Profit and Loss Forecasting for Startups

We went to the British Library’s world-renowned Business and Intellectual Property Centre on Tuesday morning to learn more about startup accounting. Johnny Martin, a man who has made his name by demystifying accounting jargon and debunking finance myths, led the seminar.

This blog will focus on the nitty gritty of Profit and Loss forecasting. If you have any other queries, feel free to get in touch with the man himself!

What is a Profit and Loss Forecast?

A profit and loss forecast is a spreadsheet that estimates the profits and losses that your business will encounter in a year. The document is extremely useful if you are pitching for investment. If you, as a startup looking for funding, can produce a sound Profit and Loss Forecast to a venture capitalist, angel investor or a bank, they will be buoyed by your understanding of accounting.

A profit and loss forecast works with this equation in mind:

Sales - Cost of Sales = Gross Profit. Gross Profit - Total Overheads = EBIT. EBIT - Interest = Profit Before Tax.

Before you get your answers by using this formula, you need to understand eaxctly what each heading means. In other words, you need to the acute differences between a 'cost-of-sale' and an 'overhead', for example.

It is useful to note that the same structure and formula can be used when you’re up and running for your Management Accounts.

Sales

Sales are the hardest part of your profit and loss to forecast. It is, by definition, difficult to estimate the sales that you are likely to make.

First off, you need to identify all of your different sales channels. You need to include a monthly estimation for each sales channel. If your single product is t-shirts, for example, you need to project sales made from a market stall, from wholesale supply and online.

Your Sales section also includes any other income except funds raised by selling equity. Equity investments are not sales, they are funding agreements. If you win any competitions or receive any business grants, these need to go into your Sales column.

Also, it would be extremely wise to include 'assumptions' in your spreadsheet. Assumptions are simple formulas that can be built in that allow for variations in your predictions. For example, what happens if you make 15% more sales than you estimate? Or 15% fewer sales than you estimate? If you build in a formula that multiplies all of the sales estimations by a fraction (x 1.15 for 15% more or x 0.85% for 15% fewer), this will blow the socks off potential investors. They will appreciate that you understand the volatility of starting up.

Cost of Sales

When you have worked out a figure for your sales, you need to subtract the cost of sales from your sales sub-total to work out your Gross Profit. Or, to return to the formula:

Sales - Cost of Sales = Gross Profit.

To work out your 'costs of sales' you need to add together all of the costs that are incurred to make your product. For t-shirts, this would be materials and printing costs. For sandwiches, this would be bread, butter, cheese and pickle, for example.

It is best to carry out substantial research into the cost of sales before you make your predictions. It is wise to ask questions of experienced professionals in your industry.

When you have estimated your cost-of-sales, subtract this number from your Sales. The resulting number is your Gross Profit!

Gross Profit

Gross Profit is, as you will have worked out, the money you have made before you subtract your overheads and interest! Your gross profit is useful to know as it gives you the value of your product.

Furthermore, If you express your gross profit as a percentage of sales, this enables you to quickly recognise a downturn (or upturn!) in sales. Viewing your Gross Profit as a percentage of Sales is know as your 'Gross Profit Margin'. The percentage demystifies number, you could have made £300, £300, £600 and £2000 in Months 1, 2, 3 and 4; however if the GPM  trend is: Month One: 50%, M2: 50%, M3: 50%, M4: 12% - it becomes apparent that there is an aberration that you need to analyse!

Overheads

Overheads is a term that we’re all familiar with. The term 'Overheads' refers to all of the 'indirect costs' that your business incurs - any cost that isn’t included as a 'cost of sale'.

Including within Overheads are things like: Labour (or, your current salary), marketing, accommodation and office space. Furthermore, If you have purchased a computer, or a similar piece of expensive technology, for your business, you also need to include a column similar to 'Computer Depreciation'.

