1
00:00:07,910 --> 00:00:13,490
Okay. Let me talk a little bit about cost projections. I'm going to go a little bit faster in the interest of time.

2
00:00:13,910 --> 00:00:18,050
The first thing you want to do is you want to estimate your cost of goods sold.

3
00:00:18,500 --> 00:00:22,879
And we typically express them as a percentage of sales.

4
00:00:22,880 --> 00:00:29,060
But this is the cost that, you know, we we have just for selling the product.

5
00:00:29,450 --> 00:00:32,599
The next thing on the cost side is you got to figure out your expenses.

6
00:00:32,600 --> 00:00:38,580
And here are the key categories that you need to think about. You clearly are going to have to pay a rent if you need a property.

7
00:00:38,600 --> 00:00:45,770
A lot of companies don't need that today anymore, and typically you have a trade off between renting or owning a property.

8
00:00:45,890 --> 00:00:52,370
And that's true also for capital equipment. The quick answer is entrepreneurs almost always want to rent, not own.

9
00:00:52,580 --> 00:00:56,780
It's going to be sort of this should be, you know, part of your DNA as an entrepreneur.

10
00:00:56,990 --> 00:01:03,649
If I don't need to buy it, let me not buy it. Because typically we're finance constrained and we just want to service.

11
00:01:03,650 --> 00:01:08,900
And so the rent model tends to work better. But you have to calculate your expenses of renting, leasing the equipment.

12
00:01:09,440 --> 00:01:15,560
The big one then is labour expenses. And here people just often do the wrong calculation because they only think about salary.

13
00:01:15,800 --> 00:01:21,710
You really want to think about benefits, training, costs, bonuses, maybe even things like stock options.

14
00:01:21,830 --> 00:01:26,250
And the tricky part is whether you as a founder are going to draw a salary.

15
00:01:26,270 --> 00:01:30,499
This is not an issue as long as you're a sole proprietor because it's your business,

16
00:01:30,500 --> 00:01:35,600
it's your self, the moment you're going to grow and you're going to have taken outside investors.

17
00:01:35,840 --> 00:01:41,600
This becomes a huge issue. Basically, entrepreneurs often make the mistake of forgetting to put a founder salary on there,

18
00:01:41,870 --> 00:01:43,880
and five years into the business, they're still hungry.

19
00:01:44,630 --> 00:01:51,350
And other expenses, marketing and sales is a big one and then legal and administrative type of things as well.

20
00:01:52,160 --> 00:01:58,660
And. The third type of cost category is what it costs you to even get to revenue.

21
00:01:58,660 --> 00:02:01,510
And this is really important at the Start-Up stage.

22
00:02:01,870 --> 00:02:08,950
Some of these are very mundane set up costs just to get a bunch of licenses, find the office space, maybe some legal setup costs.

23
00:02:09,460 --> 00:02:15,530
But then you will sort of want to think about how long is my pre revenue development phase if you have a restaurant,

24
00:02:15,550 --> 00:02:20,440
maybe some refurbishing, but within two months you're up and running or less in a biotech.

25
00:02:20,440 --> 00:02:25,390
The first ten years of your company are pre-revenue, so development costs take on a whole different meaning.

26
00:02:25,750 --> 00:02:31,930
What are they? A lot of them are employees. So that you actually counted already other expenses, so don't double count.

27
00:02:32,320 --> 00:02:37,330
And by then there's a bunch of other capital expenditures. And for technology based companies,

28
00:02:38,200 --> 00:02:47,320
the cost of one licensing in the technology and then protecting your own technology are very significant development costs.

29
00:02:47,770 --> 00:02:51,819
Would you typically want to do at this point is develop some kind of a milestone and

30
00:02:51,820 --> 00:02:56,200
figure out the timing of when you're going to spend all of these development costs.

31
00:02:58,160 --> 00:03:01,270
There are things like taxes. It's not a bad idea to pay your taxes.

32
00:03:01,280 --> 00:03:06,079
I highly recommend it. And you also want to look into tax credits.

33
00:03:06,080 --> 00:03:11,000
Those affect your financial projections. They're very specific to industries and countries and things like that.

34
00:03:11,000 --> 00:03:14,510
So I'm not going to talk too much about them and.

35
00:03:16,100 --> 00:03:19,550
Now. How do we integrate the financial projections?

36
00:03:19,910 --> 00:03:25,130
Couple of useful things if you want to use them. Here is the fundamentals.

37
00:03:25,640 --> 00:03:33,620
There is a whole bunch of software out there and on my web page you can find one of the models that basically

38
00:03:33,620 --> 00:03:39,830
allows you to just convert your revenue and cost projections into the standard three financial statements.

39
00:03:40,190 --> 00:03:46,470
So you don't really need to know a lot about the accounting. You just use these software.

40
00:03:46,490 --> 00:03:49,580
It's not a bad idea that you trust and understand the numbers that they generate.

41
00:03:49,910 --> 00:03:51,710
They tend to generate the three statements.

42
00:03:51,950 --> 00:03:59,240
The income statement is about establishing the viability and profitability of the business, and that's what the income statement will give you.

43
00:04:00,050 --> 00:04:05,780
The cash flow statement is determine your financial needs and monitor the survival of your company.

