250,000 $0 $600,000 $3,000,000 25 early adopters are Free the first 2022 Total WorksheetTotal 4.14 Revenue Revenue

Total revenues Total Projecting out for five Total Revenue Revenue Revenue years based on expected customer

Year 2022 Number of customers Worksheet 2500 4.14 Monthly Annually

2024

2025

2026

2019 100

2020 1000

2021 10000

2022 100000

$35,000,000 $420,000,000

$350,000,000 $4,200,000,000

$230,000 $2,760,000

Average

3000 3000 revenue 3000 shows2750 an example with a monthly per customer per month (old or new $137,500 customers)$150,000 that is $1,000 per customer in sales rev­ $50 $125,000 $150,000 $150,000 $142,500 $1,500,000 $1,650,000 $1,800,000 $1,800,000 enue.$600 The spreadsheet calculator$1,800,000 uses the same process projecting out$1,710,000 a number of years with expected numbers of customers for each year into the Revenue Total Total Total Total Total Average future.perNote Revenue that these Revenue customer numbers all project Revenue Revenue growth—you Revenue can set

Customer Year Number of customers Monthly Annually

2023

Average

$3,500 $42,000

2018 10

$0 $350,000 $3,500,000 $0 $4,200,000 $42,000,000 First 10 early adopters are Free in 2018

$77,770,000 $933,240,000

98

Business Finance Planning with Microsoft® Excel®

your customer numbers to any values you like. Also note that if you really want to get creative, you can change these calculators and the way they cal­ culate. In the case shown in Worksheet 4.14, 2022 has a total of 25 custom­ ers, where monthly revenue from each of those customers is projected out as a multiple of 50 customers in 2023, meaning that revenue from a single customer is multiplied by 50, assuming there are 50 customers, generating monthly revenue of $50,000 and annual revenue of $600,000. The important point is that we need to present numbers as divided up by month and year because that is how financial statements are built and presented: for specific periods such as monthly, quarterly, and annually. The Revenueway to garner investor interest is to present financial projections simplest Total Total Total Total Total per Average Revenueformat. Revenue Revenue Revenue Revenue in aCustomer standardized It is better to explain your or service and ideas, rather 2022 2023 product2024 2025your bright2026 Year Number of customers 25 the wheel 50 in trying 250 500accounting than reinventing to explain a 350 never-heard-of method you just made up, especially if you are not an accountant. Monthly $1,000 $0 $50,000 $250,000 $350,000 $500,000Focus on $230,000 Annually the Revenue $12,000 $0 your business $600,000 $3,000,000 $4,200,000 $6,000,000 $2,760,000 task at hand: idea.

Totaladopters are Total Total Total Total 25 early Free the first 2022 per Average Revenue Revenue Revenue Revenue Revenue Customer Revenue Total Total Total Total Total 2022 2023 2024 2025 2026 Year Average per Revenue Revenue Revenue Revenue Revenue Number of customers 25 50 250 350 500 Customer Year 2022 2023 2024 2025 2026 Monthly of customers $1,000 $0 $50,000 $250,000 $350,000 $500,000 $230,000 Number 2500 2750 3000 3000 3000 Annually $12,000 $0 $600,000 $3,000,000 $4,200,000 $6,000,000 $2,760,000 25$125,000 early adopters $137,500 are Free the first$150,000 2022 Monthly $50 $150,000 $150,000 $142,500 Annually $600 $1,500,000 $1,650,000 $1,800,000 $1,800,000 $1,800,000 $1,710,000 Revenue Total Total Total Total Total Average per Revenue Worksheet Revenue RevenueProjecting Revenue Revenue Revenue 4.15 Total Total Totalrevenues out Totalfor five years Total Customer Average per based on expected customers forRevenue a2025 restaurant Revenue Year Revenue Revenue Revenue 2022 2023 2024 2026 Customer Number of customers 2500 2750 3000 3000 3000 Year 2018 2019 2020 2021 2022 Worksheet 4.15 shows100 the same 1000 spreadsheet calculator but with differ­ Number of customers 10 10000 100000 Monthly $50 $125,000 $137,500 $150,000 $150,000 $150,000 $142,500 ent revenue and customer numbers, such as for a business like a restaurant. Annually $600 $1,500,000 $1,650,000 $1,800,000 $1,800,000 $1,800,000 $1,710,000 Monthly $3,500 $0 $350,000 $3,500,000 $35,000,000 $350,000,000 $77,770,000 Annually $42,000 $0 $4,200,000 $42,000,000 $420,000,000 $4,200,000,000 $933,240,000 Revenue FirstTotal 10 early adopters are Free in 2018 Total Total Total Total Average per Revenue Revenue Revenue Revenue Revenue Customer Revenue Total Total Total Total Total Year 2018 2019 2020 2021 2022 Average per Number of customers 10 100 1000 10000 100000 Revenue Revenue Revenue Revenue Revenue Customer Year 2018 2019 2020 2021 2022 Monthly $3,500 $0 $350,000 $3,500,000 $35,000,000 $350,000,000 $77,770,000 Number of customers 0 0 0 0 0 Annually $0 $4,200,000 $42,000,000 $420,000,000 $4,200,000,000 $933,240,000 $42,000 First 10 Monthly $0 $0early adopters$0are Free in 2018$0 $0 $0 $0 Annually

$0 $0 $0 $0 $0 $0 Revenue Worksheet 4.16 Projecting revenues out for five years FirstTotal 0 early adoptersTotal are Free in 2018Total Total Total per based onRevenue expected customers for aRevenue car company Revenue Revenue Revenue Customer Year 2018 2019 2020 2021 2022 Number of customers 0 0 0 0 0 Monthly Annually

$0 $0

$0 $0 $0 $0 $0 $0 First 0 early adopters are Free in 2018

$0 $0

$0 $0

$0 Average

$0 $0

Predicting Sales Using Your Competitors 99

Worksheet 4.16 shows a sample of low customer numbers with high cost per item, such as for something like an electric car startup looking for early adopters in the first few years. All this process is really doing is encouraging you as a small business owner to think about what you are planning to do in detail, analyze it all systematically, get it written down (typed in), and get it all organized—it is much easier to execute a plan when you have a plan. It is also much easier to adjust your plan when executing if you already have a structured think­ ing process and plan to guide you, even if you change that plan during the execution process. The mere act of planning will make you more conscious of details and therefore better at executing it and putting it into practice, using a systematic and unemotive approach.

4.3.1.5 Adding to Financial Statements for Your Business Idea You can use Worksheet 4.17 and take your Average Monthly Revenue from one of the examples between Worksheet 4.13 and Worksheet 4.16 and plug it into your equivalent revenue expectations. Obviously not every business would divide revenues between Pay Per Use and Subscription or have con­ sulting services, so you can build your revenue stream breakdown any way you like, depending on your business and how you would like to present it to investors. >

SALES REVENUE Revenue Stream 1 Revenue Stream 2 Revenue Stream 3 Refunds

Mar 0 0 0 0 0

Refund estimate (subscription cancellations) Consulting services Assumed effective tax rate

5% 10% 10%

Income Statement as of End of Quarter 2022 Jun Sep Dec 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Worksheet 4.17 General revenue stream for your business over four quarters of the first year

Worksheet 4.18 extends into the second year of the project operation of your business.

2022 0 0 0 0 0

100

Business Finance Planning with Microsoft® Excel® >

SALES REVENUE Revenue Stream 1 Revenue Stream 2 Revenue Stream 3 Sum of Adjustments

Mar 0 0 0 0 0

Refund estimate (subscription cancellations) Consulting services Assumed effective tax rate

5% 10% 10%

Income Statement as of End of Quarter 2023 Jun Sep Dec 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

2023 0 0 0 0 0

Worksheet 4.18 General revenue stream for your business over four quarters of the second year

Worksheet 4.19 takes the first two years’ quarters, combines them, and in addition projects out to five years into the future.

2022 Phase1 0

SALES REVENUE Revenue Stream 1 Revenue Stream 2 Revenue Stream 3 Refunds Refund estimate (subscription cancellations) Consulting services Assumed effective tax rate

> Income Statement as of Dec 31st 2023 2024 2025 Phase2 Phase2+ Phase+ 0 0 0

2026 Phase2+ 0

5% 10% 10%

Worksheet 4.19 General revenue stream for your business projected over five years

Note that the items added underneath Worksheets 4.17–4.19 (Refund estimate, Consulting services, Assumed effective tax rate) are simple multi­ pliers that can be used as is or substituted for other possible revenue streams—what you add and how you use them is up to you, but they get applied as standard percentage calculators to either introduce new line items or adjust existing line items.

4.3.2 Promotion, Place, and the Beginnings of Marketing Expenses Remember that this process, this book, and these tools are all intended as a systematic process through which you can analyze, give due diligence to, and

Predicting Sales Using Your Competitors 101

prepare a presentation that will give you a better shot at getting finance— the more you think and break it down into parts, the better the result will be.

4.3.2.1 Promotion (Marketing) The last two sections of The 4 Ps—Promotion and Place—are part of marketing and are covered in the next chapter; this chapter is about revenue. But because they are still part of The 4 Ps, for the sake of continuity they are covered briefly here. This chapter gave you tools to estimate potential revenues—the next chapter will begin with the process of how much it will cost you to generate those revenues with marketing. When looking to promote the BDaaSB business idea to customers, pur­ chased LinkedIn® contact lists are a good tool to begin with because this process can be used to accurately target specific small business prospects. Social networks like Facebook® (now Meta) and advertising platforms such as Google are more consumer based, and they can be used for brand building, but they are expensive, so if funding is short, then LinkedIn is a better tool to begin with. Other than expensive sales-lead generation ser­ vices and advertising agencies, the most accurately targetable advertising option is well-vetted, small-scale but highly subscribed, cleaned, reputable B2B email contact lists, where decision-makers can be directly contacted. Initial email contact would be followed up with marketing and selling execution using an online customer relationship management (CRM) tool such as Insightly®. The initial founder can utilize B2B lists for BDaaSB during the prototyping phase, adding on LinkedIn contact lists and online advertis­ ing as funding and person hours become available. Hiring salespeople and a sales-lead generation service would be executed when funding is available. Do some research on B2B contact lists before you buy, even use try-before­ you-buy and search for references, because these lists can sometimes have a low price-to-value ratio, and it can be very difficult to assess their quality. Promotional activities can also include participating in trade associations and trade shows, presenting at conferences, publishing articles in trade journals, utilizing organizations such as the local Chamber of Commerce, blogs, and press releases. In the case of BDaaSB, any activities costing money, such as travel, will have to be restricted to online options until the business has been built enough to cover expenses—that is, until funding is available. Early-adopter customers should be carefully selected to receive BDaaSB for free, using any affordable marketing source. Worksheet 4.20

N N N N ? ?

Sales Umbrella on LinkedIn Leadripple Found.ly Leadsforsure Salesaladin Lead Generation Interchanges

Worksheet 4.20

N N Y N Y N Y Y N N Y Y Y Y Y N

Thumbtack Thunderquote MetricFox 24Task Inside Sales on Demand Modifyed Design Thumb Print Callbox Candor Works Bulldog Solutions Intelliverse Sales Genie Overdrive Interactive Vsynergize Abstract Marketing ProTop on LinkedIn

Specialized Sales Lead Generator

N Y N N ? N

N N N Y N N Y N N N N Y N N N Y

Free Trial

$60/month $50-500/month None None ? None

$20-100/lead $20-100/lead Expensive $4-6/hr $1200/month None Pay on Delv. Expensive Expensive Expensive None None None None None $180/year

Pricing Model

Email Listbuilder Email Listbuilder Email Listbuilder Email Listbuilder Insecure Website No Answer from Sales Rep.

Task Aggregator Task Aggregator Generalized Marketer Generalist but Good Repuatation Sales AAS SEO and Online Footprint Free Until Leads Acquired Generalized Marketer Generalized Marketer Generalized Marketer Specialized Telemarketer Direct & Online Mail SEO and Online Footprint Specialized Sales Lead Gen. Specialized Sales Lead Gen. Screenscraping?

Notes

Sales-lead generation service options as of 2017

N N N N ? N

Y Y N Y Y N N N N N N N N N N N

Pricing Budgetable

1

2 2 1

2

1

1 2

1 1

Phase

102 Business Finance Planning with Microsoft® Excel®

Predicting Sales Using Your Competitors 103

shows a brief summary assessment of currently available sales-lead genera­ tion services, with red highlighted notes indicating the best options. Note that sales-lead generation organizations shown in Worksheet 4.20 are as they existed in October 2017, at the time of building the business plan for BDaaSB. This list might have changed, so it would be a good idea to go online and do your own research—lists like these can change rapidly in the online world, even when the internet is used as the only source of information. The phase column shown in Worksheet 4.20 can be used as a guide as to when the selected sales-lead generator companies should be utilized, which for BDaaSB would have been 2018 as Phase 1 and 2019 as Phase 2, the initial prototype followed by cloud-based installation.

4.3.2.2 Place (Marketing) BDaaSB is an online product that does not require physical distribution as it is an electronic service. On the contrary, the Place of a product is about where a product is and where it is marketed from and sold to. Not only can BDaaSB be delivered online, it can also be marketed to subsidiaries, such as partners or other small companies with different but related services or products. As with most new products, it is sensible to begin locally because of costs and the value of meeting with new customers and partners face to face, but an online service is not restricted geographically. For example, a useful partnering target market is small retailers selling computer products to small companies, who will resell BDaaSB services for a commission. Other non-partner examples might include car dealerships and big-ticket-item, non-franchise retailers, or even smaller franchisees like restaurant chains, smaller multi-franchise auto repair shops, specialized retailers with large area demographic draw areas, or any small- to medium-scale retailer that can benefit from more accurate marketing information drivers. Once again, a very important point to note about the case study for this book is that BDaaSB does not have inventory and all the associated costs and headaches that come with managing inventory. BDaaSB has no stock and no stock control—it sells a digital or virtual service, which is technically not a product but a service. Inventory and product costs you will have to figure out for yourself if you have them for your business, but you can add them with a single inventory cost line item on the income statement, then stretched out over months and years to present a projection. Analyzing inventory costs would rely on your knowledge of your specific business.

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4.4 Conclusion The information presented in this chapter is extremely important because it presents you with a process, rather than just a wild guess, as to how much revenue your business idea is worth over time; you want it to be measur­ able in order to be taken seriously, and quantity (money) and time can suf­ fice to demonstrate you are well prepared. If you plan to spend your own or your friends’ and family’s money on a new business idea, take big loans from banks, or acquire investor financing, you need to know up front if you can make a profit or not—as do your investors. The first step to assessing profitability is figuring out how much revenue you can generate, which is the purpose of this chapter. This chapter covered: • • • • •

Pricing strategy with marketing analysis tools How much competitors charge Calculating potential revenue based on revenue of competitors Product, price, and sales revenue forecasting Promotion, place, and the beginnings of marketing expenses

The next chapter will lead to the cost of winning customers for your new busi­ ness, including segmentation, marketing, SMART objectives, and the general cost of marketing and customer acquisition as a cost to building your business.

4.5 The Spreadsheet So Far The relevant worksheets can be downloaded at oracletroubleshooter.com /business-finance-planning/ch4

Chapter 5

Predicting Marketing Costs

Don’t market the product— market the absence of the product. — Steve Jobs The previous chapter presented a process that can help you to figure out how much revenue you can generate with a business and then project that revenue over time for eventual presentation to investors. This chapter digs into building a customer base with a marketing plan that helps you to figure out how much it will cost you to look for and acquire customers. This chapter covers: • Market and industry segmentation • Marketing costing and budgeting • Sales forecasting • Adding marketing costs into financial statements

5.1 Market and Industry Segmentation Aligning business plan and marketing creates a brand, awareness, and partner­ ships—the objective is to acquire customers because without sales there is no

105

106

Business Finance Planning with Microsoft® Excel ®

business. Figuring out what your business market is and where it fits into a wider economic picture, such as its general industrial segment, can help to define how to market and thus attempt to predict and plan out your marketing costs.

5.1.1 Market Segmentation Once again, we begin with the BDaaSB case study in order to set the tone. Market segmentation will initially be driven by purchased B2B contact lists in order to help get BDaaSB off the ground; more effective but higher-cost leadgeneration services can be invested in when funding is available. Purchased B2B contact lists should contain built-in segmentation attributes such as rev­ enue, company size, funding stage (for a startup), and so on. Worksheet 5.1 shows a map of BDaaSB market segmentation, allowing for a clearer picture of which market segments are targeted as well as when they will be targeted. The next step is for you to draw up a similar picture analysis for your own business idea, as for that shown in Worksheet 5.1, where you can figure out the different ways in which to segment your market. The idea is that you break your market of potential customers into market segments, such as size of customer (company), based on things such as employees, revenue, location, or demographics. Breaking a market into segments is not a com­ plex science, but it is more difficult when you have to think about it for a specific business, especially if you’re an entrepreneur learning about a new business; write down each thing you think of, perhaps in a personal brain­ storming session, to make sure you don’t miss anything, and then proceed to get it better organized. Figure 5.1 shows a large number of different ways that a market can be broken down.

A market is the people or organizations who might be persuaded to buy your product. Figure 5.1 shows the segments that a market can be broken into based on four primary groupings of the following: 1. 2. 3. 4.

Geography. Where people are Demographics. Statistics about those people Psychography. What those people consume Behavior. How those people respond

Locally gives face to face contact

$5-10 million in annual revenue can pay Scale up to $20-50 million in revenue

Small companies can't afford internal BigData Large companies already have BigData

Why?

Figure 5.1

Psychographic Social class Personality traits Goals Activities Interests Opinions Values Attitudes Lifestyles

Behavioral Purchases Spending preferences Brand loyalties Online activities Product attitudes Product benefits Product usage rate Product usage situation

Breaking down market segmentation into four groups

Demographic Age Gender Nationality Occupation Household size Household income Ethnicity Religion Married or single Education level

A STEEP analysis for assessment of strategic change with the BDaaSB case study

Geographic City State Country Density Climate Time zone Language

Worksheet 5.1

Market Segmentation Map Company Size Phase Small Companies ONLY ALL Revenue in Millions $1 Prototype $5-10 Phase 1 Cloud Based $20-50 Phase 2 Managed Services Company Type Small Businesses ALL Location State of Massachusetts Prototype North East Phase 1 Cloud Based United States of America Phase 1 Cloud Based Global Phase 2 Managed Services

Predicting Marketing Costs 107

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Business Finance Planning with Microsoft® Excel ®

The delimiters between some of these groups is a little vague from a big-picture perspective, meaning it’s not that important to be precise, but it helps the process to break things down. Looking back at Worksheet 5.1, you can see that the BDaaSB case study is only broken down in a small number of ways: Company Size, Revenue in Millions, Company Type, and finally Location—none of this is complicated, even though at first glance the details in Worksheet 5.1 might seem a little cryptic. In describing the details in Worksheet 5.1, we can note the following types of customers sought as market segments for BDaaSB: • Small companies for all phases. • Companies with $1 million in revenue during the prototype phase of BDaaSB, followed by $5–$10 million companies in Phase 1, and then $20–$50 million in Phase 2. • Small businesses as a company type applies to ALL, meaning this is the BDaaSB customer base as baked into the business title, where BDaaSB is BigData as a service for Small Business. • Locations are broken into different target market areas (segments) within the different phases, beginning with the local state (Massachu­ setts, in the United States) where BDaaSB is headquartered, through to an entire global population for Phase 2. What we accomplish with this market segmentation process is that we clearly define what type of customers we are looking for, as well as when we look for them. We are targeting a customer base that is as specific as possible so that we have a better chance of making sales. Random market­ ing campaigns can be very expensive, do not work very well, and are diffi­ cult to assess for their value. Your approach to marketing will help your new business to be precise with respect to the acquisition of new customers as a logical and productive activity and not waste money on marketing cam­ paign segments that will not be exploitable. How do you accomplish this with your business focus on creating your market segments as applicable to your business idea? Worksheet 5.2 gives you a blank canvas or frame­ work that you can use to create ideas for your business idea. Break it down into small, manageable pieces, which are your market segments, so that when it comes to spending money on marketing later on, you know exactly what you are spending it on, when, and how much. There is no better way to burn all your cash and end up with nothing but

Segment 4

Segment 3

Segment 2

Segment 1

Worksheet 5.2

Why?

Filling in a blank market segmentation map for your business idea

Market Segmentation Map Phase

Predicting Marketing Costs 109

110

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randomized marketing campaigns that do not produce tangible, or at least trackable, results netting you lots of profitable customers. Don’t throw your hard-won capital at things that don’t count. In fact, using platforms such as Google® and Facebook® can give you marketing platforms that allow you to track your marketing more or less in real time and adjust accordingly to generate a better return on investment for your marketing dollars.