Johnny explained that you include a depreciation column for several reasons: your Profit and Loss spreadsheet is a tool that calculates the value of your business at a given time. ^ months from M1, your new Mac isn’t going to be worth what it once was. If it depreciates at a rate of £10 a month, this is what you need to include, as an overhead, in your 'Computer Depreciation' column.

Depreciation is also a method that spread the cost on a single purchase over a longer time. A £360 purchase could be recorded as 36 £10 installments in a depreciation column, rather than one hit.

When you subtract your Overheads from your Gross Profit you are left with your EBIT, or Operating Profit.

EBIT, Interest and Profit Before Tax

After subtracting your Interest from your EBIT, you are left with your profit before tax. The profit before tax is the last sector of your Profit and Loss forecast! I hope the figure that falls out of the bottom is far larger than you first estimated.

Thank you to Johnny for sharing his wisdom, and thank you to the BIPC for being so welcoming.

Image: mikekorn

We Can Appreciate Perspectives: A Dachshund, Relativity and the 'Double Exposure' Project

Strolling back from a photo lab this morning, I saw a bouncy, and very pre-occupied, miniature Dachshund. The dog was avidly burying a piece of chocolate-chip cookie wrapper in the ground – as deep as its diminutive legs allowed it to dig – so no one would be able find it; somewhere top-secret and safe. 

The sight got me thinking of humans and ideas. As human beings, when we come up with a new brainchild, we molly-coddle and guard it. Consciously or not, we try to protect it from any external
influences, further brushing it under the carpet. And in the end, we often end up burying it completely.

Think about it: what happens to children as a consequence of ‘helicopter-parenting’? As a rule, an overprotective parental approach leads to adversity or possibly even, results in opposing consequences. Children brought up in such environments, being ‘padded’ from every angle possible, struggle to develop adequate personalities and fail to cope with future conflicts and relationships. On the other hand, a reverse ‘Free Range Kids’ approach may lead to a complete loss of a contact between a child and its parents.

Hence, it seems, the most apt parenting manner lies somewhere in the middle. Similarly, when we nurture our ideas, balance is the key: we don’t want ‘the ball’ to bounce too much and deflate, leading to a loss of our personal connection and motivation, but just enough to give it a gain of momentum. Sharing a thought would generate fresh perspectives, which are invaluable. However, to let our ‘idea boomerang’ fly we first need to trust the people we share it with. Moreover, to build trust we
initially, need to be able to recognise and appreciate the value of the opinion-former’s perspective.

By this point of my walk the Dachshund’s owner was trying to pull the poor thing over a humongous puddle. Have you ever tried to see a giant puddle from a dachshund’s point of view – literally?

“The world as we see it is only the world as we see it. Others may see it differently.” - Albert Einstein.

Here we go. Countless ordinary negative conflicts arise from the failure to consider relativistic reality,
leaning towards absolutism in domains of relativity. The reality we see and experience is an interpretation of the efforts of our personal sense organs and perception. Whereas, people around us see and experience their ‘own’ reality.

“Relativity teaches us the connection between the different descriptions of one and the same reality.” -
Albert Einstein.

Reality has a multiplicity of facets; it is subject to our personal interpretations. Its establishment is the
same, but its appearance may vary significantly. Our individual subjective views would tend to be rather flat, and no matter, how many different ‘hats’ we can wear, we always tend to ’style’ them in our distinctive, individual way. 

On the topic of styling - a few years ago I had a pleasure to work as a stylist on a few editorial projects
with a beloved friend of mine, who is now based in NY. Recently she got in touch with a project proposal – a truly thrilling prospect!  However, from my personal experience, I know that a successful collaboration requires understanding and trust. Surely, we develop as individuals while walking along
this devious path called Life.

No doubt, throughout the past two years, both of us have evolved as individuals. Given the time spent apart, do we still hold those mutual traits? Can we still do it? Can we empathize with each other’s aspirations in relation to the project? Can we avoid misunderstandings and negative conflict?