44
00:04:06,260 --> 00:04:11,900
The balance sheet is, in some sense the financial health or the resilience of the business.

45
00:04:13,960 --> 00:04:18,440
How long, how detailed you typically want to give a minimum of one or two years?

46
00:04:19,420 --> 00:04:25,209
One years? Absolute minimum. Two years is probably better. Some businesses you're going to take a 3 to 5 year rise in.

47
00:04:25,210 --> 00:04:28,090
If you want to do a nuclear power plant, you probably should do 50 years.

48
00:04:29,080 --> 00:04:34,059
Now, it depends a lot on the industry and the development cycle, the frequency.

49
00:04:34,060 --> 00:04:37,900
This is incredibly frustrating. Should I do monthly, quarterly or yearly?

50
00:04:38,290 --> 00:04:45,729
And whatever you do is wrong. So I've seen investor presentations where a presenter shows monthly projections very precise.

51
00:04:45,730 --> 00:04:51,790
The investor says Way too much detail, just give me the yearly stuff. So next time round same presenter brings yearly.

52
00:04:51,790 --> 00:04:56,100
So Mr. While there's no detail here, I mean, give me the details. So whatever you do is wrong.

53
00:04:56,110 --> 00:05:01,840
That's that's a good sort of starting point. The point is you should be prepared in some sense to have all of them.

54
00:05:01,960 --> 00:05:05,470
I want to give you one example, though. Here's a cashflow forecast.

55
00:05:05,770 --> 00:05:09,069
Here's my quarterly cash flow forecast. Looks great.

56
00:05:09,070 --> 00:05:12,640
I've got a great business, you know. Okay. So my first rig was a bit tough.

57
00:05:13,030 --> 00:05:17,430
My cash balances go close to zero. But look at the business that I have here.

58
00:05:17,950 --> 00:05:21,610
Well, this is a quarterly forecast. Let's look at the monthly forecast.

59
00:05:22,270 --> 00:05:26,140
Ooh, it actually turns out that I will never be rich or anything like that,

60
00:05:26,500 --> 00:05:30,250
because if I look at the monthly picture, I realise that I'm running out of cash.

61
00:05:30,550 --> 00:05:34,540
And by the way, a business that runs out of cash is no business anymore.

62
00:05:35,200 --> 00:05:39,310
It's the lifeblood of a company. So cash management is incredibly important.

63
00:05:39,640 --> 00:05:47,650
A company that runs out of business does not exist. The way it works is, well, either, you know, the bank comes after you or if you have employees,

64
00:05:47,650 --> 00:05:50,830
they don't come back on Monday morning because you didn't pay them on Friday afternoon.

65
00:05:52,210 --> 00:05:59,200
So this is very important to remember the detail and have especially for the first year, I recommend that every entrepreneur should have monthly,

66
00:05:59,290 --> 00:06:06,340
in some cases, weekly financial projections, because even within a month you can run out of money in the middle of the month and that's not good.

67
00:06:07,600 --> 00:06:11,530
So two words about cash flow management. I'm going to be very brief here.

68
00:06:11,770 --> 00:06:17,950
There is a concept of working capital. This is a bit more of an accounting concept, so I just want to briefly touch upon it.

69
00:06:18,370 --> 00:06:26,410
But it is a concept that's really important. That's the cash burn rate, which is at what rate does your company eat of money?

70
00:06:26,860 --> 00:06:32,530
And the reality is most companies burn cash. A few companies print cash.

71
00:06:33,540 --> 00:06:38,880
That's if you have negative working capital, you're basically receiving the money before you're delivering the services.

72
00:06:39,120 --> 00:06:41,890
That's beautiful. It works and so on. Subscription models.

73
00:06:42,360 --> 00:06:50,170
Most businesses, especially if you're dealing in physical goods, you first pay the suppliers and then at some later point you sell your goods.

74
00:06:50,210 --> 00:06:55,560
That's positive working capital. You really have to manage that.

75
00:06:55,830 --> 00:07:00,780
So the concept of working capital is something that you can get out of your financial projections.

76
00:07:01,110 --> 00:07:05,490
And so as you're doing your planning, this is something to pay attention to.

77
00:07:05,880 --> 00:07:10,500
One other thing I'd like. Oh, here's my haiku. Look at that burn rate.

78
00:07:10,950 --> 00:07:15,719
When is my fume? Days and fume? That is basically when you're running out of cash.

79
00:07:15,720 --> 00:07:18,810
Pray for tomorrow. Now you might wonder what Tamo is.

80
00:07:18,810 --> 00:07:25,170
So Thomas says, then a miracle occurs. So that's my my haiku about.

81
00:07:25,700 --> 00:07:32,820
And very briefly, trade credit is an incredibly important concept, and your financial projections will get you towards that.

82
00:07:33,060 --> 00:07:38,310
Again, this is going into I just want to make you aware of the topic of managing cash.

83
00:07:38,640 --> 00:07:44,280
Trade credit is something that's often badly managed. In fact, people sometimes use it too much, not too little.

84
00:07:44,610 --> 00:07:50,870
And so I have a little table here that you can look at at your leisure, but is the true cost of trade credit?

85
00:07:50,880 --> 00:07:57,000
And the answer is sometimes trade credit is more expensive than credit cards. So that's something to be aware of.