5.1.2 Industry Segmentation An industry segment analysis is performed for BDaaSB in Worksheet 5.3, where it becomes clear that some industries might be more useful to pursue than others. Beginning with the case study as a guide to purpose and mean­ ing for this section, Worksheet 5.3 attempts to fill in some of the blanks when deciding in which industries BDaaSB should be searching for clients. Worksheet 5.3 does not show partners as potential customers, such as a small company that sells a set of office computers to other small compa­ nies—partners are not really end-user customers, but they can help you long term. Partners and resellers sell your products for you and are also very important in marketing, and they can be contacted cheaply with B2B contact lists or a sales-lead generation service. Focusing on a specific tar­ get market allows for concentration of marketing effort and easier techni­ cal repetition with a core set of initial customers. Focus your business on a target market that works for it.

Just as in daily life, figure out what works for your business idea and what you’re good at as a contributor, and then do that over and over again—a lot! Targets can be contacted initially using email followed up by a phone call requesting an in-person meeting, and the entire process is managed, controlled, scheduled, and monitored using a simple online CRM tool like Insightly® (see insightly.com). The next step for you and your business idea is to use the blank industry segment analysis as shown in Worksheet 5.4, and fill in what you think are something like the three to five best industries for you to target with your

Industry

Utilities

Travel

Worksheet 5.3

Transportation

Services

Retail

Professional Services

Performing Act

Music Publishing Performance Venue

Manufacturing

Book Publishing Chemicals Communications Defense Energy Engineering Financial Government Healthcare High Technology Higher Education Industrial Life Sciences

Automotive

Aerospace and Defense Advertising

Airlines too big & bookings centralized online Too big

Good target market for one or more forfree/test early adopter customers

Too general

Perhaps not much collected

Amazon has this covered

Security too expensive Too big

Amazon has this covered Too big Too big Too big and security too expensive Too big Too big Too big and security too expensive Too big Security too expensive

Why not?

Too big

Industry segmentation/market segmentation by industry (partners excluded)

Smaller transportation companies such as trucking

YES. Smaller retailers and perhaps low footprint franchises

Difficult to find a use other than Advertising

Is Ticketmaster too big?

Veterinarians Small scale manufacturers of home-made, specialized type products

If it is not IT

Small marketing and advert agencies Small independent companies and smaller footprint franchises

Useful?

Predicting Marketing Costs 111

Industry

Why not?

Industry and market segmentation by industry as a blank canvas

Useful?

Worksheet 5.4

Aerospace and Defense Advertising Automotive Book Publishing Chemicals Communications Defense Energy Engineering Financial Government Healthcare High Technology Higher Education Industrial Life Sciences Manufacturing Music Publishing Performance Venue Performing Act Professional Services Retail Services Transportation Travel Utilities 112 Business Finance Planning with Microsoft® Excel ®

Predicting Marketing Costs

113

business idea. Obviously, if you are opening up a local restaurant, then this step might be irrelevant because of the nature of your business. However, it is highly appropriate to perform an industry analysis in IT because as a service industry, any type of commercial computer science product or service can often be abstracted to numerous industries, where companies sell easily duplicated and perfected products over and again to many customers and many different industries, generating copious amounts of revenue. For example, Microsoft® Windows® sells across all industries. Tax account­ ing software sells to a multitude of customers as well and in any industry; however, a specialized dental office software package is industry specific to dentists. Some business ideas and industries are potentially more prof­ itable than others because of their wider audience, but the less special­ ized an industry segment is, perhaps the more numerous and capable your competitors will be. On the contrary, more specialized products might find more traction because their market is more defined and more predictable, but it will be a smaller market. There is a very good reason why the Tech. industry compa­ nies like Microsoft drive and even dominate stock markets in highly devel­ oped economies; they generate enormous amounts of wealth because software is able to abstract all industry segments—are there any office environments in the United States that still don’t use Microsoft Windows? The million-dollar question at this point for you in reading this book is, where do these segmentation processes lead you in costing out your busi­ ness idea? Marketing costs money and can be very expensive as an upfront cost that is hard to justify to a financial backer if you have not done your homework; how you win customers is super important, as your cus­ tomer base drives sales, and without at least potential sales you are throw­ ing money away. So you do need a product, but a product without customers is a point­ less exercise. And your potential financial backers will want to see numbers, projections, and a systematic and sensible method of calculating those pro­ jections—they want to know how much money you will make, which leads them to how much money they will make, and without a detailed, logical approach, you will not be able to demonstrate that you have adequately prepared and thought out your approach into an apparently profitable ven­ ture; marketing is key to all of this.

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Don’t expect all the dots to connect before you know what all the dots are. Get comfortable with ambiguity. You can’t predict everything. Plan for what is known. This may not yet be a direct connect-the-dots thing, but what you should understand at this point is that different marketing tools can and should be used for different types of market segmentation, including online market­ ing tools in addition to more traditional and even outsourced marketing tools and services. Some of the tools and services available today are as follows, and they do have different costs: • Television and radio broadcast media—extremely expensive. • Print media—cheaper than TV and radio but still quite pricey. • Door-to-door or in-person specialized marketing—expensive and time consuming. • Online advertising such as Google—expensive, but not using precision in segment targeting can lead to a generalized brand-building pro­ cess that takes a lot of time. • Social media—very tightly targeted marketing but more expensive than Google advertising. • Purchased lists of addresses and phone numbers that you act on yourself—cheaper than most but time-consuming and better done by experienced marketers. • Lead-generation service—they do everything from finding to acquir­ ing your customers for you, depending on how much you are willing to spend; can be very expensive but very effective. In the world of marketing, you do get what you pay for. In general, the more you pay the more you get, and if you have to get lots of customers quickly to grow your business, then you will be spending money. Do your homework and go through this process step by step, starting with seg­ mentation as presented in this section so that you can more accurately and rapidly acquire well-paying customers. You do not want to spend large amounts of your hard-won financial backing randomly blasting the world with junk mail that people discard without reading or spam email that is automatically deleted by anti-spam tools and never even seen at all. You need to segment your markets in order to focus your marketing dollars on

Predicting Marketing Costs

115

your most potentially lucrative outcome. For example, don’t hire a leadgeneration service and expect them to figure out your market segments for you; at least do some of the ground work yourself first—your knowledge and experience counts, so narrow the process down a bit first.

5.2 Marketing Costing and Budgeting The objective of marketing is to get a company started and build a customer base using various techniques and tools, such as purchased email lists and building a CRM dataset, all of which helps to acquire new customers and build relationships.

5.2.1 Sales-Lead Generation Cost Figure 5.2 (on next page) shows a list of available sales-lead generation services found searching online as of 2017 (repeated as a courtesy from Chapter  4, Figure 4.3)—do this search again, as you may find some that are better and cheaper than these. There are some interesting attributes about each of these services, which you can use to note down in a work­ sheet like Figure 5.2 as you find them online, and then give yourself a way to compare value based on price and potential quality. You can use this list of sales-lead generation and related services shown in Worksheet 5.4 to help you build a customer base for your business idea. Research the effectiveness of services like these before you start spending money—marketing services can be expensive as they can involve entire teams of people. Search for genuine providers using online customer reviews, which might be the most important measure; use “10 Best” lists to get a clear and authentic picture of quality.

5.2.2 Continuing Sales Forecasting from Chapter 4 Worksheets 4.9, 4.13, and 4.15 in Chapter 4 (repeated in this chapter here as a courtesy) show various examples of guesstimated revenue based on business type. Worksheet 5.5 repeats Chapter 4, Worksheet 4.9, showing an estimated revenue projection for the BDaaSB case study for the first five years as both monthly and annual estimates. Use these worksheets to

Sales Umbrella on LinkedIn Leadripple Found.ly Leadsforsure Salesaladin Lead Generation Interchanges

Thumbtack Thunderquote MetricFox 24Task Inside Sales on Demand Modifyed Design Thumb Print Callbox Candor Works Bulldog Solutions Intelliverse Sales Genie Overdrive Interactive Vsynergize Abstract Marketing ProTop on LinkedIn

N N N N ? ?

Figure 5.2

N N Y N Y N Y Y N N Y Y Y Y Y N

Specialized Sales Lead Generator N N N Y N N Y N N N N Y N N N Y

Free Trial $20-100/lead $20-100/lead Expensive $4-6/hr $1200/month None Pay on Delv. Expensive Expensive Expensive None None None None None $180/year

Pricing Model Task Aggregator Task Aggregator Generalized Marketer Generalist but Good Repuatation Sales AAS SEO and Online Footprint Free Until Leads Acquired Generalized Marketer Generalized Marketer Generalized Marketer Specialized Telemarketer Direct & Online Mail SEO and Online Footprint Specialized Sales Lead Gen. Specialized Sales Lead Gen. Screenscraping?

Notes

N N N N ? N

N Y N N ? N

$60/month $50-500/month None None ? None

Email Listbuilder Email Listbuilder Email Listbuilder Email Listbuilder Insecure Website No Answer from Sales Rep.

Sales-lead generation service options as of 2017

Y Y N Y Y N N N N N N N N N N N

Pricing Budgetable

1

2 2 1

2

1

1 2

1 1

Phase

116 Business Finance Planning with Microsoft® Excel ®

Predicting Marketing Costs

117

help you to figure out potential revenue projections for your business idea, perhaps changing how the worksheet is built if that is prudent and suit­ able to your particular situation and business idea (be careful about new rows and columns and that you may have to change cells referencing these worksheets). Revenue per Customer Year Number of customers Monthly Annually

$536 $6,437

Total Revenue

Total Revenue

Total Revenue

Total Revenue

Total Revenue

2018 25

2019 50

2020 250

2021 350

2022 500

$187,732 $2,252,787

$268,189 $3,218,267

$0 $26,819 $134,094 $0 $321,827 $1,609,134 25 early adopters are Free the first 2018

Average

$123,367 $1,480,403

Worksheet 5.5 BDaaSB sales forecast projections per month and per year (repeat of Worksheet 4.9)

You can use your own numbers to assess your sales revenue projections, where Worksheet 5.6 (repeated from Chapter 4, Worksheet 4.13) contains a blank for you to fill in with your own numbers, where the monthly revenue­ per-customer number would be pulled from the sales forecast projections in Chapter 4 that you would calculate, fill in, or guess.

Best option is not to guess. Research—if not for yourself then for potential investors. It’s got to be believable! Revenue per Customer

Year Number of customers Monthly Annually

$0 $0

Total Revenue

Total Revenue

Total Revenue

Total Revenue

Total Revenue

2022 0

2023 0

2024 0

2025 0

2026 0

$0 $0

$0 $0

$0 $0 $0 $0 $0 $0 First 0 early adopters are Free in 2022

Worksheet 5.6 Projecting revenues out for five years from customers and sales forecasting (Worksheet 4.13)

Average

$0 $0

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Worksheet 5.7 shows the same spreadsheet calculator but with different revenue and customer numbers, such as for a business like a restaurant (repeated from Chapter 4, Worksheet 4.15 as a courtesy). Revenue per Customer

Year Number of customers Monthly Annually

$50 $600

Total Revenue

Total Revenue

Total Revenue

Total Revenue

Total Revenue

2022 2500

2023 2750

2024 3000

2025 3000

2026 3000

$125,000 $1,500,000

$137,500 $1,650,000

$150,000 $1,800,000

$150,000 $1,800,000

$150,000 $1,800,000

Average

$142,500 $1,710,000

Worksheet 5.7 Projecting revenues out for five years based on expected customers for a restaurant (Worksheet 4.15)

5.2.3 Marketing Costs Estimate BDaaSB marketing costs estimates are shown as a new venture in Work­ sheet 5.8, which we now proceed to accurately assess in preparation for adding into the income statement.

SMART Objective

Hours

Purchase B2B email and phone contact lists by 31 Jan, 2018. Development and understanding of customer requirements will create a better product

Add contact lists to online CRM tool Insightly Segment B2B list to extract most useful contacts by 31 Jan, 2018 Isolated target segments in contact lists Begin CRM activities with B2B list using Insightly by 31 Jan, 2018 Insightly quarterly subscription fees Ongoing CRM marketing and customer acquisition work Begin social network and general marketing and advertising activities by 30 Jun, 2018 Linkedin subscription fee budget Linkedin advertising fee budget Facebook advertising budget Google advertising budget Specialized printed magazine advertising budget Hourly rate of initial founder of BDaaSB Number of customers in 2018

Annual Budget

Phase

1 $12,625

Buying one or more B2B contact lists Cleaning and verifying contact lists

Qtrly Cost Estimate

$10,000 25

$1,875

10

$750 $375 $375 $3,387 $387

$3,000

5 40

$75 25

$12,075 $75 $3,000 $3,000 $3,000 $3,000

Worksheet 5.8 Estimated marketing costs to get BDaaSB started

1 1548

ALL

ALL 300 12000 12000 12000 12000

Predicting Marketing Costs

119

As a guideline, I use the details shown in Figure 5.3 to help me calculate the various amounts based on which phase (based on year and quarter) each activ­ ity (amount) is applied to, as some items are only executed on in the first quar­ ter of the first year, some in all quarters, and only beginning in Quarter 3 of the first year (social network and general marketing and advertising activities).

SMART Objective

Hours

Purchase B2B email and phone contact lists by 31 Jan, 2018. Development and understanding of customer requirements will create a better product

Add contact lists to online CRM tool Insightly Segment B2B list to extract most useful contacts by 31 Jan, 2018 Isolated target segments in contact lists Begin CRM activities with B2B list using Insightly by 31 Jan, 2018 Insightly quarterly subscription fees Ongoing CRM marketing and customer acquisition work Begin social network and general marketing and advertising activities by 30 Jun, 2018 Linkedin subscription fee budget Linkedin advertising fee budget Facebook advertising budget Google advertising budget Specialized printed magazine advertising budget Hourly rate of initial founder of BDaaSB Number of customers in 2018

Annual Budget

Phase

Year

Qtr

1

2018

1

1

2018

1

ALL

2018,2019

ALL

ALL

2018,2019

3+,ALL

$12,625

Buying one or more B2B contact lists Cleaning and verifying contact lists

Qtrly Cost Estimate

$10,000 25

$1,875

10

$750 $375 $375 $3,387 $387 $3,000

5 40

$75 25

$12,075 $75 $3,000 $3,000 $3,000 $3,000

1548

300 12000 12000 12000 12000

Figure 5.3 How the BDaaSB marketing costs are calculated in detail

Next, we add in a detailed cost analysis of hiring a sales-lead generation service as shown in Worksheet 5.9, which can be productive but also can

SMART Objective Hire a sales lead generation service 31 Mar, 2019 Basic monthly service (similar to Linkedin) Low lead to customer conversion ratio Cost effective lead to customer conversion ratio High lead to customer conversion ratio Extravagant lead to customer conversation ratio

Customer Conversion Ratio 0.01% 2.5% 10% 25% 50%

25 New Customers Needed Leads 250 63 25 13

Cost per Lead (quality)

Cost Estimate per Qtr

$750 15 100 500 3500

$2,250

$3,750

$6,250

$12,500

$43,750

Worksheet 5.9 Estimating the cost for a BDaaSB sales-lead generation service

120

Business Finance Planning with Microsoft® Excel ®

be a very large expense; it has various levels based on a desired customer conversion ratio, as in the more money that is spent by BDaaSB, then the more and the better the quality of sales leads that the sales-lead generation service will acquire. The more money invested in marketing, the more likely a lead is to turn into an eventual paying customer in the future, or at least a good first adopter reference for future customers, but make sure you assess, research, and get other customer reviews. Ask questions—it’s your money, so get value for it. And once again, as shown in Figure 5.4, we use assignment of different levels of the sales-lead generation service at different points in time (dif­ ferent phases, quarters, years) in order to ramp up the marketing effort as the new venture begins to get up to speed, and also spend less money to begin with and get this process out to get a clearer picture of potential marketing return on investment.

Customer Conversion Ratio 0.01% 2.5% 10% 25% 50%

25 New Customers Needed

Cost per Lead (quality)

Cost Estimate per Qtr

Year

Qtr

$750 $2,250 250 15 $3,750 2 2019 63 100 $6,250 2 2019 25 500 $12,500 2 2019 13 3500 $43,750 2 2019 Figure 5.4 BDaaSB uses different levels of customerconversion ratios in different quarters

ALL 1 2 3 4

Leads

Phase

Worksheet 5.10 presents a different version of that shown for BDaaSB in Worksheet 5.8, where I have used the example of a restaurant (see Chap­ ter 4, Worksheet 4.15), where perhaps 2,500 customers in the first year is an achievable objective. Note that I have assumed an email list only in the first quarter, even if email lists might be unrealistic for a restaurant, but I have attempted to simplify and expand a little on marketing options assuming that a sales-lead service is too expensive for a new restaurant business. You can create your own Marketing Costs assessment, filling in the blanks and references as you see fit for your specific business; you can even use

Predicting Marketing Costs

SMART Objective Email list purchase and use Purchase email lists Segment and process email lists Acquire, learn and use email lists tools CRM (Customer Relationship Management) tools Insightly subscription fees Ongoing CRM work Social media marketing Other online advertising Linkedin subscription fees Linkedin advertising fees Facebook advertising Google advertising Other online advertising & promotions Print, TV & radio advertising and marketing Printed news advertising Specialized printed magazine advertising Radio advertising TV and Youtube advertising Trade shows and presentations Hourly rate of initial founder of BDaaSB Number of customers in 2022

Hours

10 10

40

Qtrly Cost Estimate $7,000 $5,000 $1,000 $1,000 $5,548 $1,548 $4,000 $9,575 $75 $2,500 $3,000 $3,000 $1,000 $3,500 $1,000 $500 $1,000 $1,000 $0

121

Qtr 1 ONLY Y

Y Y Y

$100 2500

Worksheet 5.10 A guess at estimated marketing costs to get your own business started (a restaurant)

a more expensive sales-lead service as well if you want as included in the worksheet but not printed in this chapter.

5.2.3.1 Adding to Financial Statements for the BDaaSB Case Study The result of the calculations made for BDaaSB marketing costs are shown in Worksheet 5.11 (on next page), where we construct and calculate the incomestatement inserts based on calculations made in Worksheets 5.8 and 5.9, in addition to Figures 5.2 and 5.3. Worksheet 5.11 shows the quarterly break­ downs for the first two phases of 2018 and 2019 for BDaaSB.

122

Business Finance Planning with Microsoft® Excel ®

B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service

Mar $16,387 $0 $0

2018 Jun Sep $3,387 $3,387 $0 $12,075 $0 $0

Oct $3,387 $12,075 $0

B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service

Mar $3,387 $12,075 $6,000

2019 Jun Sep $3,387 $3,387 $12,075 $12,075 $8,500 $14,750

Oct $3,387 $12,075 $46,000

Worksheet 5.11

BDaaSB quarterly estimates for the various marketing activities

Worksheet 5.12 adds in an annual summary projected out five years, where 2018–2019 are simply summed up and plugged in; the years 2020– 2021 are duplicated from 2019 for the first two items. The costs for the sales-lead generation service is increased based on an estimated number of customers to be acquired in each subsequent year of operation of BDaaSB. Note in Figure 5.5 how the totals on the far right of 2018 and 2019 are plugged into the five-year annual worksheet, and also how the number of new customers in each year affects the cost of the sales-lead generation ser­ vices in years 2020–2022.

B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service

$26,548 $24,150 $0

$13,548 $48,300 $75,250

$13,548 $48,300 $368,000

2021 100 2021 Managed Services $13,548 $48,300 $184,000

B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service

Mar $16,387 $0 $0

2018 Jun Sep $3,387 $3,387 $0 $12,075 $0 $0

Oct $3,387 $12,075 $0

$26,548 $24,150 $0

B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service

Mar $3,387 $12,075 $6,000

2019 Jun Sep $3,387 $3,387 $12,075 $12,075 $8,500 $14,750

Oct $3,387 $12,075 $46,000

$13,548 $48,300 $75,250

Number of new customers

2018 25 2018

2019 25 2019

2020 200 2020

Cloud Based

Worksheet 5.12

2022 150 2022

$13,548 $48,300 $276,000

BDaaSB quarterly and annual estimates for the various marketing activities

Predicting Marketing Costs

123

Figure 5.5 BDaaSB and how the different numbers are connected to each other

Worksheet 5.13 (page 124) shows the numbers added into the BDaaSB 2018 quarterly income statement generated from the marketing costs cal­ culated for 2018. Worksheet 5.14 (page 125) shows the numbers added into the BDaaSB 2019 quarterly income statement generated for market­ ing costs calculated for 2019. Worksheet 5.15 (page 126) shows the numbers added into the BDaaSB five-year proforma income statement projected into the first five years.