We need to catch up. Our collaborative project, which is currently being discussed, would involve
photography. So here came my idea: we’ll explore each other’s frames of view literally, through a ‘double exposure’ experiment. Here’s how it works: a double exposure occurs when two images get
exposed onto the same frame of a film, which results in a fascinating blend of both scenes overlapping. 

With this in mind, I shot a 24-exposure film and posted it to my friend, in order that she could have her
personal take on it. She did the same. Since giving the film in to be developed, I find myself bursting with impatience to see the final results – to see the world the way my friend sees it – so far away, yet in the same frame. 

Thus, we CAN appreciate perspectives.

by @Olga_Dukova

http://www.wearecan.net/

@WeAreCAN_Global

http://wearecan.tumblr.com/

MicroFinance Tips for Small Business

As StartUp Britain’s Finance Week rolled into its fifth and final day, Club Workspace were very pleased to have a man in the room for the 'MicroFinance' panel.

What is MicroFinance?

When a startup starts up, it may not be looking for a huge cheque. Not every startup is looking for that VC-sized, million-pound investment. A young startup may require a sum in the hundreds and thousands, rather than amounts equivocal to Premier League transfer fees. This is where microfinancing enters the fray.

We went along to Startup Britain’s MicroFinancing panel event to hear four experts speak about different ways by which UK startups could boost to their fledgling finances. The panel was chaired by Emma Jones, Founder of Enterprise Nation and cofounder of StartUp Britain.

The Experts

Russell Gould is from Wonga, the short term loan specialists. He explained that Errol Damelin, Wonga’s CEO, considers the business to be placed in the 'tech' sector, rather than in the 'finance' scene. According to Errol, Wonga’s primary aim is to disrupt the money-lending marketplace.

Russell made it explicit that Wonga’s loans were quick-fixes, not long term finance solutions. Wonga realises that cashflow can cause a lot of small business heartache. That’s why they have engineered short-term loan-packages for startups and SMEs. These small injections of cash can alleviate the pressure of small business financial-management.

However, Russell made it clear that Wonga’s loans are for the short term. It is true that the interest on a Wonga business loan can reach 104% in a calendar year, however if the loan is payed back within a week, the interest will be capped at a more manageable 0.5-2%. Perfect, Russell argues, for an entrepreneur riding a cashflow hump.

Ginny Lunn, from The Prince’s Trust, spoke next. She explained that the Prince’s Trust offers Startup Loans to young people. These loans come hand-in-hand with a business mentor. Another stipulation is that the recipient of the loan must be unemployed.

Ginny explained that the loan, usually around £2,500, comes directly from the Prince’s Trust. This is good news as there are no complicated tie-ins with banks. Ginny offered this stat: 85% of the startups who receive the 85% startup loan succeed. That is a n industry defying percentage!

A heartwarming fact rounded off Ginny’s intro: the Prince’s Trust recently received a charitable donation of £250k from a business that it helped start with a startup loan!

Stu Anderson spoke next, on behalf of Shell Livewire UK. Stu divulged that Shell Livewire’s monthly competitions give away four bundles of £1k to young businesspeople. These competitions are judged mostly by an expert panel. Even though part of the decision-making-process is given-over to a public vote, the judges are the real decision-makers.

It is the expert judges that give the Shell competitions their real prestige. Feedback from five industry giants can’t be sniffed at! Furthermore, due to the involvement of the experts and the leverage of Shell’s brand-name, winners of the £1k bundles are well positioned for PR activity on local and national levels after their win!

Erika Watson from Prowess 2.0 was next on the mic. Erika spoke about CDFI Loans. She explained that CDFI loans usually amass an interest rate of 17-30%.

Erika explained that it is nigh-on impossible for microbusinesses to successfully pitch for corporate contracts. She preached the benefits of partnering with other organisations in order to ascertain larger contracts.

The Audience

In addition to Russell, Ginny, Stu, Erika and Emma, the other expert contributor to the day’s proceedings was the audience.