5.2.3.2 Adding to Financial Statements for Your Business Idea Note that the number of new customers is presented in this case shown in Worksheet 5.16 (page 127) (see Chapter 4, Worksheet 4.15) as guesses at a number of new customers that could be won for a restaurant in each year and into the future. Note that you don’t get a blank worksheet in this case where you manually fill in your numbers—the reason being that all the numbers in the worksheets in this section are generated from previous worksheets in the sequence of events presented thus far. Worksheet 5.17 (page 128) takes the numbers as constructed in Work­ sheet 5.16 and plugs the entire marketing section into the quarterly income statement for the first year for your new business idea. [Text continues on page 131]

Worksheet 5.13

5% 10% 15%

Plugging into the BDaaSB 2018 quarterly income statement

Refund estimate (subscription cancellations) Consulting services Assumed effective tax rate

15462 3387 12075 0 10000 500 2500 3000 500 500 250 250 2500 (96050)

Marketing and Advertising B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) 15462 3387 12075 0 10000 500 2500 3000 500 500 250 250 2500 (96050)

16387 16387 0 0 10250 2250 2500 3000 500 0 2000 0 0 (98150)

SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES 3387 3387 0 0 10000 500 2500 3000 500 500 250 250 2500 (71900)

Income Statement as of End of Quarter 2018 Mar Jun Sep Dev 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 55126 55126 55126 55126 53776 53776 53776 53776 1350 1350 1350 1350 0 0 0 0 0 0 0 0 0 0 0 0 43024 16774 40924 40924

Bigdata as a Service for Small Businesses (BDaaSB)

50698 26548 24150 0 40250 3750 10000 12000 2000 1500 2750 750 7500 (362151)

0 0 0 0 0 220505 215105 5400 0 0 0 141646

2018

124 Business Finance Planning with Microsoft® Excel ®

Worksheet 5.14

23962 3387 12075 8500 10000 500 2500 3000 500 500 250 250 2500 (348443)

30212 3387 12075 14750 10000 500 2500 3000 500 500 250 250 2500 (328157)

61462 3387 12075 46000 10000 500 2500 3000 500 500 250 250 2500 (357871)

Plugging into the BDaaSB 2019 quarterly income statement

5% 10% 15%

21462 3387 12075 6000 10000 500 2500 3000 500 500 250 250 2500 (376229)

Marketing and Advertising B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA)

Refund estimate (subscription cancellations) Consulting services ratio Assumed effective tax rate

Mar 32786 16091 16091 (201) 805 356091 309991 3600 30000 12500 0 52924

SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES

Income Statement as of End of Quarter 2019 Jun Sep Dec 65572 98358 131144 32183 48274 64365 32183 48274 64365 (402) (603) (805) 1609 2414 3218 356091 356091 356091 309991 309991 309991 3600 3600 3600 30000 30000 30000 12500 12500 12500 0 0 0 57924 70424 132924

Bigdata as a Service for Small Businesses (BDaaSB)

137098 13548 48300 75250 40000 2000 10000 12000 2000 2000 1000 1000 10000 (1410700)

327861 160913 160913 (2011) 8046 1424365 1239965 14400 120000 50000 0 314196

2019

Predicting Marketing Costs 125

Worksheet 5.15

137098 13548 48300 75250 40000 2000 10000 12000 2000 2000 1000 1000 10000 (1255499)

429848 13548 48300 368000 40000 2000 10000 12000 2000 2000 1000 1000 10000 (219394)

1729819 804567 804567 (40228) 160913 1479365 1239965 14400 0 0 225000 469848 245848 13548 48300 184000 40000 2000 10000 12000 2000 2000 1000 1000 10000 656533

Managed Services 2421746 1126394 1126394 (56320) 225279 1479365 1239965 14400 0 0 225000 285848 337848 13548 48300 276000 40000 2000 10000 12000 2000 2000 1000 1000 10000 1602424

3459637 1609134 1609134 (80457) 321827 1479365 1239965 14400 0 0 225000 377848

Consolidating into the BDaaSB five-year proforma income statement

5% 10% 10%

50698 26548 24150 0 40250 3750 10000 12000 2000 1500 2750 750 7500 (311453)

Marketing and Advertising B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA)

Refund estimate (subscription cancellations) Consulting services Assumed effective tax rate

0 0 0 0 0 220505 215105 5400 0 0 0 90948

SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES

Cloud Based 345964 160913 160913 (8046) 32183 1424365 1239965 14400 120000 50000 0 177098

Bigdata as a Service for Small Businesses (BDaaSB) Income Statement as of Dec 31st 2018 2019 2020 2021 2022

126 Business Finance Planning with Microsoft® Excel ®

2023 2750 2023 $0 $22,192 $38,300 $14,000 $0

Jun $0 $5,548 $9,575 $3,500 $0

Jun $0 $5,548 $9,575 $3,500 0

2022 2500 2022 $7,000 $22,192 $38,300 $14,000 $0

Mar $7,000 $5,548 $9,575 $3,500 $0

Mar $0 $5,548 $9,575 $3,500 0

Email list purchase and use CRM (Customer Relationship Management) tools Social media marketing Other online advertising Print, TV & radio advertising and marketing Hire sales lead generation service

Email list purchase and use CRM (Customer Relationship Management) tools Social media marketing Other online advertising Print, TV & radio advertising and marketing Hire sales lead generation service

Email list purchase and use CRM (Customer Relationship Management) tools Social media marketing Other online advertising Print, TV & radio advertising and marketing Hire sales lead generation service

2025 $0 $22,192 $38,300 $14,000 $0

Oct $0 $5,548 $9,575 $3,500 $0

Oct $0 $5,548 $9,575 $3,500 0

2022 Sep $0 $5,548 $9,575 $3,500 $0 2023 Sep $0 $5,548 $9,575 $3,500 0

2025 3000

2024 $0 $22,192 $38,300 $14,000 $0

2024 3000

Worksheet 5.16 Quarterly and annual estimates for the various marketing activities for your business idea

Number of new customers

0 22192 38300 14000 0

7000 22192 38300 14000 0

2026 $0 $22,192 $38,300 $14,000 $0

2026 3000

7000 110960 191500 70000 0

Predicting Marketing Costs 127

128

Business Finance Planning with Microsoft® Excel ®

>

SALES REVENUE Revenue Stream 1 Revenue Stream 2 Revenue Stream 3 Refunds COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES

Income Statement as of End of Quarter 2022 Mar Jun Sep Dec 375000 375000 375000 375000 375000 375000 375000 375000 0 0 0 0 0 0 0 0 0 0 0 0 130052 154545 210137 129152 126077 148770 207062 126077 3150 4950 2250 2250 25 25 25 25 50 50 50 50 750 750 750 750 0 0 0 0 0 0 0 0 55096 42211 42211 42211

Marketing and Advertising Email list purchase and use CRM (Customer Relationship Management) tools Social media marketing Other online advertising Print, TV & radio advertising and marketing Hire sales lead generation service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA)

25623 7000 5548 9575 3500 0 3850 700 300 350 400 450 500 550 600 189852

18623 0 5548 9575 3500 0 4965 1215 500 375 350 500 250 775 1000 178244

18623 0 5548 9575 3500 0 4965 1215 500 375 350 500 250 775 1000 122652

18623 0 5548 9575 3500 0 4965 1215 500 375 350 500 250 775 1000 203637

81492 7000 22192 38300 14000 0 18745 4345 1800 1475 1450 1950 1250 2875 3600 694384

OPERATING INCOME/LOSS (EBIT)

189852

178244

122652

203637

694384

Refund estimate (subscription cancellations) Consulting services Assumed effective tax rate

Worksheet 5.17

2022 1500000 1500000 0 0 0 623887 607987 12600 100 200 0 181729

5% 10% 15%

Plugging into the BDaaSB 2022 quarterly income statement

Predicting Marketing Costs

129

>

SALES REVENUE Revenue Stream 1 Revenue Stream 2 Revenue Stream 3 Refunds COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES

Income Statement as of End of Quarter 2023 Mar Jun Sep Dec 412500 412500 412500 412500 412500 412500 412500 412500 0 0 0 0 0 0 0 0 0 0 0 0 303184 303184 303184 303184 284034 284034 284034 284034 5400 5400 5400 5400 0 0 0 0 0 0 0 0 0 0 0 0 12500 12500 12500 12500 1250 1250 1250 1250 42211 42211 42211 42211

Marketing and Advertising Email list purchase and use CRM (Customer Relationship Management) tools Social media marketing Other online advertising Print, TV & radio advertising and marketing Hire sales lead generation service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA)

18623 0 5548 9575 3500 0 4965 1215 500 375 350 500 250 775 1000 67105

18623 0 5548 9575 3500 0 4965 1215 500 375 350 500 250 775 1000 67105

18623 0 5548 9575 3500 0 4965 1215 500 375 350 500 250 775 1000 67105

18623 0 5548 9575 3500 0 4965 1215 500 375 350 500 250 775 1000 67105

74492 0 22192 38300 14000 0 19860 4860 2000 1500 1400 2000 1000 3100 4000 268420

OPERATING INCOME/LOSS (EBIT)

67105

67105

67105

67105

268420

Revenue Stream 2 adjustment Revenue Stream 3 adjustment Assumed effective tax rate

5% 10% 15%

Worksheet 5.18 Plugging into the quarterly income statement for your business idea

2023 1650000 1650000 0 0 0 1212737 1136137 21600 0

50000 5000 168844

130

Business Finance Planning with Microsoft® Excel ®

SALES REVENUE Revenue Stream 1 Revenue Stream 2 Revenue Stream 3 Refunds COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES

2022 Phase1 1500000 1500000 0 0 0 623887 607987 12600 100 200 3000 0 0 100237

> Income Statement as of Dec 31st 2023 2024 2025 Phase2 Phase2+ Phase+ 1650000 1800000 1800000 1650000 1800000 1800000 0 0 0 0 0 0 0 0 0 1212737 1157737 1157737 1136137 1136137 1136137 21600 21600 21600 0 0 0 0 0 0 0 0 0 50000 0 0 5000 0 0 94352 94352 94352

2026 Phase2+ 1800000 1800000 0 0 0 1157737 1136137 21600 0 0 0 0 0 94352

Marketing and Advertising Email list purchase and use CRM (Customer Relationship Management) tools Social media marketing Other online advertising Print, TV & radio advertising and marketing Hire sales lead generation service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA)

81492 7000 22192 38300 14000 0 18745 4345 1800 1475 1450 1950 1250 2875 3600 775876

74492 0 22192 38300 14000 0 19860 4860 2000 1500 1400 2000 1000 3100 4000 342912

74492 0 22192 38300 14000 0 19860 4860 2000 1500 1400 2000 1000 3100 4000 547912

74492 0 22192 38300 14000 0 19860 4860 2000 1500 1400 2000 1000 3100 4000 547912

74492 0 22192 38300 14000 0 19860 4860 2000 1500 1400 2000 1000 3100 4000 547912

OPERATING INCOME/LOSS (EBIT)

775876

342912

547912

547912

547912

Refund estimate (subscription cancellations) Consulting services Assumed effective tax rate

5% 10% 10%

Worksheet 5.19 Consolidating for your business idea into a five-year proforma income statement

Predicting Marketing Costs

131

Worksheet 5.18 (page 129) generates the numbers for the quarterly income statement for the second year for your new business idea. Finally, Worksheet 5.19 consolidates and generates all the previous num­ bers into a proforma projected income statement over the next five years for your new business idea.

5.3 Conclusion The information presented in this chapter is extremely important because it presents you with a process to assess how much it will cost to market your product or service. After the marketing costing calculations are com­ pleted, they can be plugged into your financial statements for presentation to investors. Demonstrating marketing cost projections using a systematic and detail-oriented process as presented in this chapter can give your mar­ keting plan credibility with potential investors as being part of a viable business opportunity. This chapter covered: • • • • •

Market and industry segmentation Marketing costing and budgeting Using a sales-lead generation service Sales forecasting Adding marketing costs into financial statements for the BDaaSB case study • Help in adding marketing costs into financial statements for any busi­ ness idea

5.4 The Spreadsheet So Far The relevant worksheets can be downloaded at oracletroubleshooter.com /business-finance-planning/ch5

Chapter 6

Formal Financial Planning and Budgeting An entrepreneur executing a good plan today is better than a perfect plan executed later. —General George S. Patton The previous chapter taught you how to figure out marketing and advertising costs as a step-by-step process using various useful tools, thus completing the process of learning the steps you can use to create solidly supported financial statements. This new chapter will finally put all those financial statements into a single cohesive set of information, where at the end of this chapter you will see a picture of your financial statements as a whole, helping you to understand the nuts and bolts of your business idea better and be able to show that you have done your homework when pitching to any potential investors. You will have a plan, which may not be perfect and may not survive as a plan as you begin to get your business up and running, but it is at least a way of getting the ball rolling for you. This chapter covers: • The income statement • The balance sheet • The cash-flow statement

133

134

Business Finance Planning with Microsoft® Excel ®

6.1 Startup Balance Sheet A startup balance sheet is where to expand on and provide more detail in finan­ cial statements on top of what has already been covered in income statements in previous chapters. This is the stage where we will create formal financial statements and projections that can ultimately be presented to potential inves­ tors. When you first start a business, there may well be initial costs and initial loans into that business required to begin as up-front investments of capital. Initial capital investments (small or large) are not expenses because they are required to start doing something productive and useful. Worksheet 6.1 shows that, as a computing service provider, BDaaSB must begin by purchasing computer hardware for a pre-startup working platform to begin building the software, and the founder makes a loan to the new company in order to purchase that hardware. Therefore, the business owns the hardware but also owes the founder for the loan into the business for the purchase of that hardware. Bigdata as a Service for Small Businesses (BDaaSB) As of 31/12/2017 Cash on Hand Other Current Assets Property Improvement (basement air conditioning extension) Equipment (more reliable computer hardware) Other Fixed Assets ASSETS TOTAL Short-Term Debt Current Liabilities Long-Term Debt (SBA loan 1) Loan From Founder Long-Term Liabilities LIABILITIES TOTAL Preferred Stock Common Stock Retained Earnings SHAREHOLDERS EQUITY LIABILITIES & EQUITY

2018 0 0 0 2500 10000 0 12500 12500 0 0 0 12500 12500 12500 0 0 0 0 12500

Worksheet 6.1 Starting balance sheet for the BDaaSB case study

Formal Financial Planning and Budgeting

135

It follows that Worksheet 6.2 is provided to allow you as the reader to fill out your own starting balance sheet for your business idea, which can be important to show investors that you are not only working hard at your idea but that you believe in it enough to put some of your own hard-earned cash into it; it will be much easier to convince investors to believe in an idea that you believe in yourself by investing in it yourself. Note that in Worksheet 6.2 I have taken the liberty of adding some arbitrary categories and numbers, which you can remove and replace; however, these will be useful as the flow of projected numbers proceeds through the various financial statements as they are built upon and presented in this chapter. In the case of Worksheet 6.3 (on next page) it is assumed that you spend $10,000 on Land & Buildings, $10,000 on Equipment, and $5,000 on Other as an unclassified asset capital expenditure before you have started doing busi­ ness at all. You also made a loan to the business of $10,000 and managed to get an SBA loan of $50,000.

> As of 31/12/2021

Cash on Hand Other Current Assets Land & Buildings Equipment Heavy Machinery Other Fixed Assets ASSETS TOTAL Short-Term Debt Current Liabilities Long-Term Debt (SBA loan) Loan From Founder Long-Term Liabilities LIABILITIES TOTAL Preferred Stock Common Stock Retained Earnings SHAREHOLDERS EQUITY LIABILITIES & EQUITY Worksheet 6.2

2022 0 0 0 10000 10000 0 5000 25000 25000 0 0 50000 10000 60000 60000 0 0 (35000) (35000) 25000

Starting balance sheet for your business idea

136

Business Finance Planning with Microsoft® Excel ® > As of 31/12/2021

Cash on Hand Other Current Assets Land & Buildings Equipment Heavy Machinery Other Fixed Assets ASSETS TOTAL Short-Term Debt Current Liabilities Long-Term Debt (SBA loan) Loan From Founder Long-Term Liabilities LIABILITIES TOTAL Preferred Stock Common Stock Retained Earnings SHAREHOLDERS EQUITY LIABILITIES & EQUITY

2022 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Worksheet 6.3 A blank starting balance sheet for your business idea

So fill in your own initial startup capital investments to get your own business numbers into the step-by-step building and analytical process. Note how the balance sheet always has the same amount in ASSETS TOTAL and LIABILITIES & EQUITY, showing that you have to lend or invest money into your company in order to buy things, where the asset purchases belong to the company and not the founder. Worksheet 6.3 gives you a generalized blank starting balance sheet where you can add your own startup capital investments.

Using an SBA loan is a better option than founder funding on

revolving credit because an SBA loan is cheaper if a sizable

enough loan can be acquired. The business will pay the

pay interest on debt for an SBA loan, decreasing founder

salary requirements if not servicing the debt personally.

Ideally, the business is best funded by investment from the

beginning, and a good place to begin is crowd funding.

Formal Financial Planning and Budgeting

137

6.2 Schedule of Startup Expenses After you have made basic loans and initial capital investments in hard assets like property and equipment, it is time to start working on expenses for services and materials that you will use to help operate your business, with the BDaaSB case study example as shown in Worksheet 6.4. Worksheet 6.5 gives you a sample Schedule of Startup Expenses for your business idea to use as a model. Your schedule of startup expenses adds in the starting balance sheet capital investments for clarity. Note that the schedule of startup expenses is duplicated from a previous chapter, where in this chapter all we have done is added in the initial marketing expenses. We do not need to add a completely blank version here because it could cause some confusion as we have already added in the Legal and Other Expenses sections in a previous chapter.

6.3 Proforma Income Statement A proforma financial statement is a type of statement that attempts to proj­ ect ahead into the future, which for a new business seeking financial support Bigdata as a Service for Small Businesses (BDaaSB) Capitalized Expenses Property Improvement (basement air conditioning extension) Equipment (more reliable computer hardware) Marketing Costs B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service Legal LLC Creation NDA and NCA Creation Stock option contract General Legal Costs Other Expenses Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses Payroll in Qtr1 for Initial Founder (CEO) Startup Capital

Worksheet 6.4

2018 Qtr1 $12,500 $2,500 $10,000 $16,387 $16,387 $0 $0 $2,250 $500 $500 $750 $500 $26,844 $2,500 $3,000 $500 $0 $2,000 $0 $0 $18,844 $41,594

Ongoing

Schedule of startup expenses for the BDaaSB case study

$500

$500 $9,500 $2,500 $3,000 $500 $500 $250 $250 $2,500

138

Business Finance Planning with Microsoft® Excel ®

> Capitalized Expenses Land & Buildings Equipment Heavy Machinery Other Marketing Costs Email list purchase and use CRM (Customer Relationship Management) tools Social media marketing Other online advertising Print, TV & radio advertising and marketing Legal Company Legal Costs Intellectual Property Costs Stock option contract General Legal Costs Other Expenses Incidentals Utilities Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses Payroll in Qtr1 for Initial Founder (CEO) Startup Capital

2022 Qtr1 $25,000 $10,000 $10,000 $0 $5,000 $14,000 $7,000 $5,000 $1,000 $1,000 $700 $100 $150 $200 $250 $28,275 $300 $350 $400 $450 $500 $550 $600 $25,125 $53,975

Ongoing per Qtr

$1,215 $500 $115 $100 $500 $3,750 $500 $375 $350 $500 $250 $775 $1,000

Worksheet 6.5 Schedule of startup expenses for your business idea

and backing is exactly what is needed; you are making an educated and hopefully calculated guess at future income in order to show that you have a viable business idea. Thus far in this book we have added in sections to the proforma income statement for different business activities including sales rev­ enues, costs of goods sold, more general operating expenses, and marketing expenses. At this stage we can begin to wrap up the income statement by add­ ing in a number of sections that are more general in nature but still important: •

Operating expenses. Operating expenses or operating costs are those costs that you need to spend to run your business on a day-to-day basis but are not directly related to sales in cost of goods sold, such as paying rent,

Formal Financial Planning and Budgeting

•

•

• • •

• •

139

renting equipment, marketing, or paying employees. How you divide up different types of businesses between costs of goods sold and operating expenses can depend on the business you are proposing. For example, one of a restaurant’s cost of goods sold items would be food purchases, but purchases of employee snacks for an office would be an operating expense. Asset, loan, and accounting expenses: o Depreciation. It costs money to own assets because their value decreases over time, and if you sell them after use, you may have to sell them at lower than market value as used. o Interest payment. Paying interest on loans is also known as debt ser­ vicing, where you service and maintain the capacity to access further debt through making on-time, scheduled interest payments. Debt can allow you to scale a business quickly as long as you don’t take out so much debt that you cannot make the interest payments. Gross profit. Gross profit is also known as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization. This is the difference between how much you make from sales (revenue) and the cost of goods sold plus your operating expenses. Operating income/loss. Also known as EBIT (Earnings Before Interest and Taxes). This is earnings after all costs and expenses are subtracted. EBT (earnings before taxes). Taxes are subtracted last because they are calculated on your operating income (if not a loss). NOL deduct (CFWD-20yrs, assumed cumulative). This is the Net Operat­ ing Loss, Carried Forward cumulatively over 20 years into the future. This means that when you start a big company with a lot of money involved, and perhaps large up-front capital investment and expenses, you can spread the tax deductions for initial losses over time (carry them forward) to pay less in taxes in subsequent profitable years. This also means that you can use these calculations at the end of your income statement to decide how much in loans over time you need to get your business going and keep it running. What you are doing is using the NOL deduction to offset one year’s losses against the income of one of more other years in the future. Taxes. Everybody has to pay taxes, and these are calculated as a per­ centage of your earnings. Net income/loss. How much did you actually earn or lose, or in the case of proforma predictive statements, how much do you expect to make or lose, and when will your business be profitable?

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6.3.1 Quarterly One-Year Proforma Income Statement Beginning with the first year’s income statement, let’s look ahead over the first four quarters. For the BDaaSB case study, as shown in Worksheet 6.6, I have added an overly simplistic interpretation of depreciation using 5% of deprecia­ tion per quarter, which in the case of Worksheet 6.6 is calculated as 5% of the Fixed Asset value, as shown on the starting balance sheet in Worksheet 6.1.

In reality depreciation calculations are much more complex than a single 5% percentage calculator on fixed asset value.

6.3.2 Quarterly Two-Year Proforma Income Statement Next we do the same for the income statement for the second year of operation of the BDaaSB case study, as shown in Worksheet 6.7. Note that depreciation is exactly the same for the first two years of projected operation, and that is because for this particular business it is all cloud based in the future, and the only asset purchases are those used to win the first clients at the very beginning using the in-the-basement initial development option. Cloud-based software services is an Information Technology (IT) service, and as a result it does not require a large capital investment—it’s a rental model. All cloud-based hardware and software is effectively rented and is thus much cheaper and less complex than having to buy and maintain on-premise based assets; how’s that for a great business to be in? Worksheet 6.7 shows the second year of operation for BDaaSB with the same depreciation numbers as for Year 1 of operation.

6.3.3 Annualized Five-Year Proforma Income Statement Worksheet 6.8 simply adds the numbers for the first two years of BDaaSB operation and then estimates depreciation costs the same as the first two years. Note that this type of equipment, given its nature, can very likely be written off as a single full amount in depreciation expense the first year; however, I would spread it over five years and beyond in this case in order to show a spread­ out-over-time depreciation expense. At this stage we will continue and present all the BDaaSB case study financial statements first, and in a later section we will present the financial statements

Worksheet 6.6

Refund estimate (subscription cancellations) Consulting services Depreciation

SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES Hardware Support Software Support Marketing and Advertising B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT Taxes NET INCOME/LOSS (72057)

(98307) 5% 10% 5%

(72057)

(98307)

Mar 0 0 0 0 0 55126 53776 1350 0 0 0 43024 0 0 16387 16387 0 0 10250 2250 2500 3000 500 0 2000 0 0 (98150) 156 (98307)

(96207)

(96207)

(96207)

(96207)

Income Statement as of End of Quarter 2018 Jun Sep Dev 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 55126 55126 55126 53776 53776 53776 1350 1350 1350 0 0 0 0 0 0 0 0 0 16774 40924 40924 0 0 0 0 0 0 3387 15462 15462 3387 3387 3387 0 12075 12075 0 0 0 10000 10000 10000 500 500 500 2500 2500 2500 3000 3000 3000 500 500 500 500 500 500 250 250 250 250 250 250 2500 2500 2500 (71900) (96050) (96050) 156 156 156 (72057) (96207) (96207)

Bigdata as a Service for Small Businesses (BDaaSB)

0 0 0 0 0 220505 215105 5400 0 0 0 141646 0 0 50698 26548 24150 0 40250 3750 10000 12000 2000 1500 2750 750 7500 (362151) 625 (362776) 0 (362776) 0 (362776)

2018

Formal Financial Planning and Budgeting 141

Proforma income statement in quarters for 2018 for the BDaaSB case study

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Business Finance Planning with Microsoft® Excel ® Bigdata as a Service for Small Businesses (BDaaSB)

SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES Hardware Support Software Support Marketing and Advertising B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT Taxes NET INCOME/LOSS Refund estimate (subscription cancellations) Consulting services ratio Depreciation

Income Statement as of End of Quarter 2019 Mar Jun Sep Dec 32786 65572 98358 131144 16091 32183 48274 64365 16091 32183 48274 64365 (201) (402) (603) (805) 805 1609 2414 3218 356091 356091 356091 356091 309991 309991 309991 309991 3600 3600 3600 3600 30000 30000 30000 30000 12500 12500 12500 12500 0 0 0 0 52924 57924 70424 132924 0 0 0 0 0 0 0 0 21462 23962 30212 61462 3387 3387 3387 3387 12075 12075 12075 12075 6000 8500 14750 46000 10000 10000 10000 10000 500 500 500 500 2500 2500 2500 2500 3000 3000 3000 3000 500 500 500 500 500 500 500 500 250 250 250 250 250 250 250 250 2500 2500 2500 2500 (376229) (348443) (328157) (357871) 156 156 156 156 (376385) (348599) (328313) (358027) (376385)

(348599)

(328313)

(358027)

(376385)

(348599)

(328313)

(358027)

2019 327861 160913 160913 (2011) 8046 1424365 1239965 14400 120000 50000 0 314196 0 0 137098 13548 48300 75250 40000 2000 10000 12000 2000 2000 1000 1000 10000 (1410700) 625 (1411325) 0 (1411325) 0 (1411325)

5% 10% 5%

Worksheet 6.7 Proforma income statement in quarters for 2019 for the BDaaSB case study

as a whole for your business idea; the reason is that the financial statements are interrelated, and we have to bounce back and forth between them to clearly demonstrate those interrelationships, which is not necessary for both the BDaaSB case study and the financial statements for your business idea.

6.4 Proforma Balance Sheet At this stage we have to get our balance sheet organized so that we can pass specific items back to the income statement and thus continue the process

Formal Financial Planning and Budgeting

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Bigdata as a Service for Small Businesses (BDaaSB) Income Statement as of Dec 31st 2018 2019 2020 2021 2022

SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES Hardware Support Software Support Marketing and Advertising B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT Taxes NET INCOME/LOSS Refund estimate (subscription cancellations) Consulting services Depreciation

Worksheet 6.8

0 0 0 0 0 220505 215105 5400 0 0 0 90948 0 0 50698 26548 24150 0 40250 3750 10000 12000 2000 1500 2750 750 7500 (311453) 625 (312078)

Cloud Based 345964 160913 160913 (8046) 32183 1424365 1239965 14400 120000 50000 0 177098 0 0 137098 13548 48300 75250 40000 2000 10000 12000 2000 2000 1000 1000 10000 (1255499) 625 (1256124)

(312078) 0 (312078)

(1256124) 0 (1256124)

1729819 804567 804567 (40228) 160913 1479365 1239965 14400 0 0 225000 469848 0 0 429848 13548 48300 368000 40000 2000 10000 12000 2000 2000 1000 1000 10000 (219394) 625 (220019)

Managed Services 2421746 1126394 1126394 (56320) 225279 1479365 1239965 14400 0 0 225000 295848 5000 5000 245848 13548 48300 184000 40000 2000 10000 12000 2000 2000 1000 1000 10000 646533 625 645908

3459637 1609134 1609134 (80457) 321827 1479365 1239965 14400 0 0 225000 387848 5000 5000 337848 13548 48300 276000 40000 2000 10000 12000 2000 2000 1000 1000 10000 1592424 625 1591799

(220019) 0 (220019)

645908 0 645908

1591799 0 1591799

5% 10% 5%

Five-year proforma income statement for the BDaaSB case study

of interconnecting our financial statements. Worksheet 6.9 is our first repre­ sentation of the balance sheet with the things we have covered thus far but including some new additions.

6.4.1 Adding to the Balance Sheet A number of items are added to the balance sheet at this stage that use other items previously calculated by the income statement. We will also add

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Bigdata as a Service for Small Businesses (BDaaSB) Balance Sheet As of Dec 31st Starting Balance Sheet 2017

2018

2019 Cloud Based

2020

2021 Managed Services

Cash on Hand Accounts Receivable Other Current Assets Property Improvements Equipment Intangible Assets Other Fixed Assets ASSETS TOTAL Short-Term Debt Accounts Payable Current Liabilities Addition to Long Term Loan from Founder Addition to Crowd Funding Loan Adding to Long Term SBA Loan Long Term Loan From Founder Crowd Funding Loan Long Term SBA Loan Principal Payment on Loan From Founder Crowd Funding Service Costs Mandatory Principal Payments on SBA Loan Voluntary Principal Payments on SBA Loan Long-Term Liabilities LIABILITIES TOTAL Preferred Stock Common Unvested Stock Retained Earnings SHAREHOLDERS EQUITY LIABILITIES & EQUITY

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0 2500 10000 0 0 12500 12500 0 4547 4547 12500 0 200000 0 0 0 0 0 0 0 212500 217047 105947 0

0 28830 0 28830 0 0 0 0 0 28830 0 8855 8855 0 0 1400000 12500 0 200000 0 0 (28571) 0 1583929 1592783 0 0

0 144152 0 144152 0 0 0 0 0 144152 0 23492 23492 0 0 550000 12500 0 1571429 0 0 (224490) 0 1909439 1932931 0 0

0 (270991) 0 1638448 1653240 0 0

0 0 0

(312078) (206131) 10917

(1568203) (1568203) 24581

(1788222) (1788222) 144709

(1142314) (1142314) 510926

449485 449485 850047

Discretionary Financing Needed (DFN) Long Term Debt Proceeds Short Term Debt Proceeds Total SBA

0

1583 212500 0

4249 1400000 0

(558) 550000 0

(309114) 0 0

(561744) (12500) 0 2150000

Accounts receivable outstanding at year end Accounts payable outstanding at year end SBA payoff/year as total principal / Term

8% 5% 7

0 201812 0 201812 0 0 0 0 0 201812 0 14792 14792 0 0 0 12500 0 1896939

2022

0

0 288303 0 288303 0 0 0 0 0 288303 0 19392 19392 0 0 0 0 0 1625948 (12500) 0 (232278) (1000000) 381169 400562 0 0

Worksheet 6.9 Five-year proforma balance sheet for the BDaaSB case study

further items to the balance sheet that we will subsequently pass back to the income statement. The income statement calculates how much money you are making (or losing) by subtracting costs from revenues to show how you are doing in your business; by comparison the balance sheet goes a step further and presents a snapshot in time for what your company owns,

Formal Financial Planning and Budgeting

145

what you owe to others, and how much has been invested in your company by any shareholders.

6.4.1.1 Projecting Accounts Receivable and Accounts Payable Accounts receivable is calculated as a percentage of the total sales revenue projection and is thus an estimation of how much revenue you expect to take in on credit. Accounts receivable is an asset because you expect to receive it and also a current asset because you expect to receive it in the short term. The balance sheet in Worksheet 6.9 shows a percentage at the bottom of the worksheet as Accounts receivable outstanding at year end, with a value of 8%, where Accounts Receivable entered into the balance sheet would multiply that 8% by all the sales revenue from each year in the income statement to get an estimate of your Accounts Receivable. Accounts Payable is what we expect to have outstanding at the end of each year as credit given by suppliers and providers, which is also a percentage (5% in Worksheet 6.9), which is multiplied by operating expenses to get a reason­ able estimation of accounts payable. The percentages for accounts receivable and accounts payable are esti­ mated at 8% and 5%, respectively. These numbers can be higher or lower depending on the type of business you are proposing and what you think you realistically can sell to investors; you can change these percentages simply by altering them on the worksheet to yield predictive (proforma) values: Accounts receivable = income statement sales revenue *

Accounts receivable outstanding at year end (8%)

Accounts payable = income statement operating expenses *

Accounts payable outstanding at year end (5%)

Accounts receivable and payable add to the validity of your balance by showing how much you project to be owed by your debtors and how much you expect to owe to your creditors, which are short term and thus current asset and current liability, respectively.

6.4.1.2 Founder Loans to the Company Worksheets 6.1 (page 134) and 6.4 (page 137) showed startup expenses and a starting balance sheet, which detail initial expenses covered by the founder

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of the BDaaSB case study, in the form of a loan to the company by the founder of $12,500 to buy the initial in-the-basement hardware for pre-startup develop­ ment in Phase 1. This founder-funded cost becomes a loan to the company that begins in the first year as a short-term interest-free loan, becoming a longterm interest-free loan in subsequent years, and it is ultimately paid back to the founder when the company can afford it without making a loss. All these numbers are also shown in the BDaaSB balance sheet in Worksheet 6.9. Note that this founder-based loan is interest free and as such does not affect the Interest Paid item in the income statement.

6.4.1.3 Crowd Funding As an Option Crowd funding is included in the Worksheet 6.9 balance sheet as being an acceptable funding option. In general, you might do better with crowd funding with a mass-appeal presentable idea, such as something with a mis­ sion that intends to help solve a current issue that has popular appeal—for example, something addressing an element of climate change or helping to cure some unpleasant disease. Non-profit ideas might be easier to finance with some crowd funding. Crowd funding is online and can be useful for hitting up lots of people for small amounts to accomplish something on a large scale demographically. Of course, there is always an exception, and a good idea is a good idea that may appeal to the general public—you will never reach an objective you don’t have, or you don’t reach for, so try crowd funding if you think it will work.

6.4.1.4 Small Business Administration (SBA) Loans When you take out loans, you are in some respects risking other people’s money, but the lenders expect to turn a profit out of the act of lending you that money through interest, and they want to know they will get paid back with respect to risk. The SBA (sba.gov) is a US Federal Government agency whose general objective is to encourage and help small businesses in the United States of America—other countries likely have similar government programs, as small businesses can help to build nation-state economies. As stated earlier in this chapter, when you take out loans, you have to service those loans to make sure you don’t get foreclosed on and you retain your ability to get further credit if needed in the future. You service loans by paying interest

Formal Financial Planning and Budgeting

147

on those loans, where that interest is passed back to the income statement as interest paid, which affects your net profit (net income/loss). In the balance sheet for the BDaaSB case study as shown in Worksheet 6.9, there is an SBA loan taken out where the loans are short term in the current year and move to long term when not paid off in the year they were taken out. We allocate current and long term to separate years in the balance sheet because sometimes interest rates are different on different types of loans, and also so that we can calculate Discretionary Finance Needed (DFN) and longterm debt proceeds within each specific year. DFN will be covered in detail later in this chapter, but at this stage we need to know how much money we need in each year for the business to exceed and survive its costs annually to support it in each of those years.

See SBA (Small Business Administration) loans for low-interest loans made in the United States for new business ideas; if you can get one it is a good low-interest option for funding your business. https://www.sba.gov/loans-grants/see-what -sba-offers/sba-loan-programs/general-small-business -loans-7a/7a-loan-amounts-fees-interest-rates. As of May 22, 2022, the SBA loan rates are as shown in Figure 6.1, which indicates a sharp increase in SBA loan rates since this BDaaSB business idea

Figure 6.1

Current SBA loan rates and limitations

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was first conceived in 2017; for this book we will retain the historical rates and calculations as of 2017. Over time you might decide to pay off an SBA loan early as an option if you decide to cover your debts more rapidly than required to help reduce interest payments. This is as opposed to spending the extra money to acquire more customers; not every customer is a good, profitable customer, and not all busi­ ness situations require more customers—bigger is not always better in busi­ ness. Using excess can also be plugged into controlled business growth, but make sure you don’t spend for the sake of it and expose yourself to potentially unserviceable debt in the future. The way that SBA loans are described on Worksheet 6.9 is as follows: • We add new SBA loan amounts taken out each year to top up our fund­ ing to remain in business. • We accumulate all SBA loan amounts taken out in previous years as a longterm SBA loan that is considered a sunk cost (a cost you can’t recover). • SBA loans have different structures and can change over time, but in 2017 there was a mandatory principal payment on this loan, requiring that 1/7 of the current accumulated loan be paid off its principal each year (the loan term is seven years). • Interest payments on loans will be covered in the next section of this chapter when we return to the income statement—interest is a taxdeductible expense.

6.4.1.5 Shares in Lieu of Wages Shares for wages is a common method of paying founding members in a startup company, where for the BDaaSB case study the shares for wages number originates from the Leads Worksheet in Chapter 3 as Worksheet 3.4, repeated here in Worksheet 6.10 as a courtesy. The shares-for-wages amount is plugged into the balance sheet as preferred stock.

Preferred stock gives no voting rights, whereas common stock does, but in the case of dividends and bankruptcy, preferred stock generally gets priority. We are assuming no common stock in this book, which is unlikely for the founder and could be fixed by changing the worksheets.

Formal Financial Planning and Budgeting

Phase1 Prototype Lead Role (Founding Partner) Initial Founder (CEO) Marketing and Sales Managers Financial Managers Human Resources Managers Employee count Labor cost Shares for wages ratio (phase 1 only) Hourly rate of initial founder of BDaaSB Remote employees are cheaper

Cost/yr $112,500 $103,763 $104,790 $90,158

Shares $37,125 $34,242 $34,581

2018 $75,375 $69,521 $70,209

$105,947

3 $215,105

149

Phase2 Cloud 2019 $112,500 $103,763 $104,790 $90,158 4 $411,210

33% $75 75%

Worksheet 6.10 Leaders’ labor costs showing shares for wages for the balance sheet

There would have to be vesting agreements for shares for wages. In this case we would assume that share vesting periods have to be covered by available profits, where this form of vesting means that shares can only be sold by those who earned them in lieu of wages, when the company can afford to pay out without making a loss for the company.

6.4.1.6 Retained Earnings, DFN, and Long-Term Debt Proceeds The current and previous years’ net profits are accumulated as retained earn­ ings (negative being a loss) and are carried forward from the previous year to accumulate into the current year’s total retained earnings. Thus, you will add up the income statement net gain/loss each year as an accumulation of earnings or losses over multiple years. In theory the shareholders own the loss in the same way that they would own accumulated gains, where the current iteration of the BDaaSB case study balance sheet in Worksheet 6.9 (page 144) clearly shows losses (the bracketed red numbers are negative values) in Years 1–4 followed by a gain in Year 5. DFN is a number in the balance sheet that gives you the difference in each period between assets and liabilities—what you own and what you owe—or if you like, what you intend to purchase and how you are going to pay for it. The DFN is a simple calculation that subtracts debt from worth (liabilities from assets) that tells you how much you need to borrow in the next year of doing business, which is controlled by adding to loans for the current year. A more precise DFN formula is as follows:

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DFN (for next year) = change in assets – change in liabilities – change in equity For the purposes of simplicity, we will stick to the following formula and mean­ ings for DFN in the case of the balance sheet format, as shown in Worksheet 6.9: • Assets (Liabilities & Equity) = negative means that we owe more than we own but there is enough money to run the business; however, it could also mean that we are over-leveraged with too much debt, we have bor­ rowed too much so that we could fund further future growth, or we could be at risk using excess loan proceeds to fund over-rapid growth and be unable to service debt. • Assets (Liabilities & Equity) = positive means we are under-leveraged in that we are not putting our asset value fully to work to generate revenue. We might need to acquire additional financing to operate the business and risk not being able to operate by not doing enough; however, that debt costs money, and we could swing our DFN negative and become unable to service that debt. A recent example as of August 2022 is Bed Bath & Beyond® (BBBY) becoming a meme stock subject to massive short squeeze swings where large loans were taken out to execute stock buybacks, the market tanked, and their balance sheet became over-leveraged with debt.

Not all balance sheets are calculated in the same way or display numbers in the same way. DFN tells us: • How much we estimate we have to raise each year in loans to keep the business running. • How much accumulated debt will be added up over how many years in order to generate a profit, and thus generate a return for investors.