A bone of contention for many thirty-somethings in the audience was this: there are plenty of incentivisation schemes for young people and for the ever-growing silverpreneur community, but there is very little on offer for the inbetweeners who form the vast majority. Do you know of any financial boosters that are open to entrepreneurs of all ages?

Another sticky-wicket was that to be a recipient of the Prince’s Trust’s funding, you have to be unemployed. This was deemed 'unfair' by many entrepreneurs who felt that it is necessary to maintain self-employed status before starting-up. It was argued that without an income, it would be impossible to meet event the most meagre living costs.

Emma Jones also offered another alternative to the four options offered by the representatives from Wonga, TPT, Shell and Prowess 2.0: Credit Cards! If all a business requires is a short-term monetary tonic whilst their finances whir into action, simply using a credit card can provide this fiscal respite.

Thank You

Thank you again to the excellent Startup Britain team for hosting the event, and to the four expert speakers.

Improve Your Business Presentations using the Whole Brain Method

The fates and fortunes of a small business can hinge on the quality of one presentation. Whether you’re a freelancer pitching for a contract or a startup standing in front of an investor, your presentation skills could be the difference between a summer of success and slim pickings.

On the evening of Thursday 17th May, Ann Hermann-Nedhi came along to our Club venue at the Clerkenwell Workshops to explain how you could build your presentation skills by better understanding the 'Hermann Whole Brain Model.'

Ann Herrmann-Nedhi is the current CEO of Herrmann International and an expert in the field of Whole Brain Thinking. Herrmann International was founded by Ann’s father, Ned Herrmann, the scientist and author of 'The Whole Brain Business Book', who developed the eponymous brain model. Thursday’s event was hosted by Miradorus who were supplied by PCG.

The Fist Metaphor

The workshop kicked off with Ann asking every audience member to find a buddy, and to compare foot sizes. 'Bigfoot' had to make a fist, 'Littlefoot' had to attempt to break that fist.

Some used physical force, some tickled, some bargained and some bribed!

This fist-metaphor exposed the different problem-solving methods that a small sample of 40 people called upon when faced with exactly the same problem. How is this experiment relevant to presentations? When delivering a presentation, you need to be mindful that your audience will be comprised of people who think in different ways.

The Hermann 'Whole Brain Thinking' model helps you understand different types of 'thinkers'. By better understanding the thinking-trends of others, you can more effectively gear your presentations to appeal to a diverse audience.

The Whole Brain Model

According to the Whole Brain method, the brain can be separated into two halves. The left half is analytical, the right half is creative. These two halves can be split once more. The quadrants on the left side are 'analytical' and 'organisational.' The two creative quadrants on the right side are primed for 'strategising' and 'personalising'.

The 'analytical' quadrant is statistical and logical. It thinks objectively and critically. It is money-minded and understands how things and systems work. The 'organisational' quadrant takes preventative actions. It realises risks and established procedures. It writes lists and creates itineraries.

The 'strategising' quadrant is a risk taker. It is impulsive. It always has an idea and doesn’t care about failure. The ‘personalising’ quarter is chatty, expressive and empathetic. It focuses on people, it tells anecdotes.

Another important thing to note is that you cannot pigeon-hole people into quadrants. It is unlikely that a person’s thinking is 100% dictated by one-quadrant. People are usually led by a mixture of two, three, or all four quadrants.

How To Satisfy a Whole Brained Audience

Ann explained to everyone that the world is 'whole brained'. In other words, if you were able to take a global average of 'brain types', there would be no dominant quadrant. Therefore, it is extremely likely that your audience will be 'whole brained'. In order to satisfy this audience, your presentation will need something for everyone.

To achieve the perfect 'holistic' presentation, you need to stand-by these watchwords: Structure, A Big Idea, Clarity and Empathy.

Structure is self-explanatory. Ann explained that presentations rely on narratives. A good presentation will be clear, linear and purposeful. Each slide will logically follow from the last. There will be no clunky transitions or awkward logic. A sound structure will satisfy the organisational left-brainers.