This is deliberate repetition because it’s important: be careful

with growing a business using excess debt, as growth is

very hard to execute on and could result in over-leveraging,

where you could risk taking on so much debt that you

can’t service that debt by paying the interest on time.

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151

In the case of BDaaSB and Worksheet 6.9 (page 144), we would add to the item Adding to Long Term SBA Loans for each year so that we get a DFN result that is close to zero, and preferably slightly negative. It follows that if our loans are too large, the DFN will give us a negative number (we don’t need that much), and we will have unused loan proceeds for a given year and we are thus taking out too big of a loan for that year, which means we are over-leveraged with too much debt and we can reduce additional loan amounts for that specific year. Based on the income statement in Worksheet 6.8 (page 143) and the bal­ ance sheet in Worksheet 6.9, we see that BDaaSB has losses accumulating in Years 1–3 and growing profits in Years 4 and 5, but the accumulation of retained earnings only turns into an overall profit in Year 5. Therefore, BDaaSB takes too much in loans in Years 1–4, but there’s no reason not to be paying voluntary amounts back ahead of time as in Year 5, and SBA loans as of 2017 were cheap debt that could be used for growth. The DFN numbers clearly show that BDaaSB had its debt load correct in Years 1–3 but borrowed far too much money in Years 4 and 5, given that the Year 4 and 5 DFN numbers are highly negative, and we are at risk of over-leveraging with debt to the point of being unable to service that debt later on. Taking out too much debt to run a business is the same thing as buying a house with a mortgage that you can’t afford and then getting foreclosed on a few years down the line, the bank takes your house, and you end up with nowhere to live. When you present your business finance plan to an investor, they will look for these numbers to see that you have done your planning and your home­ work and have a good chance of eventually providing a healthy return on their investment. The BDaaSB case study is quite obviously at this stage not an investment that makes a return quickly enough—I did explore an SBA, but I was advised to start a restaurant, as it would probably make a return in the first year of operation. The caveat to the balance sheet shown in Worksheet 6.9, where DFN is massively decreased between Years 3 and 4, could tell you, in tandem with the income statement, that BDaaSB potential profit growth is seriously over-estimated (new loans were reduced); however, IT startup companies can grow in this way when they begin in stealth mode or give their service away for free until they build up enough of a reputation to start generating revenue by acquiring a much larger customer base. Also, software takes time to develop at the beginning, and it is only ready to use when it works—this type of a gamble needs incredible sales skills and a very good track record to get investors on board.

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Long-term debt proceeds are shown on the balance sheet so that we can see how much money we bring into the company to sustain the business for each year. The Total SBA number on the last line of the balance sheet shown in Worksheet 6.9 serves to remind us how much we expect to borrow from the SBA over the full five-year projected period.

There is no short-term debt for the BDaaSB case

study at present, and thus the line is added

to the balance sheet with zero values.

At this stage in the financial statements presentation, we do not have the Cash-On Hand item values to display for Worksheet 6.9 because those values come from the cash-flow statement, which we will cover later in this chapter. Therefore, the DFN values, loans required, and loan proceeds are not correct as of yet without cash-on-hand values, but you now have an introductory understanding as to how these items work, what they are for, and that they are very important, even though they may not seem that way as individual pieces in a larger mosaic. The next step is to return to the income statement to complete it by add­ ing interest payment projections on loans based on what has thus far been plugged into the balance sheet—all these different financial statements interconnect, and all of those connections will eventually make sense when we have it all created.

6.5 Returning to the Income Statement The two items to add into the income statement that completes this part of the financial analysis are interest paid on loans as well as taxes, both of which belong at the end of the income statement and depend on interest payable loans as described in the balance in Worksheet 6.9. The interest payments are calculated based on all interest-subject loans, which in the case for the BDaaSB case study is the SBA loan, which includes calculating all additions for each year plus all accumulated loan proceeds for previous years. Note that the interest payments have also been calculated by taking into account subtractions of SBA loan principal payments, both

Formal Financial Planning and Budgeting

153

mandatory and voluntary, which reduces the loan amount and thus the inter­ est payments. For the quarterly income statements, I have used the annual calculation and divided by 4 to account for a split across each quarter, as well as assuming that the SBA loan is made on January 1 of the current year. Calculating taxes in the quarterly statements for the first two years (2018 and 2019) is easy because there is no income, and thus the taxes are zero! So, the income statements for the first two years of BDaaSB projected operations look as shown in Worksheets 6.11 and 6.12, where interest calculations add up these four amounts and negative values (loan principal repayments) are subtracted: • Adding to Long-Term SBA Loan • Long-Term SBA Loan • Mandatory Principal Payments on SBA Loan • Voluntary Principal Payments on SBA Loan Taxes are calculated by multiplying the assumed effective tax rate (set at 21% in this case) by the Earnings Before Taxes (EBT) as shown in the income statements. Interest and taxes are shown first for 2018 (Year 1 of operation) in Worksheet 6.11. Interest and taxes are shown second for the BDaaSB case study for 2019 (Year 2 of operation) in Worksheet 6.12, where taxes are still zero because a profit is not projected for BDaaSB at this point in the operation of the business.

The effective tax rate is the same as the resulting tax rate paid on your personal income after all deductions have been removed—it’s your actual resulting tax rate. This approach is vaguely appropriate to this business when it first starts, as it’s only the founder and unlikely to even need to be an LLC at the beginning. In later years the corporate tax rate and something like an S-Corporation might apply to BDaaSB; however, as of 2018 the corporate tax rate was 21%, so all we are assuming is that we pay the same tax rate over five years—you can make it more complicated if you wish, given that a 21% personal effective tax rate might be a little on the high side. Next, we examine the five-year annualized income statement, and some things have changed, as shown in Worksheet 6.13. The NOL (Net Operating

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Business Finance Planning with Microsoft® Excel ®

Bigdata as a Service for Small Businesses (BDaaSB)

SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES Hardware Support Software Support Marketing and Advertising B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT Taxes NET INCOME/LOSS Refund estimate (subscription cancellations) Consulting services Assumed effective tax rate Depreciation Current base rate SBA loan (under 50K has zero fees, 2.25% spread under 7 years maturity) SBA Loan short term interest rate

Mar 0 0 0 0 0 55126 53776 1350 0 0 0 43024 0 0 16387 16387 0 0 10250 2250 2500 3000 500 0 2000 0 0 (98150) 156 (98307) 1875 (100182) 0 (100182)

Income Statement as of End of Quarter 2018 Jun Sep Dev 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 55126 55126 55126 53776 53776 53776 1350 1350 1350 0 0 0 0 0 0 0 0 0 16774 40924 40924 0 0 0 0 0 0 3387 15462 15462 3387 3387 3387 0 12075 12075 0 0 0 10000 10000 10000 500 500 500 2500 2500 2500 3000 3000 3000 500 500 500 500 500 500 250 250 250 250 250 250 2500 2500 2500 (71900) (96050) (96050) 156 156 156 (72057) (96207) (96207) 1875 1875 1875 (73932) (98082) (98082) 0 0 0 (73932) (98082) (98082)

5% 10% 21% 5% 1.25% 2.50% 3.75%

Worksheet 6.11 Plugging interest and taxes into the

BDaaSB 2018 quarterly income statement

Loss) section is introduced to help reduce the tax burden. NOL laws have been changed in recent years due to COVID, but in 2017 it seems you could carry forward net losses against up to 80% of a year’s income indefinitely, using losses from previous years—the IRS calls this loss carry forward, which may or may not apply to tax laws in other countries.

2018

0 0 0 0 0 22050 21510 5400 0 0 0 14164 0 0 50698 26548 24150 0 40250 3750 10000 12000 2000 1500 2750 750 7500 (36215 625 (36277 7500 (37027 0 (37027

Formal Financial Planning and Budgeting

155

Bigdata as a Service for Small Businesses (BDaaSB)

SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES Hardware Support Software Support Marketing and Advertising B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT Taxes NET INCOME/LOSS Refund estimate (subscription cancellations) Consulting services ratio Assumed effective tax rate Depreciation Current base rate SBA loan (under 50K has zero fees, 2.25% spread under 7 years maturity) SBA Loan short term interest rate

Income Statement as of End of Quarter 2019 Mar Jun Sep Dec 32786 65572 98358 131144 16091 32183 48274 64365 16091 32183 48274 64365 (201) (402) (603) (805) 805 1609 2414 3218 356091 356091 356091 356091 309991 309991 309991 309991 3600 3600 3600 3600 30000 30000 30000 30000 12500 12500 12500 12500 0 0 0 0 52924 57924 70424 132924 0 0 0 0 0 0 0 0 21462 23962 30212 61462 3387 3387 3387 3387 12075 12075 12075 12075 6000 8500 14750 46000 10000 10000 10000 10000 500 500 500 500 2500 2500 2500 2500 3000 3000 3000 3000 500 500 500 500 500 500 500 500 250 250 250 250 250 250 250 250 2500 2500 2500 2500 (376229) (348443) (328157) (357871) 156 156 156 156 (376385) (348599) (328313) (358027) 14732 14732 14732 14732 (391118) (363331) (343045) (372759) 0 0 0 0 (391118) (363331) (343045) (372759) 5% 10% 21% 5% 1.25% 2.50% 3.75%

Worksheet 6.12 Plugging interest and taxes into the

BDaaSB 2019 quarterly income statement

As shown in Worksheet 6.13, because there is a cumulative NOL greater than all incomes even by Year 5, BDaaSB only pays tax on 20% of EBT in Years 4 and 5 of operation because of then-current NOL taxation rules used in this book. These rules apply the NOL deductible against 80% of income using the

2019

32786 16091 16091 (2011 8046 142436 123996 14400 12000 50000 0 31419 0 0 13709 13548 48300 75250 40000 2000 10000 12000 2000 2000 1000 1000 10000 (14107 625 (14113 58929 (14702 0 (14702

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Bigdata as a Service for Small Businesses (BDaaSB)

Income Statement as of Dec 31st

2018 2019 2020 2021 2022

SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES Hardware Support Software Support Marketing and Advertising B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT NOL deduct (CFWD-20yrs, assumed cumulative) Net Operating Loss Cumulative Carried Forward Net Operating Loss Taxable Mandatory 20% of EBT NOL Tax Deductible to 80% of EBT Cumulative Carried Forward NOL Residual Taxable Taxes NET INCOME/LOSS Refund estimate (subscription cancellations) Consulting services Assumed effective tax rate Depreciation Current base rate SBA loan (under 50K has zero fees, 2.25% spread under 7 years maturity) SBA Loan short term interest rate

0 0 0 0 0 220505 215105 5400 0 0 0 90948 0 0 50698 26548 24150 0 40250 3750 10000 12000 2000 1500 2750 750 7500 (311453) 625 (312078) 7500 (319578)

Cloud Based 345964 160913 160913 (8046) 32183 1424365 1239965 14400 120000 50000 0 177098 0 0 137098 13548 48300 75250 40000 2000 10000 12000 2000 2000 1000 1000 10000 (1255499) 625 (1256124) 58929 (1315053)

1729819 804567 804567 (40228) 160913 1479365 1239965 14400 0 0 225000 469848 0 0 429848 13548 48300 368000 40000 2000 10000 12000 2000 2000 1000 1000 10000 (219394) 625 (220019) 398357 (618377)

(319578) (319578) 0

(1315053) (1634631) 0

(618377) (2253008) 0

0 0 (319578)

0 0 (1315053)

0 0 (618377)

5% 10% 21% 5% 1.25% 2.50% 3.75%

Worksheet 6.13 Consolidating interest and taxes into the BDaaSB five-year proforma income statement

Managed Services 2421746 1126394 1126394 (56320) 225279 1479365 1239965 14400 0 0 225000 295848 5000 5000 245848 13548 48300 184000 40000 2000 10000 12000 2000 2000 1000 1000 10000 646533 625 645908 341449 304459

3459637 1609134 1609134 (80457) 321827 1479365 1239965 14400 0 0 225000 387848 5000 5000 337848 13548 48300 276000 40000 2000 10000 12000 2000 2000 1000 1000 10000 1592424 625 1591799 82671 1509129

0 0 60892 243567 (2009441) 60892 12787 291672

0 0 301826 1207303 (802138) 301826 63383 1445745

Formal Financial Planning and Budgeting

157

residual cumulative loss. The result in Worksheet 6.13 is that BDaaSB only has to pay 21% tax on 20% of its EBT until the Cumulative Carried Forward NOL Residual is reduced to zero.

6.6 Proforma Cash-Flow Projection What is cash flow and what is in a cash-flow projection? Cash flow is the amount of money flowing in and out of a business, where we would like to have more flowing in than out, which would result in positive cash flow. Cash really does flow, in that it has to be put to work buying things and making things, and we hope to be able to sell those products and services to someone else at a profit. A cash-flow projection is a financial document that can help you get investor interest by showing that you have made a realistic analysis of where your busi­ ness will cost money and where it will generate revenue, and how much, and also that you know in which periods you have excess cash and also in which periods you might have cash starvation—no cash means no business because you can’t pay the bills in a specific period if you don’t have enough money.

6.6.1 What’s in the Cash-Flow Projection? What we do here is to add up the various cash outflows and inflows from both the income statement and the balance sheet in order to understand exactly how much money we need in each period we are projecting for into the future, ultimately to operate and survive as a business; if we don’t expect to be able to pay the bills in a single quarter or single year, then we either have the options of (1) we cut back on expenses, (2) we go out of business, or (3) we increase financing and potentially borrow more money than the business can sustain as serviceable debt. These are the individual items in the cash flow: • Beginning Cash. Previous year’s beginning cash + previous year’s ending net income o Can be a gain (positive) or a loss (negative). o Does not affect cash inflow in the period, as cash inflow is calculated from net cash flow at the end of the previous period. • Cash Inflow. This is the amount of money coming in: o Operating Income/Loss (EBIT) from the income statement.

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Business Finance Planning with Microsoft® Excel ®

The cash inflow adds EBIT to depreciation, which is an expense that decreases taxes from the income statement. o The cash flow also adds the expected change in accounts receivable at the end of the year, which is customers we expect to owe us money and is part of current assets in the balance sheet. Cash Outflow. This is the amount of money going out: o Capital investments plus change in accounts payable to suppliers o Interest paid (EBT) o Taxes (Net income/loss) Net Cash Flow from Operations. This is the sum of the Cash Inflow and the Cash Outflow for running the business. Net Cash Flow from Financing. This is a sum from the balance sheet indicating how much you have to take out in loans to operate the busi­ ness in a given projected period. Net Cash Flow. This adds the previous two items where the operations net value must be smaller than the financing net in order to create a Net Cash Flow above zero, otherwise you don’t have enough money to successfully operate the business. o

•

• •

•

6.6.2 Quarterly Two-Year Proforma Cash-Flow Projection Worksheet 6.14 shows the quarterly cash flow of the BDaaSB case study for the first two years of the operation of the company.

6.6.3 Annual Five-Year Proforma Cash-Flow Projection Worksheet 6.15 expands on the first two years of quarterly breakdown from Worksheet 6.14, into an annual projection out to five years; prospective inves­ tors want to know that you are planning on making them a good return for their investment out into the future, and the better you plan ahead and demonstrate that you have done so in concisely presented detail, the more likely you will find financial support for your new business idea. We have an obvious problem, as shown in Worksheet 6.15, in that we have a net cash flow going out of less than zero ($123,501), and that we can fix that and increase the long-term debt load as shown by the balance sheet snippet in Figure 6.2 (on next pages).

Formal Financial Planning and Budgeting

Cash Flow Projection Bigdata as a Service for Small Businesses (BDaaSB) Beginning Cash OPERATING INCOME/LOSS (EBIT) Depreciation Accounts Receivable Increase Cash Inflow Capitalized Equipment Accounts Payable Decrease Interest Paid Taxes Cash Outflow NET CASH FLOW from OPERATIONS Long Term Debt Proceeds Short Term Debt Proceeds NET CASH FLOW from FINANCING NET CASH FLOW

Mar 0 (98307) 156 0 (98150) 3125 1137 1875 0 6137 (104287) 53125 0 53125 (51162)

Jun (51162) (72057) 156 0 (71900) 3125 1137 1875 0 6137 (78037) 53125 0 53125 (24912)

2018

Sep (76074) (96207) 156 0 (96050) 3125 1137 1875 0 6137 (102187) 53125 0 53125 (49062)

159

Quarterly Projection Dec (125136) (96207) 156 0 (96050) 3125 1137 1875 0 6137 (102187) 53125 0 53125 (49062)

Mar (174199) (376385) 156 7208 (369022) 0 1077 20357 0 21434 (390456) 492857 0 492857 102402

2019 Jun Sep (71797) 58391 (348599) (328313) 156 156 7208 7208 (341236) (320949) 0 0 1077 1077 20357 14732 0 0 21434 15809 (362670) (336758) 492857 492857 0 0 492857 492857 130188 156099

Dec 214489 (358027) 156 7208 (350663) 0 1077 14732 0 15809 (366472) 492857 0 492857 126385

Worksheet 6.14 Two-year cash-flow projection in quarters for BDaaSB

Bigdata as a Service for Small Businesses (BDaaSB) Beginning Cash OPERATING INCOME/LOSS (EBIT) Depreciation Accounts Receivable Increase Cash Inflow Capitalized Equipment Accounts Payable Decrease Interest Paid Taxes Cash Outflow NET CASH FLOW from OPERATIONS Long Term Debt Proceeds Short Term Debt Proceeds NET CASH FLOW from FINANCING NET CASH FLOW

Worksheet 6.15

Cash Flow Projection 2018 0 (312078) 625 0 (311453) 12500 4547 7500 0 24547 (336001) 212500 0 212500 (123501)

2019 (123501) (1256124) 625 28830 (1226669) 0 4308 81429 0 85736 (1312405) 1971429 0 1971429 659023

Annual Projection 2020 535523 (220019) 625 115321 (104073) 0 14638 90421 0 105058 (209132) 239796 0 239796 30664

2021 566187 645908 625 57661 704194 0 (8700) 77504 23873 92677 611517 (344461) 0 (344461) 267056

2022 833243 1591799 625 86491 1678915 0 4600 28932 65640 99172 1579743 (1307752) 0 (1307752) 271991

Five-year cash-flow projection for BDaaSB

6.7 Final BDaaSB Financial Statements This section simply presents the five-year projected proforma copies of each of the financial statements for better presentation after the step-by-step process described thus far, beginning with the income statement in Worksheet 6.16 (page 162). Worksheet 6.17 (page 163) shows the final balance sheet, where

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Balance Sheet Snippet

Figure 6.2 Increasing the debt load in order to get a positive cash flow for BDaaSB in Year 1

we can adjust the SBA loan addition amounts in each year in order to retain positive cash flow and remain in business, assuming of course that the SBA would lend this much money to this business idea. Note that there is one further change to the balance sheet, as shown in Worksheet 6.17, where the projected income taxes calculated in the income statement are added to the balance sheet. Finally, Worksheet 6.18 (page 164) shows the final five-year planned cash-flow projection statement.

Formal Financial Planning and Budgeting

161

Cash Flow Snippet

6.8 Final Financials for Your Business Idea By now you will probably have noticed that a large number of financial state­ ment items are derived from other worksheets that are non-financial, from other financial statements, as well as within the same financial statement. There isn’t much that you have to add manually in this chapter other than startup expenses

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SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES Hardware Support Software Support Marketing and Advertising B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT NOL deduct (CFWD-20yrs, assumed cumulative) Net Operating Loss Cumulative Carried Forward Net Operating Loss Taxable Mandatory 20% of EBT NOL Tax Deductible to 80% of EBT Cumulative Carried Forward NOL Residual Taxable Taxes NET INCOME/LOSS

Worksheet 6.16

Bigdata as a Service for Small Businesses (BDaaSB) Income Statement as of Dec 31st 2018 2019 2020 2021 2022 Cloud Managed Based Services 0 345964 1729819 2421746 3459637 0 160913 804567 1126394 1609134 0 160913 804567 1126394 1609134 0 (8046) (40228) (56320) (80457) 0 32183 160913 225279 321827 220505 1424365 1479365 1479365 1479365 215105 1239965 1239965 1239965 1239965 5400 14400 14400 14400 14400 0 120000 0 0 0 0 50000 0 0 0 0 0 225000 225000 225000 90948 177098 469848 295848 387848 0 0 0 5000 5000 0 0 0 5000 5000 50698 137098 429848 245848 337848 26548 13548 13548 13548 13548 24150 48300 48300 48300 48300 0 75250 368000 184000 276000 40250 40000 40000 40000 40000 3750 2000 2000 2000 2000 10000 10000 10000 10000 10000 12000 12000 12000 12000 12000 2000 2000 2000 2000 2000 1500 2000 2000 2000 2000 2750 1000 1000 1000 1000 750 1000 1000 1000 1000 7500 10000 10000 10000 10000 (311453) (1255499) (219394) 646533 1592424 625 625 625 625 625 (312078) (1256124) (220019) 645908 1591799 7500 81429 90421 77504 28932 (319578) (1337553) (310440) 568404 1562868 (319578) (319578) 0 0 (319578) 0 0 (319578)

(1337553) (1657131) 0 0 (1657131) 0 0 (1337553)

(310440) (1967572) 0 0 (1967572) 0 0 (310440)

0 (1967572) 113681 454724 (1399167) 113681 23873 544531

0 (1967572) 312574 1250294 (404704) 312574 65640 1497227

Final proforma income statement for the BDaaSB case study

and the startup balance sheet, in addition to the first three operating expenses shown in Worksheets 6.19, 6.20, and 6.21 (starting on page 165) for your busi­ ness idea. The first financial statement shown in Worksheet 6.19 is the quarterly income statement for the first year of your business idea.

Formal Financial Planning and Budgeting

Cash on Hand Accounts Receivable Other Current Assets Property Improvements Equipment Intangible Assets Other Fixed Assets ASSETS TOTAL Short-Term Debt Accounts Payable Income Taxes Payable Current Liabilities Addition to Long Term Loan from Founder Addition to Crowd Funding Loan Adding to Long Term SBA Loan Long Term Loan From Founder Crowd Funding Loan Long Term SBA Loan Principal Payment on Loan From Founder Crowd Funding Service Costs Mandatory Principal Payments on SBA Loan Voluntary Principal Payments on SBA Loan Long-Term Liabilities LIABILITIES TOTAL Preferred Stock Common Unvested Stock Retained Earnings SHAREHOLDERS EQUITY LIABILITIES & EQUITY

(123501) 0 0 (123501) 2500 10000 0 0 12500 (111001) 0 4547 0 4547 12500 0 200000 0 0 0 0 0 0

2019 Cloud Based 659023 28830 0 687854 0 0 0 0 0 687854 0 8855 0 8855 0 0 2000000 12500 0 200000 0 0 (28571)

212500 217047 105947 0 (319578) (213631) 3417

2183929 2192783 0 0 (1657131) (1657131) 535652

2423724 2447217 0 0 (1967572) (1967572) 479645

0 (344461) 0 2079264 2117929 0 0 (1423040) (1423040) 694889

Discretionary Financing Needed (DFN) Long Term Debt Proceeds Short Term Debt Proceeds Total accumulated long term loans

(114417) 212500 0

152201 1971429 0

(304829) 239796 0

(226021) (344461) 0

2018

Worksheet 6.17

2020 30664 144152 0 174816 0 0 0 0 0 174816 0 23492 0 23492 0 0 550000 12500 0 2171429 0 0 (310204)

2021 Managed Services 267056 201812 0 468869 0 0 0 0 0 468869 0 14792 23873 38665 0 0 0 12500 0 2411224

163

2022

0

271991 288303 0 560294 0 0 0 0 0 560294 0 19392 65640 85033 0 0 0 0 0 2066764 (12500) 0 (295252) (1000000) 759012 844045 0 0 74187 74187 918232 (357937) (1307752) 0 771512

Final proforma balance sheet for the BDaaSB case study

The next statement in Worksheet 6.20 shows the quarterly income statement for the second predicted year of operation of your business. Worksheet 6.21 shows the five-year statement looking into the future. For a type of business operation such as a restaurant, we would expect a fairly substantial up-front capital investment but a lower ongoing capital investment later on, with operating revenue potential as soon as the business opens, thus helping to offset loan costs straight away and making it more likely to get an SBA loan. IT startup companies have up-front costs in labor, services, and fixed

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Business Finance Planning with Microsoft® Excel ®

Bigdata as a Service for Small Businesses (BDaaSB) Beginning Cash OPERATING INCOME/LOSS (EBIT) Depreciation Accounts Receivable Increase Cash Inflow Capitalized Equipment Accounts Payable Decrease Interest Paid Taxes Cash Outflow NET CASH FLOW from OPERATIONS Long Term Debt Proceeds Short Term Debt Proceeds NET CASH FLOW from FINANCING NET CASH FLOW

Cash Flow Projection 2018 0 (312078) 625 0 (311453) 12500 4547 7500 0 24547 (336001) 212500 0 212500 (123501)

2019 (123501) (1256124) 625 28830 (1226669) 0 4308 81429 0 85736 (1312405) 1971429 0 1971429 659023

Annual Projection 2020 535523 (220019) 625 115321 (104073) 0 14638 90421 0 105058 (209132) 239796 0 239796 30664

2021 566187 645908 625 57661 704194 0 (8700) 77504 23873 92677 611517 (344461) 0 (344461) 267056

2022 833243 1591799 625 86491 1678915 0 4600 28932 65640 99172 1579743 (1307752) 0 (1307752) 271991

Worksheet 6.18 Proforma cash flow for the BDaaSB case study

assets that can operate at a loss over an extended period, and thus have less chance of acquiring SBA loan support because they take much longer to show a return on investment, ability to service debt load, and ability to pay off the loan. The next item is the balance sheet as predicted over the next five years, which is shown in Worksheet 6.22 (page 168). Note that manual additions to this financial statement include changes to asset values through capital investments (unlikely for a new single restaurant project), changes to loans and perhaps short-term debt for covering salaries (no short-term debt is used in the balance sheet for this business idea). The last thing we examine is cash flow for your business idea, where we are trying to figure out how much money goes in and out of the business within specific periods of time—quarterly in Worksheet 6.23 (page 169) and annually in Worksheet 6.24. As already described, Worksheet 6.24 shows the five-year projected cash flow for your business idea, where the objective is predictable cash flow, so that you understand if and where money will be in short supply and you would need further access to loan finance in order to remain in business.

6.9 Conclusion The information presented in this chapter is extremely important because it allows you to see how you will spend money, how you will earn, how cash flows [Text continues on page 164]

Formal Financial Planning and Budgeting

165

>

SALES REVENUE Revenue Stream 1 Revenue Stream 2 Revenue Stream 3 Refunds COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES Information Technology Rent Equipment Maintenance Marketing and Advertising Email list purchase and use CRM (Customer Relationship Management) tools Social media marketing Other online advertising Print, TV & radio advertising and marketing Hire sales lead generation service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT Taxes NET INCOME/LOSS Refund estimate Revenue Stream 2 estimator Revenue Stream 3 estimator Assumed effective tax rate Depreciation Current base rate SBA loan (under 50K has zero fees, 2.25% spread under 7 SBA Loan short term interest rate

Worksheet 6.19

Mar 393656 375000 37500 1875 (20719) 130052 126077 3150 25 50 750 0 0 39473 10000 0 0 25623 7000 5548 9575 3500 0 3850 700 300 350 400 450 500 550 600 224131 875 223256 875 222381 33357 189024

Income Statement as of End of Quarter 2022 Jun Sep 393656 393656 375000 375000 37500 37500 1875 1875 (20719) (20719) 154545 210137 148770 207062 4950 2250 25 25 50 50 750 750 0 0 0 0 28588 25088 5000 1000 0 0 0 500 18623 18623 0 0 5548 5548 9575 9575 3500 3500 0 0 4965 4965 1215 1215 500 500 375 375 350 350 500 500 250 250 775 775 1000 1000 210523 158431 875 875 209648 157556 875 875 208773 156681 31316 23502 177457 133179

Dec 393656 375000 37500 1875 (20719) 129152 126077 2250 25 50 750 0 0 25088 1000 0 500 18623 0 5548 9575 3500 0 4965 1215 500 375 350 500 250 775 1000 239416 875 238541 875 237666 35650 202016

5% 10% 5% 15% 5% 1.25% 2.25% 3.50%

Quarterly Year-1 income statement for your business idea

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Business Finance Planning with Microsoft® Excel ®

>

SALES REVENUE Revenue Stream 1 Revenue Stream 2 Revenue Stream 3 Refunds COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES Information Technology Rent Equipment Maintenance Marketing and Advertising Email list purchase and use CRM (Customer Relationship Management) tools Social media marketing Other online advertising Print, TV & radio advertising and marketing Hire sales lead generation service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT Taxes NET INCOME/LOSS Refund estimate Revenue Stream 2 estimator Revenue Stream 3 estimator Assumed effective tax rate Depreciation Current base rate SBA loan (under 50K has zero fees, 2.25% spread under 7 years SBA Loan short term interest rate

Worksheet 6.20

Income Statement as of End of Quarter 2023 Mar Jun Sep Dec 450656 450656 450656 450656 412500 412500 412500 412500 41250 41250 41250 41250 20625 20625 20625 20625 (23719) (23719) (23719) (23719) 303184 303184 303184 303184 284034 284034 284034 284034 5400 5400 5400 5400 0 0 0 0 0 0 0 0 0 0 0 0 12500 12500 12500 12500 1250 1250 1250 1250 25088 25088 25088 25088 1000 1000 1000 1000 0 0 0 0 500 500 500 500 18623 18623 18623 18623 0 0 0 0 5548 5548 5548 5548 9575 9575 9575 9575 3500 3500 3500 3500 0 0 0 0 4965 4965 4965 4965 1215 1215 1215 1215 500 500 500 500 375 375 375 375 350 350 350 350 500 500 500 500 250 250 250 250 775 775 775 775 1000 1000 1000 1000 122384 122384 122384 122384 3000 3000 3000 3000 119384 119384 119384 119384 1188 1188 1188 1188 118197 118197 118197 118197 17729 17729 17729 17729 100467 100467 100467 100467 5% 10% 5% 15% 5% 1.25% 2.25% 3.50%

Quarterly Year-2 income statement for your business idea

Formal Financial Planning and Budgeting

SALES REVENUE Revenue Stream 1 Revenue Stream 2 Revenue Stream 3 Refunds COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES Information Technology Rent Equipment Maintenance Marketing and Advertising Email list purchase and use CRM (Customer Relationship Management) tools Social media marketing Other online advertising Print, TV & radio advertising and marketing Hire sales lead generation service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT NOL deduct (CFWD-20yrs, assumed cumulative) Net Operating Loss Cumulative Carried Forward Net Operating Loss Taxable Mandatory 20% of EBT NOL Tax Deductible to 80% of EBT Cumulative Carried Forward NOL Residual Taxable Taxes NET INCOME/LOSS Refund estimate Revenue Stream 2 estimator Revenue Stream 3 estimator Assumed effective tax rate Depreciation Current base rate SBA loan (under 50K has zero fees, 2.25% spread under 7 SBA Loan short term interest rate

Worksheet 6.21

167

2022 Phase1 1638750 1500000 150000 75000 (86250) 623887 607987 12600 100 200 3000 0 0 118237 17000 0 1000 81492 7000 22192 38300 14000 0 18745 4345 1800 1475 1450 1950 1250 2875 3600 896626 3500 893126 3500 889626

> Income Statement as of Dec 31st 2023 2024 2025 Phase2 Phase2+ Phase+ 1802625 1966500 1966500 1650000 1800000 1800000 165000 180000 180000 82500 90000 90000 (94875) (103500) (103500) 1212737 1157737 1157737 1136137 1136137 1136137 21600 21600 21600 0 0 0 0 0 0 0 0 0 50000 0 0 5000 0 0 100352 100352 112352 4000 4000 4000 0 0 12000 2000 2000 2000 74492 74492 74492 0 0 0 22192 22192 22192 38300 38300 38300 14000 14000 14000 0 0 0 19860 19860 19860 4860 4860 4860 2000 2000 2000 1500 1500 1500 1400 1400 1400 2000 2000 2000 1000 1000 1000 3100 3100 3100 4000 4000 4000 489537 708412 696412 12000 15900 16650 477537 692512 679762 4750 5821 4990 472787 686690 674772

2026 Phase2+ 1966500 1800000 180000 90000 (103500) 1157737 1136137 21600 0 0 0 0 0 112352 4000 12000 2000 74492 0 22192 38300 14000 0 19860 4860 2000 1500 1400 2000 1000 3100 4000 696412 17775 678637 0 678637

0 0 177925 711701 0 889626 44481 845145

0 0 94557 378229 0 472787 23639 449147

0 0 135727 542909 0 678637 33932 644705

0 0 137338 549352 0 686690 34335 652356

0 0 134954 539817 0 674772 33739 641033

5%

10%

5%

15%

5%

1.25% 2.25% 3.50%

Five-year income statement for your business idea

168

Business Finance Planning with Microsoft® Excel ®

2022

2023

2024

2025

2026

Cash on Hand Accounts Receivable Other Current Assets Property Improvements Equipment Intangible Assets Other Capital Investment Fixed Assets ASSETS TOTAL Short-Term Debt Accounts Payable Income Taxes Payable Current Liabilities Addition to Long Term Loan from Founder Addition to Crowd Funding Loan Adding to Long Term SBA Loan Long Term Loan From Founder Crowd Funding Loan Long Term SBA Loan Principal Payment on Loan From Founder Crowd Funding Service Costs Mandatory Principal Payments on SBA Loan Voluntary Principal Payments on SBA Loan Long-Term Liabilities LIABILITIES TOTAL Preferred Stock Common Unvested Stock Retained Earnings SHAREHOLDERS EQUITY LIABILITIES & EQUITY

1014296 136563 0 1150858 35000 35000 0 0 70000 70000 1220858 0 5912 44481 50393 5000 0 100000 0 0 0 0 0 0

501412 150219 0 651631 10000 0 0 0 10000 80000 731631 0 5018 23639 28657 0 0 50000 5000 0 100000 0 0 (14286)

686524 163875 0 850399 20000 5000 0 1000 26000 106000 956399 0 5018 34335 39352 0 0 50000 5000 0 135714 0 0 (19388)

628322 163875 0 792197 0 0 5000 0 5000 111000 903197 0 5618 33739 39356 0 0 0 5000 0 166327

105000 155393 178580 0 845145 1023725 1179118

140714 169371 0 0 1294292 1294292 1463663

171327 210679 0 0 1946648 1946648 2157326

0 (23761) 0 147566 186922 0 0 2587681 2587681 2774603

(377887) 163875 0 (214012) 0 0 7500 0 7500 118500 (95512) 0 5618 33932 39549 0 0 0 5000 0 142566 (12500) 0 (20367) (1000000) (885301) (845751) 0 0 3232386 3232386 2386634

Discretionary Financing Needed (DFN) Long Term Debt Proceeds Short Term Debt Proceeds Total SBA

41740 105000 0

(732033) 35714 0

(1200927) 30612 0

(1871406) (23761) 0

Accounts receivable outstanding at year end Accounts payable outstanding at year end SBA payoff/year as total principal / Term

Worksheet 6.22

0

(2482146) (1032867) 0 (885301)

8% 5% 7

Five-year proforma balance sheet for your business idea

through your business as it operates, how much you will have to lend to get your business up and running, and how easily you can service the debt you build up over time. When you present a formally organized set of proforma financial

Formal Financial Planning and Budgeting

Cash Flow Projection Quarterly Projection 2018 Jun Sep Dec Mar 231312 451056 626523 870827

Jun 984360

Sep 1097893

Dec 1211427

223256 875 34141

209648 875 34141

157556 875 34141

238541 875 34141

119384 3000 3414

119384 3000 3414

119384 3000 3414

119384 3000 3414

258272

244664

192572

273557

125798

125798

125798

125798

53210 205062

51169 193495

43355 149217

55503 218054

21193 104605

21193 104605

21193 104605

21193 104605

26250 231312

26250 219745

26250 175467

26250 244304

8929 113533

8929 113533

8929 113533

8929 113533

> Beginning Cash OPERATING INCOME/LOSS (EBIT) Depreciation Accounts Receivable Increase Cash Inflow Capitalized Equipment Accounts Payable Decrease Interest Paid Taxes Cash Outflow NETT CASH FLOW from OPERATIONS Long Term Debt Proceeds Short Term Debt Proceeds NETT CASH FLOW from FINANCING NET CASH FLOW

169

Mar 0

17500 1478 875 33357

17500 1478 875 31316

26250 0

Worksheet 6.23

17500 1478 875 23502

26250 0

26250 0

17500 1478 875 35650 26250 0

2500 (224) 1188 17729 8929 0

2019

2500 (224) 1188 17729 8929 0

2500 (224) 1188 17729 8929 0

Quarterly two-year cash flow for your business idea Cash Flow Projection

> Beginning Cash OPERATING INCOME/LOSS (EBIT) Depreciation Accounts Receivable Increase Cash Inflow Capitalized Equipment Accounts Payable Decrease Interest Paid Taxes Cash Outflow NETT CASH FLOW from OPERATIONS Long Term Debt Proceeds Short Term Debt Proceeds NETT CASH FLOW from FINANCING NET CASH FLOW

Worksheet 6.24

2018 0 893126 3500 136563 1033189 70000 5912 3500 44481 123893 909296 105000 0 105000 1014296

2019 1014296 477537 12000 13656 503193 10000 (894) 4750 23639 37495 465698 35714 0 35714 501412

Annual Projection 2020 2021 1515708 2202232 692512 679762 15900 16650 13656 0 722068 696412 26000 5000 0 600 5821 4990 34335 33739 66156 44328 655912 652083 30612 (23761) 0 0 30612 (23761) 686524 628322

2022 2830554 678637 17775 0 696412 7500 0 0 33932 41432 654980 (1032867) 0 (1032867) (377887)

Five-year cash flow for your business idea

statements to investors, you will have a much better chance of convincing potential investors and loan officers to give you the financial support that you need; you will also discover the financial viability of your business at the end of a thorough financial analysis: Is your business idea worth the risk? Is it worth your time, or would you be wise to find another business idea? This chapter covered: • •

Income statement projections Balance-sheet projections

2500 (224) 1188 17729 8929 0

170

• • •

Business Finance Planning with Microsoft® Excel ®

Cash-flow projections Can your business make money? When will your business idea make money?