A Big Idea is a great device to include in a presentation for several reasons. For one, it provides an attention-grabbing precis of your presentation’s main aims. Furthermore, if you pitch an idea before you delve into the details, this will please the right-brained 'strategisers' in the audience. They don’t like getting bogged-down in facts, they would rather work with ideas and concepts.

Clarity is very important. Before you prepare your presentation, ensure that you thoroughly understand your subject matter, as this will aid the clarity of your delivery. Clarity is most important for communicating statistics and 'facts'. If the facts of your presentations aren’t presented in a clear and easily comprehensible manner, the 'analytical' members of your audience will be riled.

Speaking directly to your audience and using anecdotes to illustrate a examples are ways in which you can use empathy in presentations. The 'personalisers' in your audience will appreciate this. Personalisers are more likely to understand and remember the main-points of your presentation if you embellish them with anecdotes.

Presentation Tips

As well as the four golden words, Ann also provided the audience with a treasure trove of hints and tips.

She recommended that 'most people' aren’t very good at writing presentations at the eleventh hour. Even if you think you’re good at it, you will probably fare better if you give yourself more time. Ann explained that the brain’s ability to process information and learn is compromised when operating in this last-ditch manner.

Ann explained that you should use 'visualisation' if you have a presentation on the horizon. If you visualise yourself doing something well, this imagined-consequence is more likely to occur. As you have mentally rehearsed the situation, your brain believes that it has done it before. Therefore you brain does its best to replicate the situation, rather than having to create afresh.

In this age of smart-phones, tablets and laptops, Ann explained that you shouldn’t worry if your audience appear to be multi-tasking when they’re listening to you. The brains of your audience members are able to take small dips into the online world and still grasp what you’re communicating.

If you need to communicate facts and figures to a right-brained crowd, this may alienate your listeners. If you ask questions of the crowd, use humour or make the audience carry out physical actions, you can pull them back in.

Thank You

A massive thank you to Ann of Hermann International, to Sue and Jenny from Miradorus and to PCG. Thank you for reading, also! I hope this blog has given you new weapons for your presentation armoury.

Access to Finance: Crowdfunding Platforms and Venture Capital Firms

A member of the Club Workspace team was once again in situ as Startup Britain’s Finance Week swept into its second day. We attended the 'Access to Finance' event that took place in the impressive Burson Marsteller offices at Central St. Giles, and left with a barrel-load of info about startup funding.

Crowdfunding and VC Funding were the topics of the day at 'Access to Finance'. Experts from both fields shared their advice with the audience during two expert panel sessions. The first panel was made up of five market-leaders from the crowdfunding scene, and the second was composed of three Venture Capitalists. Questions flowed thick and fast from the audience that was choc-a-bloc with startups, entrepreneurs and SMEs.

Crowdfunding

For those who aren’t aware, crowdfunding enables startups to secure funding by advertising their idea to an online community of crowdfunders. These online investors are invited to contribute as much money as they want towards the startup’s overall target.

Crowdfunding comes in two flavours. One type of crowdfunding is reward based. Reward based crowdfunding involves startups giving away a product or a gift in return for investment. The other form of crowdfunding is equity based. Much like securing VC or Angel capital, the investor receives a share of the company in return for their investment.

Luke Lang was the first of five crowdfunding speakers to introduce themselves. Luke is a co-founder of Crowdcube. Crowdcube are a crowdfunding platform that impose strict barriers for entry. Crowdcube insist that investment-seekers must first pass rigorous checks.

Amanda Boyle of Bloom VC is at the other end of the scale. Bloom doesn’t predicate any complex barriers to entry. The only thing that potential crowdfundees need to prove is that they are a real person. Thereafter it is up to them to prove their worth to the crowdfunding community.

Paul Higgins of Grow VC explained that part of his organisation enables people to build their own crowdfunding platforms. The service provides the required web infrastructure and back-end behind a successful crowdfunding platform.