6.10 The Spreadsheet So Far The relevant worksheets can be downloaded at oracletroubleshooter.com /business-finance-planning/ch6

Appendix A

Case Study

This appendix presents a more precise version of the financial statements built sequentially throughout the chapters of this book, including explanations of some line items. SALES REVENUE • Pay Per Use: Pay Per Use percentage of revenue = 50% • Subscriptions: The other half of Pay Per Use percentage of revenue = 50% • Refunds (subscriptions lost): Refund estimate (subscription cancellations) = 5% of subscriptions • Consulting Services: Consulting services = 10% of revenue COST OF GOODS SOLD • • • • •

Payroll/Labor Costs: Staffing worksheet Payroll Outsourcing Costs: Staffing worksheet Cloud Services Hardware: Services&Equipment worksheet Cloud Services Software Licensing: Services&Equipment worksheet Managed Services Hardware, Software, Support: Services&Equipment worksheet

OPERATING EXPENSES • Hardware Support: free format • Software Support: free format

171

172

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SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES Hardware Support Software Support Marketing and Advertising B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT Taxes NET INCOME/LOSS Refund estimate (subscription cancellations) Consulting services Assumed effective tax rate Depreciation Current base rate SBA loan (under 50K has zero fees, 2.25% spread under 7 SBA Loan short term interest rate

Bigdata as a Service for Small Businesses (BDaaSB) Income Statement as of End of Quarter 2018 Mar Jun Sep Dev 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 55126 55126 55126 55126 53776 53776 53776 53776 1350 1350 1350 1350 0 0 0 0 0 0 0 0 0 0 0 0 43024 16774 40924 40924 0 0 0 0 0 0 0 0 16387 3387 15462 15462 16387 3387 3387 3387 0 0 12075 12075 0 0 0 0 10250 10000 10000 10000 2250 500 500 500 2500 2500 2500 2500 3000 3000 3000 3000 500 500 500 500 0 500 500 500 2000 250 250 250 0 250 250 250 0 2500 2500 2500 (98150) (71900) (96050) (96050) 156 156 156 156 (98307) (72057) (96207) (96207) 1875 1875 1875 1875 (100182) (73932) (98082) (98082) 0 0 0 0 (100182) (73932) (98082) (98082) 5% 10% 21% 5% 1.25% 2.50% 3.75%

• Marketing and Advertising o B2B Contact List Marketing: Marketing costs worksheet o Social Network Marketing & Advertising: Marketing costs worksheet o Sales-Lead Generation Service: Marketing costs worksheet • General & Administrative Expenses: Startup expenses worksheet dif­ ferent between 2018 and 2019 o Legal

2018 0 0 0 0 0 220505 215105 5400 0 0 0 141646 0 0 50698 26548 24150 0 40250 3750 10000 12000 2000 1500 2750 750 7500 (362151) 625 (362776) 7500 (370276) 0 (370276)

Appendix A: Case Study

SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES Hardware Support Software Support Marketing and Advertising B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT Taxes NET INCOME/LOSS Refund estimate (subscription cancellations) Consulting services ratio Assumed effective tax rate Depreciation Current base rate SBA loan (under 50K has zero fees, 2.25% spread under 7 SBA Loan short term interest rate

o o o o o o o

Bigdata as a Service for Small Businesses (BDaaSB) Income Statement as of End of Quarter 2019 Mar Jun Sep Dec 32786 65572 98358 131144 16091 32183 48274 64365 16091 32183 48274 64365 (201) (402) (603) (805) 805 1609 2414 3218 356091 356091 356091 356091 309991 309991 309991 309991 3600 3600 3600 3600 30000 30000 30000 30000 12500 12500 12500 12500 0 0 0 0 52924 57924 70424 132924 0 0 0 0 0 0 0 0 21462 23962 30212 61462 3387 3387 3387 3387 12075 12075 12075 12075 6000 8500 14750 46000 10000 10000 10000 10000 500 500 500 500 2500 2500 2500 2500 3000 3000 3000 3000 500 500 500 500 500 500 500 500 250 250 250 250 250 250 250 250 2500 2500 2500 2500 (376229) (348443) (328157) (357871) 156 156 156 156 (376385) (348599) (328313) (358027) 20357 20357 20357 20357 (396743) (368956) (348670) (378384) 0 0 0 0 (396743) (368956) (348670) (378384) 5% 10% 21% 5% 1.25% 2.50% 3.75%

Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses

173

2019 327861 160913 160913 (2011) 8046 1424365 1239965 14400 120000 50000 0 314196 0 0 137098 13548 48300 75250 40000 2000 10000 12000 2000 2000 1000 1000 10000 (1410700) 625 (1411325) 81429 (1492754) 0 (1492754)

174

Business Finance Planning with Microsoft® Excel ®

SALES REVENUE Pay Per Use Subscriptions Refunds (subscriptions lost) Consulting Services COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Cloud Services Hardware Cloud Services Software Licensing Managed Services Hardware, Software, Support OPERATING EXPENSES Hardware Support Software Support Marketing and Advertising B2B Contact List Marketing Social Network Marketing & Advertising Sales Lead Generation Service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT NOL deduct (CFWD-20yrs, assumed cumulative) Net Operating Loss Cumulative Carried Forward Net Operating Loss Taxable Mandatory 20% of EBT NOL Tax Deductible to 80% of EBT Cumulative Carried Forward NOL Residual Taxable Taxes NET INCOME/LOSS Refund estimate (subscription cancellations) Pay Per Use percentage of revenue Consulting services Assumed effective tax rate Depreciation Current base rate SBA loan (under 50K has zero fees, 2.25% spread under 7 SBA Loan short term interest rate

Bigdata as a Service for Small Businesses (BDaaSB) Income Statement as of Dec 31st 2018 2019 2020 2021 2022 Cloud Managed Based Services 0 345964 1729819 2421746 3459637 0 160913 804567 1126394 1609134 0 160913 804567 1126394 1609134 0 (8046) (40228) (56320) (80457) 0 32183 160913 225279 321827 220505 1424365 1479365 1479365 1479365 215105 1239965 1239965 1239965 1239965 5400 14400 14400 14400 14400 0 120000 0 0 0 0 50000 0 0 0 0 0 225000 225000 225000 90948 177098 469848 295848 387848 0 0 0 5000 5000 0 0 0 5000 5000 50698 137098 429848 245848 337848 26548 13548 13548 13548 13548 24150 48300 48300 48300 48300 0 75250 368000 184000 276000 40250 40000 40000 40000 40000 3750 2000 2000 2000 2000 10000 10000 10000 10000 10000 12000 12000 12000 12000 12000 2000 2000 2000 2000 2000 1500 2000 2000 2000 2000 2750 1000 1000 1000 1000 750 1000 1000 1000 1000 7500 10000 10000 10000 10000 (311453) (1255499) (219394) 646533 1592424 625 625 625 625 625 (312078) (1256124) (220019) 645908 1591799 7500 81429 90421 77504 28932 (319578) (1337553) (310440) 568404 1562868 (319578) (319578) 0 0 (319578) 0 0 (319578) 5% 50% 10% 21% 5% 1.25% 2.50% 3.75%

(1337553) (1657131) 0 0 (1657131) 0 0 (1337553)

(310440) (1967572) 0 0 (1967572) 0 0 (310440)

0 (1967572) 113681 454724 (1399167) 113681 23873 544531

0 (1967572) 312574 1250294 (404704) 312574 65640 1497227

Appendix A: Case Study

175

GROSS PROFIT/LOSS (EBITDA): EBITDA = Earnings Before Interest, Taxes, Depreciation, Amortization Depreciation: Based on asset purchases percentage for Depreciation = 5% OPERATING INCOME/LOSS (EBIT): EBIT = Earnings Before Interest, Taxes Interest Paid: Calculated on interest-bearing loan total outstanding principal, from the balance sheet. Excludes founder loans, crowd funding. Assumes an SBA loan rate only. EBT: Earnings Before Taxes NOL deduct (CFWD-20yrs, assumed cumulative) • Net Operating Loss: Annual loss • Cumulative Carried-Forward Net Operating Loss: Total accumulated annual losses • Taxable Mandatory 20% of EBT: Must pay 20% on EBT if a profit, regard­ less of residual (accumulated net losses from previous years). • NOL Tax Deductible to 80% of EBT: The 80% of EBT you do not have to pay taxes on if you have a residual < 0. • Cumulative Carried-Forward NOL Residual: EBT + residual sums to cre­ ate next year’s residual, using the 20% minimum taxable profit (cannot simply add EBT + residual). • Taxable: Only 20% of EBT is taxable if NOL residual < 0, where residual is accumulated annual net loss thus far. Taxes: Must pay at least 20% tax of EBT if profit is made in EBT, even if residual (left-over accumulated net losses) < 0. NET INCOME/LOSS: Net earnings after taxes CALCULATOR PERCENTAGES • • • • • •

Refund estimate (subscription cancellations) = 5% Pay Per Use percentage of revenue = 50% Consulting services = 10% Assumed effective tax rate = 21% Depreciation = 5% Current base rate = 1.25%: Base rate guess as of late 2017 when BDaaSB first conceived as an idea

176

Business Finance Planning with Microsoft® Excel ®

Cash on Hand Accounts Receivable Other Current Assets Property Improvements Equipment Intangible Assets Other Fixed Assets ASSETS TOTAL Short-Term Debt Accounts Payable Income Taxes Payable Current Liabilities Addition to Long Term Loan from Founder Addition to Crowd Funding Loan Adding to Long Term SBA Loan Long Term Loan From Founder Crowd Funding Loan Long Term SBA Loan Principal Payment on Loan From Founder Crowd Funding Service Costs Mandatory Principal Payments on SBA Loan Voluntary Principal Payments on SBA Loan Long-Term Liabilities LIABILITIES TOTAL Preferred Stock Common Unvested Stock Retained Earnings SHAREHOLDERS EQUITY LIABILITIES & EQUITY

(123501) 0 0 (123501) 2500 10000 0 0 12500 (111001) 0 4547 0 4547 12500 0 200000 0 0 0 0 0 0

2019 Cloud Based 659023 28830 0 687854 0 0 0 0 0 687854 0 8855 0 8855 0 0 2000000 12500 0 200000 0 0 (28571)

212500 217047 105947 0 (319578) (213631) 3417

2183929 2192783 0 0 (1657131) (1657131) 535652

2423724 2447217 0 0 (1967572) (1967572) 479645

0 (344461) 0 2079264 2117929 0 0 (1423040) (1423040) 694889

Discretionary Financing Needed (DFN) Long Term Debt Proceeds Short Term Debt Proceeds Total accumulated long term loans

(114417) 212500 0

152201 1971429 0

(304829) 239796 0

(226021) (344461) 0

2018

Accounts receivable outstanding at year end Accounts payable outstanding at year end SBA payoff/year as total principal / Term

2020 30664 144152 0 174816 0 0 0 0 0 174816 0 23492 0 23492 0 0 550000 12500 0 2171429 0 0 (310204)

2021 Managed Services 267056 201812 0 468869 0 0 0 0 0 468869 0 14792 23873 38665 0 0 0 12500 0 2411224

2022

0

271991 288303 0 560294 0 0 0 0 0 560294 0 19392 65640 85033 0 0 0 0 0 2066764 (12500) 0 (295252) (1000000) 759012 844045 0 0 74187 74187 918232 (357937) (1307752) 0 771512

8% 5% 7

• SBA loan (under 50K has zero fees, 2.25% spread under 7 years’ maturity) = 2.50%: assumed SBA > 50K adds 0.25% • SBA Loan short-term interest rate = 3.75%: overall SBA loan interest rate ASSETS TOTAL • Current Assets: Sum of current assets, which are more fluid because they can be more easily and rapidly converted into cash.

Appendix A: Case Study

177

Cash on Hand: Cash Flow Projection worksheet o Accounts Receivable: Estimates how much customers owe us based on sales revenue * 8% (Accounts receivable outstanding at year end). o Other • Fixed Assets: Sum of fixed assets, such as property and equipment, which take much more time to convert into cash if needed. o Property Improvements Assets from the StartingBalanceSheet worksheet o Equipment: Assets from the StartingBalanceSheet worksheet o Intangible Assets: Assets from the StartingBalanceSheet worksheet o Other o

LIABILITIES TOTAL • Current Liabilities: Sum of current liabilities, which is debt that is due in the short term. o Short-Term Debt: Short-term debt has different rates and is often used to pay things like salaries and contractors, but usually in larger organizations. o Accounts Payable: Estimates how much we will owe suppliers based on sales revenue * 5% (Accounts payable outstanding at year end). o Income Taxes Payable: Taxes from the ProFormaIncomeStatement • Long-Term Liabilities: Sum of long-term liabilities are long-term loans that extend over a few to many years. o Addition to Long-Term Loan from Founder o Addition to Crowd-Funding Loan: New additions to long-term loans are separated in order to allow for long-term debt accumulation over a number of years. o Adding to Long-Term SBA Loan o Long-Term Loan from Founder o Crowd-Funding Loan: Accumulations of long term are required because interest is due based on the total loan amounts taken out so far. o Long-Term SBA Loan o Principal Payment on Loan From Founder: These last four items describe amounts paid down on loans. o Crowd-Funding Service Costs o Mandatory Principal Payments on SBA Loan o Voluntary Principal Payments on SBA Loan

178

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LIABILITIES & EQUITY: Liabilities + equity is the total amount of money that is owed by the company to its owners and shareholders. SHAREHOLDERS EQUITY: Preferred stock + retained earnings, which includes unvested common stock. • Preferred Stock: Leads worksheet has shares given out to founders and employees in lieu of wages to cut short-term costs for the company. • Common Unvested Stock: Unvested means that the person receiving the stock does not own the stock until a vesting period has passed, so it is not part of shareholder’s equity, and thus not owed by the company, and thus not a liability until it is vested. • Retained Earnings: Retained earnings is Net Profit less dividends (not for BDaaSB), accumulated over two or more years. CALCULATOR ASSISTANTS & VALUES: • Discretionary Financing Needed (DFN): The amount of money needed for liabilities to match assets, thus the amount of money that has to be loaned to stay in business. This is not a balance sheet as it does not bal­ ance; it is a projected (proforma) balance, and we balance it by adding the DFN. • Long-Term Debt Proceeds: The amount of money coming into the busi­ ness from all long-term loans made this year, minus all payments made this year • Short-Term Debt Proceeds • Total accumulated long-term loans: The total amount of loans outstand­ ing after the entire 5-year projected period • Accounts receivable outstanding at year end = 8% • Accounts payable outstanding at year end = 5% • SBA payoff/year as total principal/Term = 7 Beginning Cash: The net cash flow from the previous year added to the cur­ rent year OPERATING INCOME/LOSS (EBIT): ProFormaIncomeStatement worksheet • Depreciation: ProFormaIncomeStatement worksheet • Accounts Receivable Increase: The change in accounts receivable from the ProFormaBalanceSheet worksheet

Beginning Cash OPERATING INCOME/LOSS (EBIT) Depreciation Accounts Receivable Increase Cash Inflow Capitalized Equipment Accounts Payable Decrease Interest Paid Taxes Cash Outflow NET CASH FLOW from OPERATIONS Long Term Debt Proceeds Short Term Debt Proceeds NET CASH FLOW from FINANCING NET CASH FLOW

Bigdata as a Service for Small Businesses (BDaaSB) Mar 0 (98307) 156 0 (98150) 3125 1137 1875 0 6137 (104287) 53125 0 53125 (51162)

Jun (51162) (72057) 156 0 (71900) 3125 1137 1875 0 6137 (78037) 53125 0 53125 (24912)

Sep (76074) (96207) 156 0 (96050) 3125 1137 1875 0 6137 (102187) 53125 0 53125 (49062)

2018

Cash Flow Projection Dec (125136) (96207) 156 0 (96050) 3125 1137 1875 0 6137 (102187) 53125 0 53125 (49062)

Mar (174199) (376385) 156 7208 (369022) 0 1077 20357 0 21434 (390456) 492857 0 492857 102402

Quarterly Projection 2019 Jun Sep (71797) 58391 (348599) (328313) 156 156 7208 7208 (341236) (320949) 0 0 1077 1077 20357 14732 0 0 21434 15809 (362670) (336758) 492857 492857 0 0 492857 492857 130188 156099

Dec 214489 (358027) 156 7208 (350663) 0 1077 14732 0 15809 (366472) 492857 0 492857 126385

Appendix A: Case Study 179

180

Business Finance Planning with Microsoft® Excel ®

Bigdata as a Service for Small Businesses (BDaaSB) Beginning Cash OPERATING INCOME/LOSS (EBIT) Depreciation Accounts Receivable Increase Cash Inflow Capitalized Equipment Accounts Payable Decrease Interest Paid Taxes Cash Outflow NET CASH FLOW from OPERATIONS Long Term Debt Proceeds Short Term Debt Proceeds NET CASH FLOW from FINANCING NET CASH FLOW

Cash Flow Projection 2018 0 (312078) 625 0 (311453) 12500 4547 7500 0 24547 (336001) 212500 0 212500 (123501)

2019 (123501) (1256124) 625 28830 (1226669) 0 4308 81429 0 85736 (1312405) 1971429 0 1971429 659023

Annual Projection 2020 535523 (220019) 625 115321 (104073) 0 14638 90421 0 105058 (209132) 239796 0 239796 30664

2021 566187 645908 625 57661 704194 0 (8700) 77504 23873 92677 611517 (344461) 0 (344461) 267056

2022 833243 1591799 625 86491 1678915 0 4600 28932 65640 99172 1579743 (1307752) 0 (1307752) 271991

Cash Inflow: Money flowing in • Capitalized Equipment: ProFormaBalanceSheet worksheet • Accounts Payable Decrease: The change in accounts payable from the ProFormaBalanceSheet worksheet • Interest Paid: ProFormaIncomeStatement worksheet • Taxes: ProFormaIncomeStatement worksheet Cash Outflow: Money flowing out NET CASH FLOW from OPERATIONS: The amount of money going in or out; negative is not good, implying the business did not lend enough, and if not the business will be in trouble. • Long-Term Debt Proceeds: ProFormaBalanceSheet worksheet • Short-Term Debt Proceeds: ProFormaBalanceSheet worksheet NET CASH FLOW from FINANCING: Sum of long- and short-term debts made this year NET CASH FLOW: Money flowing in (positive) or out (negative) These spreadsheets are available for download at oracletroubleshooter.com /business-finance-planning/app

Appendix B

Your Business

This appendix presents a more precise version of the financial statements built sequentially throughout the chapters of this book, including explanation of some line items. ITEMS REQUIRING SOME EXPLANATION: • • • •

Revenue Stream 1: Sales forecast Revenue Stream 1: 10% of Sales forecast Revenue Stream 1: 5% of Sales forecast Refund estimate = 5% of revenue

Worksheets start on next page. These spreadsheets are available for download at oracletroubleshooter.com /business-finance-planning/app

181

182

Business Finance Planning with Microsoft® Excel ® >

SALES REVENUE Revenue Stream 1 Revenue Stream 2 Revenue Stream 3 Refunds COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES Information Technology Rent Equipment Maintenance Marketing and Advertising Email list purchase and use CRM (Customer Relationship Management) tools Social media marketing Other online advertising Print, TV & radio advertising and marketing Hire sales lead generation service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT Taxes NET INCOME/LOSS Refund estimate Revenue Stream 2 estimator Revenue Stream 3 estimator Assumed effective tax rate Depreciation Current base rate SBA loan (under 50K has zero fees, 2.25% spread SBA Loan short term interest rate

Income Statement as of End of Quarter 2022 Mar Jun Sep Dec 393656 393656 393656 393656 375000 375000 375000 375000 37500 37500 37500 37500 1875 1875 1875 1875 (20719) (20719) (20719) (20719) 130052 154545 210137 129152 126077 148770 207062 126077 3150 4950 2250 2250 25 25 25 25 50 50 50 50 750 750 750 750 0 0 0 0 0 0 0 0 39473 28588 25088 25088 10000 5000 1000 1000 0 0 0 0 0 0 500 500 25623 18623 18623 18623 7000 0 0 0 5548 5548 5548 5548 9575 9575 9575 9575 3500 3500 3500 3500 0 0 0 0 3850 4965 4965 4965 700 1215 1215 1215 300 500 500 500 350 375 375 375 400 350 350 350 450 500 500 500 500 250 250 250 550 775 775 775 600 1000 1000 1000 224131 210523 158431 239416 875 875 875 875 223256 209648 157556 238541 875 875 875 875 222381 208773 156681 237666 33357 31316 23502 35650 189024 177457 133179 202016 5% 10% 5% 15% 5% 1.25% 2.25% 3.50%

2022 1574625 1500000 150000 7500 (82875) 623887 607987 12600 100 200 3000 0 0 118237 17000 0 1000 81492 7000 22192 38300 14000 0 18745 4345 1800 1475 1450 1950 1250 2875 3600 832501 3500 829001 3500 825501 123825.21 701676

Appendix B: Your Business

183

>

Revenue Stream 1 Revenue Stream 2 Revenue Stream 3 Refunds COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES Information Technology Rent Equipment Maintenance Marketing and Advertising Email list purchase and use CRM (Customer Relationship Management) tools Social media marketing Other online advertising Print, TV & radio advertising and marketing Hire sales lead generation service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT Taxes NET INCOME/LOSS Refund estimate Revenue Stream 2 estimator Revenue Stream 3 estimator Assumed effective tax rate Depreciation Current base rate SBA loan (under 50K has zero fees, 2.25% spread under 7 SBA Loan short term interest rate

Income Statement as of End of Quarter 2023 Mar Jun Sep Dec 412500 412500 412500 412500 41250 41250 41250 41250 20625 20625 20625 20625 (23719) (23719) (23719) (23719) 303184 303184 303184 303184 284034 284034 284034 284034 5400 5400 5400 5400 0 0 0 0 0 0 0 0 0 0 0 0 12500 12500 12500 12500 1250 1250 1250 1250 25088 25088 25088 25088 1000 1000 1000 1000 0 0 0 0 500 500 500 500 18623 18623 18623 18623 0 0 0 0 5548 5548 5548 5548 9575 9575 9575 9575 3500 3500 3500 3500 0 0 0 0 4965 4965 4965 4965 1215 1215 1215 1215 500 500 500 500 375 375 375 375 350 350 350 350 500 500 500 500 250 250 250 250 775 775 775 775 1000 1000 1000 1000 122384 122384 122384 122384 3000 3000 3000 3000 119384 119384 119384 119384 1188 1188 1188 1188 118197 118197 118197 118197 17729 17729 17729 17729 100467 100467 100467 100467 5% 10% 5% 15% 5% 1.25% 2.25% 3.50%

2023 1650000 165000 82500 (94875) 1212737 1136137 21600 0 0 0 50000 5000 100352 4000 0 2000 74492 0 22192 38300 14000 0 19860 4860 2000 1500 1400 2000 1000 3100 4000 489537 12000 477537 4750 472787 70917.975 401869

184

Business Finance Planning with Microsoft® Excel ®

SALES REVENUE Revenue Stream 1 Revenue Stream 2 Revenue Stream 3 Refunds COST OF GOODS SOLD Payroll / Labor Costs Payroll Outsourcing Costs Equipment Item 1 Equipment Item 2 Equipment Item 3 Equipment Item 4 Equipment Item 5 OPERATING EXPENSES Information Technology Rent Equipment Maintenance Marketing and Advertising Email list purchase and use CRM (Customer Relationship Management) tools Social media marketing Other online advertising Print, TV & radio advertising and marketing Hire sales lead generation service General & Administrative Expenses Legal Incidentals Utilities Liability Insurance Consulting Fees Paid Website Build & Maintenance Credit/Background Check Subscription Recruiting Expenses GROSS PROFIT/LOSS (EBITDA) Depreciation OPERATING INCOME/LOSS (EBIT) Interest Paid EBT NOL deduct (CFWD-20yrs, assumed cumulative) Net Operating Loss Cumulative Carried Forward Net Operating Loss Taxable Mandatory 20% of EBT NOL Tax Deductible to 80% of EBT Cumulative Carried Forward NOL Residual Taxable Taxes NET INCOME/LOSS Refund estimate Revenue Stream 2 estimator Revenue Stream 3 estimator Assumed effective tax rate Depreciation Current base rate SBA loan (under 50K has zero fees, 2.25% spread under 7 SBA Loan short term interest rate

2022 Phase1 1638750 1500000 150000 75000 (86250) 623887 607987 12600 100 200 3000 0 0 118237 17000 0 1000 81492 7000 22192 38300 14000 0 18745 4345 1800 1475 1450 1950 1250 2875 3600 896626 3500 893126 3500 889626

> Income Statement as of Dec 31st 2023 2024 2025 Phase2 Phase2+ Phase+ 1802625 1966500 1966500 1650000 1800000 1800000 165000 180000 180000 82500 90000 90000 (94875) (103500) (103500) 1212737 1157737 1157737 1136137 1136137 1136137 21600 21600 21600 0 0 0 0 0 0 0 0 0 50000 0 0 5000 0 0 100352 100352 112352 4000 4000 4000 0 0 12000 2000 2000 2000 74492 74492 74492 0 0 0 22192 22192 22192 38300 38300 38300 14000 14000 14000 0 0 0 19860 19860 19860 4860 4860 4860 2000 2000 2000 1500 1500 1500 1400 1400 1400 2000 2000 2000 1000 1000 1000 3100 3100 3100 4000 4000 4000 489537 708412 696412 12000 15900 16650 477537 692512 679762 4750 5821 4990 472787 686690 674772

2026 Phase2+ 1966500 1800000 180000 90000 (103500) 1157737 1136137 21600 0 0 0 0 0 112352 4000 12000 2000 74492 0 22192 38300 14000 0 19860 4860 2000 1500 1400 2000 1000 3100 4000 696412 17775 678637 0 678637

0 0 177925 711701 0 889626 44481 845145

0 0 94557 378229 0 472787 23639 449147

0 0 135727 542909 0 678637 33932 644705

5% 10% 5% 15% 5% 1.25% 2.25% 3.50%

0 0 137338 549352 0 686690 34335 652356

0 0 134954 539817 0 674772 33739 641033

Appendix B: Your Business Cash on Hand Accounts Receivable Other Current Assets Property Improvements Equipment Intangible Assets Other Capital Investment Fixed Assets ASSETS TOTAL Short-Term Debt Accounts Payable Income Taxes Payable Current Liabilities Addition to Long Term Loan from Founder Addition to Crowd Funding Loan Adding to Long Term SBA Loan Long Term Loan From Founder Crowd Funding Loan Long Term SBA Loan Principal Payment on Loan From Founder Crowd Funding Service Costs Mandatory Principal Payments on SBA Loan Voluntary Principal Payments on SBA Loan Long-Term Liabilities LIABILITIES TOTAL Preferred Stock Common Unvested Stock Retained Earnings SHAREHOLDERS EQUITY LIABILITIES & EQUITY Discretionary Financing Needed (DFN) Long Term Debt Proceeds Short Term Debt Proceeds Total SBA Accounts receivable outstanding at year end Accounts payable outstanding at year end SBA payoff/year as total principal / Term

2022 1014296 136563 0 1150858 35000 35000 0 0 70000 70000 1220858 0 5912 44481 50393 5000 0 100000 0 0 0 0 0 0

2023 501412 150219 0 651631 10000 0 0 0 10000 80000 731631 0 5018 23639 28657 0 0 50000 5000 0 100000 0 0 (14286)

2024 686524 163875 0 850399 20000 5000 0 1000 26000 106000 956399 0 5018 34335 39352 0 0 50000 5000 0 135714 0 0 (19388)

105000 155393 178580 0 845145 1023725 1179118

140714 169371 0 0 1294292 1294292 1463663

171327 210679 0 0 1946648 1946648 2157326

0 (23761) 0 147566 186922 0 0 2587681 2587681 2774603

41740 105000 0

(732033) 35714 0

(1200927) 30612 0

(1871406) (23761) 0

8% 5% 7

2025 628322 163875 0 792197 0 0 5000 0 5000 111000 903197 0 5618 33739 39356 0 0 0 5000 0 166327

185

0

2026 (377887) 163875 0 (214012) 0 0 7500 0 7500 118500 (95512) 0 5618 33932 39549 0 0 0 5000 0 142566 (12500) 0 (20367) (1000000) (885301) (845751) 0 0 3232386 3232386 2386634 (2482146) (1032867) 0 (885301)

26250 219745

Beginning Cash OPERATING INCOME/LOSS (EBIT) Depreciation Accounts Receivable Increase Cash Inflow Capitalized Equipment Accounts Payable Decrease Interest Paid Taxes Cash Outflow NET CASH FLOW from OPERATIONS Long Term Debt Proceeds Short Term Debt Proceeds NET CASH FLOW from FINANCING NET CASH FLOW

26250 175467

26250 0

43355 149217

17500 1478 875 23502

192572

157556 875 34141

Sep 451056

2019 1014296 477537 12000 13656 503193 10000 (894) 4750 23639 37495 465698 35714 0 35714 501412

8929 113533

8929 0

21193 104605

2500 (224) 1188 17729

125798

119384 3000 3414

Mar 870827

8929 113533

8929 0

21193 104605

2500 (224) 1188 17729

125798

119384 3000 3414

Jun 984360

Annual Projection 2020 2021 1515708 2202232 692512 679762 15900 16650 13656 0 722068 696412 26000 5000 0 600 5821 4990 34335 33739 66156 44328 655912 652083 30612 (23761) 0 0 30612 (23761) 686524 628322

26250 244304

26250 0

55503 218054

17500 1478 875 35650

273557

238541 875 34141

Dec 626523

Cash Flow Projection

2018

2018 0 893126 3500 136563 1033189 70000 5912 3500 44481 123893 909296 105000 0 105000 1014296

26250 0

26250 231312

26250 0

51169 193495

53210 205062

244664

258272

17500 1478 875 31316

209648 875 34141

223256 875 34141

17500 1478 875 33357

Jun 231312

Mar 0

>

Beginning Cash OPERATING INCOME/LOSS (EBIT) Depreciation Accounts Receivable Increase Cash Inflow Capitalized Equipment Accounts Payable Decrease Interest Paid Taxes Cash Outflow NET CASH FLOW from OPERATIONS Long Term Debt Proceeds Short Term Debt Proceeds NET CASH FLOW from FINANCING NET CASH FLOW

>

Cash Flow Projection Quarterly Projection 2019

8929 113533

8929 0

21193 104605

2500 (224) 1188 17729

125798

119384 3000 3414

Dec 1211427

2022 2830554 678637 17775 0 696412 7500 0 0 33932 41432 654980 (1032867) 0 (1032867) (377887)

8929 113533

8929 0

21193 104605

2500 (224) 1188 17729

125798

119384 3000 3414

Sep 1097893

186 Business Finance Planning with Microsoft® Excel ®

Appendix C

Tools and Additions

Marketing Return on Investment (ROI) Marketing cost calculations can help to generate projected customer acquisi­ tion costs, which is a business element not included in financial statements but is a very useful yardstick and sensible exercise to take in understanding where all that money is going vs. the potential benefit. Assessing how your business is doing now and is going to do in the future is very important in keeping you grounded in reality and in being able to observe the flow of cash and where that cash flow is utilized as you grow your business from the ground up. Marketing ROI is shown in Worksheet 1 for the BDaaSB case study and in Worksheet 2 for your business idea.

SALES REVENUE Sales annual percentage increase NET INCOME/LOSS Marketing and Advertising Marketing ROI

2018 $0

2019 $345,964

($319,578) $50,698 -630%

($1,337,553) $137,098 -976%

2020 $1,729,819 400% ($310,440) $429,848 -72%

2021 $2,421,746 40% $544,531 $245,848 221%

2022 $3,459,637 43% $1,497,227 $337,848 443%

Worksheet C.1 Projected customer acquisition cost and lifetime value per customer for the BDaaSB case study

187

188

Business Finance Planning with Microsoft® Excel ®

SALES REVENUE Sales annual percentage increase NET INCOME/LOSS Marketing and Advertising

Marketing ROI

2022 $1,638,750

2023 $1,802,625

$845,145 $81,492 1037%

$449,147 $74,492 603%

2024 $1,966,500 9% $652,356 $74,492 876%

2025 $1,966,500 0% $641,033 $74,492 861%

2026 $1,966,500 0% $643,967 $74,492 864%

Worksheet C.2 Projected customer acquisition cost and lifetime value per customer—e.g., a restaurant

Marketing ROI includes references and calculations that are derived as follows: • Marketing ROI = (Net Profit / Total-Marketing-Costs) • Sales annual percentage increase = (Current Sales – Last Year Sales) / Last Year Sales • Referenced items are all retrieved from the income statement

Customer Acquisition Cost (CAC) Customer acquisition costs tells you how much you have to spend to win and also retain each customer. You need to be constantly aware of how much you are spending and what you are spending it on because even though planning is important, not all customers are good and profitable customers. CAC is shown in Worksheet 3 for the BDaaSB case study and in Worksheet 4 for your business idea.

Marketing and Advertising COST OF GOODS SOLD Number of customers CAC Marketing and Advertising CAC COST OF GOODS SOLD NET INCOME/LOSS NET INCOME/LOSS per Customer Customer Loyalty in Years LTV (Lifetime value per customer) LTV/CAC

2018 $50,698 $220,505 25 $2,028 $8,820 ($319,578) ($12,783) 2 ($34,386) -3:1

2019 $137,098 $1,424,365 50 $2,742 $28,487 ($1,337,553) ($26,751) 3 ($108,740) -3:1

2020 $429,848 $1,479,365 250 $1,719 $5,917 ($310,440) ($1,242) 4 ($10,885) -1:1

2021 $245,848 $1,479,365 350 $702 $4,227 $544,531 $1,556 7 $6,664 1:1

Worksheet C.3 Projected customer acquisition cost and lifetime value per customer for the BDaaSB case study

2022 $337,848 $1,479,365 500 $676 $2,959 $1,497,227 $2,994 10 $26,986 7:1

Appendix C: Tools and Additions 189

Marketing and Advertising COST OF GOODS SOLD Number of customers CAC Marketing and Advertising CAC COST OF GOODS SOLD NET INCOME/LOSS NET INCOME/LOSS per Customer Customer Loyalty in Years LTV (Lifetime value per customer) LTV/CAC

2022 $81,492 $623,887 25 $3,260 $24,955 $845,145 $33,806 5 $144,074 5:1

2023 $74,492 $1,212,737 50 $1,490 $24,255 $449,147 $8,983 6 $29,643 1:1

2024 $74,492 $1,157,737 250 $298 $4,631 $652,356 $2,609 7 $13,635 3:1

2025 $74,492 $1,157,737 350 $213 $3,308 $641,033 $1,832 8 $11,344 3:1

2026 $74,492 $1,157,737 500 $149 $2,315 $643,967 $1,288 10 $10,564 4:1

Worksheet C.4 Projected customer acquisition cost and lifetime value per customer—e.g., a restaurant

CAC includes calculations as follows: • Referenced items are retrieved from the income statement and the SalesForecast worksheet • CAC Marketing and Advertising = Marketing Costs / Number of customers • CAC Cost of Goods Sold = COST OF GOODS SOLD / Number of customers • Net income/loss per customer = NET INCOME/LOSS / Number of customers • Lifetime Value per customer = The value of a customer per the cost of acquiring each customer = (NET INCOME/LOSS per Customer * Cus­ tomer Loyalty in Years) – CAC COST OF GOODS SOLD • Ratio of value of lifetime cost per cost of acquisition of each customer (CAC Marketing Costs + CAC COST OF GOODS SOLD)

Credit Policy Costs Supplier credit policies might be negotiable but are limited for the BDaaSB case study that includes IT vendors such as software licensing, cloud providers, and hardware facilities. BDaaSB is a service and does not require machinery, fixed assets like an office building, and not even inventory or inventory dis­ tribution other than simple and cheap electronic distribution. Credit policies that are extended to customers are based on what can be negotiated, what is acceptable risk in terms of cash flow, as well as customer credit worthiness. It is prudent to include an online background and credit checking service into the startup costs or subscription customers. The other option to consider is that the first few customers might have to get the service for free, particularly in the case of an online B2B service such

190

Business Finance Planning with Microsoft® Excel ®

as BDaaSB. Therefore, consideration of credit extension costs and risks might not be too relevant to begin with, as long as we don’t expect too much from a freebie early adopter first customer with a poor credit history. So how does credit cost you money? You pay for it in interest on the things you purchase from your suppliers, be it through credit terms extended to you from the supplier or interest on loans you use to pay. You also have to cover the costs of the products you sell before paying customers have paid you, which, depending on what your business is, can be really expensive. Again, the BDaaSB case study is not going to get too much in the way of credit costs at the start, and over the long term a subscription pricing model might be useful for many small-scale customers who don’t abuse the service.

Credit policy does not affect the starting of a company,

but rather it’s a policy decision that will affect how

you generate revenue after your company has begun

operating—and generating revenue is important.

Trend Analysis Worksheet 5 shows some numbers pulled from financial statements that we can use to draw the subsequent graphs, showing the state, progress, and status of a business over time, in this first case the BDaaSB case study. BDaaSB As of Dec 31st

Year

Cash on Hand

SALES REVENUE

COST OF GOODS SOLD

GROSS PROFIT/LOSS (EBITDA)

OPERATING EXPENSES

Long-Term Liabilities (LongTerm Debt)

2018 2019 2020 2021 2022 Sum

(123,501) 646,523 18,164 254,556 259,491 325,389

0 345,964 1,729,819 2,421,746 3,459,637 3,286,656

220,505 1,424,365 1,479,365 1,479,365 1,479,365 2,108,795

(311,453) (1,255,499) (219,394) 646,533 1,592,424 (353,669)

90,948 177,098 469,848 295,848 387,848 485,298

212,500 2,183,929 2,423,724 2,079,264 759,012 3,184,876

Current NET Liabilities (ShortINCOME/LOSS Term Debt) 4,547 8,855 23,492 38,665 85,033 18,961

TREND FORECAST

Worksheet C.5 Trend analysis comparison calculations pull from financial statements for BDaaSB

(319,578) (1,337,553) (310,440) 544,531 1,497,227 1,499,757

Cash/Sales

0% 187% 1% 11% 8% 41% Average

Appendix C: Tools and Additions 191

Graphs from Figure C.1 through Figure C.8 show Worksheet 5 numbers visually.

Figure C.1

Cash on hand for BDaaSB

Figure C.2

Sales revenue for BDaaSB

192

Business Finance Planning with Microsoft® Excel ®

Figure C.3

Figure C.4

Cash and Sales for BDaaSB

Long-term debt (long-term liabilities) for BDaaSB

Appendix C: Tools and Additions 193

Figure C.5 Cost of sales—e.g., expenses and debt for BDaaSB

Figure C.6

Gross profit (EBITDA) for BDaaSB

194

Business Finance Planning with Microsoft® Excel ®

Figure C.7

Figure C.8

Net income/loss for BDaaSB

Multiple values comparison for BDaaSB

Appendix C: Tools and Additions 195

Worksheet 6 contains the same worksheet and following pictures, except this time for your business model. > As of Dec 31st Year 2022 2023 2024 2025 2026 Sum

Cash on 1,014,296 501,412 686,524 628,322 521,375 464,436

SALES 1,638,750 1,802,625 1,966,500 1,966,500 1,966,500 2,130,375

COST OF 623,887 1,212,737 1,157,737 1,157,737 1,157,737 1,424,661

GROSS OPERATING 896,626 118,237 489,537 100,352 708,412 100,352 696,412 112,352 696,412 112,352 562,821 103,410 TREND FORECAST

Long-Term 105,000 140,714 171,327 147,566 14,699 180,729

NET 845,145 449,147 652,356 641,033 643,967 645,623

Cash/Sales 62% 28% 35% 32% 27% 37% Average

Worksheet C.6 Trend analysis comparison calculations pull from financial statements for your business

Graphs from Figure C.9 through Figure C.16 show Worksheet 6 numbers visually.

Figure C.9

Cash on hand for your business idea

196

Business Finance Planning with Microsoft® Excel ®

Figure C.10

Sales revenue for your business

Figure C.11

Cash and sales for your business

Appendix C: Tools and Additions 197

Figure C.12 Long-term debt (long-term liabilities) for your business

Figure C.13

Cost of sales—e.g., expenses and debt for your business

198

Business Finance Planning with Microsoft® Excel ®

Figure C.14

Gross profit (EBITDA) for your business

Figure C.15

Net income/loss for your business

Appendix C: Tools and Additions 199

Figure C.16

Multiple values comparison for your business

Ratio Analysis Worksheets 7 and 8 can help you to assess the quality of a business idea in terms of ratios that compare various elements in your financial statements; there are many more of these ratios that are used for financial analysis that are not represented here. Examine the spreadsheets online to under­ stand how these calculations are derived at oracletroubleshooter.com /business-finance-planning/app

11 32 22 1 0 0 0 1 255 1

0% 0% -26% -1% -71% -90% -95% -90% 769% -27% 30% 30% 31% 43% 43%

Profitability Ratios (higher is better) Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Total Assets (ROA) Return on Equity (ROE) 0 0 0 449147 449

101 1

0 0 0 1

11 32 21 2

23

0 0 0 652356 652

119 1

0 0 0 1

11 32 18 2

22

2020

0 0 0 641033 641

136 1

0 0 0 1

11 32 17 2

20

2021

Worksheet C.7 Projected customer acquisition cost and lifetime value per customer for the BDaaSB case study

Change measured from year2 given that year1 has a lot of 0 numbers

1 1 1 4226 676

23

-24%

Liquidity Ratios (higher is better) Current Ratio Efficiency Ratios (higher is better) Accounts Receivable Turnover Average Collection Period (lower is better) Fixed Asset Turnover Total Asset Turnover Leverage Ratios (lower is better) Total Debt Ratio Long-Term Debt Ratio Debt to Equity Long Term Debt to Equity Coverage Ratios (higher is better) Times Interest Earned Cash Coverage Ratio

Ratio

BDaaSB Ratio Analysis for 2022 to 2026 Change 2018 2019

0 0 0 643967 644

873 1

0 0 0 0

11 32 16 2

17

2022

Good Good Good Bad Good

Bad Good

Bad Bad Bad Good

Good Good Good Bad

Good Good

200 Business Finance Planning with Microsoft® Excel ®

23 11 32 22 1 0 0 0 1 255 1 1 1 1 4226 676

-24% 0% 0% -26% -1% -71% -90% -95% -90% 769% -27% 30% 30% 31% 43% 43%

0 0 0 652356 652

119 1

0 0 0 1

11 32 18 2

22

2020

0 0 0 641033 641

136 1

0 0 0 1

11 32 17 2

20

2021

Worksheet C.8 Projected customer acquisition cost and lifetime value per customer—for example, a restaurant

0 0 0 449147 449

101 1

0 0 0 1

11 32 21 2

23

Ratio Analysis for 2022 to 2026 Change 2018 2019

Change measured from year2 given that year1 has a lot of 0 numbers

Liquidity Ratios (higher is better) Current Ratio Efficiency Ratios (higher is better) Accounts Receivable Turnover Average Collection Period (lower is better) Fixed Asset Turnover Total Asset Turnover Leverage Ratios (lower is better) Total Debt Ratio Long-Term Debt Ratio Debt to Equity Long Term Debt to Equity Coverage Ratios (higher is better) Times Interest Earned Cash Coverage Ratio Profitability Ratios (higher is better) Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Total Assets (ROA) Return on Equity (ROE)

Ratio

0 0 0 643967 644

873 1

0 0 0 0

11 32 16 2

17

2022

Good Good Good Bad Good

Bad Good

Bad Bad Bad Good

Good Good Good Bad

Good Good

Appendix C: Tools and Additions 201