Jeff Lyn is part of the Seedrs team. Seedrs is a crowdfunding platform that allows investors to make equity investments in startups. Jeff also proved to be an enigmatic speaker with a touch of Eric Ries’ lean-startupism about him.

The final panelist to say hi, Simon Dixon, is the author of Bank to the Future and the creator of the eponymous website.

The first big question to arise was, 'what’s better: reward based crowdfunding or equity based?' The answer was that both forms of crowdfunding work, but each type is prefered by different people.

The reward based platform is great if you’re an investor who is willing to invest in exchange for a reward and the afterglow of being quasi-charitable. On the other hand, the argument for equity based went thusly: no-one wants to give money to the next Zuckerberg in exchange for a kitschy mug. Investors want the money!

The next question asked whether crowdfunding was a genuine alternative to VC or Angel funding? There were two answers. It certainly can be an alternative, if a startup can ascertain all the funding that it requires by utilising a crowdfunding community, then so be it.

It was also argued, however, that startups could use both crowdfunding and VC capital. A startup could use crowdfunding to ascertain funding at a far earlier stage than either Angels or VCs could manage. A startup could secure a 'first round' of funding on a crowdfunding site and then could graduate to VC or Angel funding for their second round. This approach would enable startups to grow far quicker than ever before. In the words of Jeff Lynch: "VCs are only able to invest in a business, crowdfunding investors will invest in an idea."

Amanda Boyle made a great point about product testing. Crowdfunding provides a perfect opportunity for startups who would like to crowdsource information about their product. If a startup releases a product that is at prototype level to a crowdfunding community and it receives a hundredweight of positive feedback and investment requests, they can swagger into a VC’s den with a bounty of market-research behind them.

A great question came in from the audience: is it wise to crowdfund if you have IP that is essential to your startup? The short answer was: no. If your IP is the epicentre of your project and you genuinely wouldn’t feel comfortable disclosing it, then crowdfunding may not be for you. However, if you can manage to write a crowdfunding pitch that hinted at your project’s usefulness whilst maintaining the chastity of your IP, then go right ahead!

Most crowdfunding platforms charge between 5-8% on the amount of investment raised. Others also charge a similar percentage on the money that is gained by investors. We’ll let you check the individual websites for accurate figures.

Venture Capital Funding

After a short coffee break, the next panel was go.

The VC panel was made up of three distinguished figures from the Venture Capital scene. Alliott Cole is a man who we’ve met before at Club Workspace. He shared his expertise at our SEIS Adivce Event, which was cohosted with Dreamstake. It was great to see him again. Alliott appeared on behalf of Octopus Investments. Octopus invest between £100k and £5m in companies and look to recoup 15x their initial investment. Octopus have invested in Love Film, Zoopla and GymBox.

Mattias Ljungman is part of the team at Atomico Ventures. Atomico were started by the creator of Skype. They prefer to invest in high-growth startups who are looking to break into world markets. In the past, Atomico have funded Last FM & Angry Birds.

David Bagley spoke on behalf of both Venture Hothouse and Startup Yorkshire. Venture Hothouse readies startups for their investment rounds. Startup Yorkshire make VC investments of a value between £50k and £2m.

The first nugget of advice that was provided by the VCs was to do with a startup’s debut on the investment scene.

Mattias advised that it is a necessity for startups to research their investors. There are a myriad of VCs out there, and they are not all cut from the same cloth. Every VC looks for different things! For example, Alliott prefers to invest in British companies as it’s easier to keeps tabs on an organisation who are down the road in London, for example. Mattias, on the other hand, doesn’t mind if your base is in Buenos Aires. If startups go into a pitch with a good knowledge of their Angel’s idiosyncrasies, this will not only look good, but it will save your time and theirs by eliminating potential incompatibilities.

Many members of the StartUp Britain audience wanted to find out what makes a startup investible.

David Bagley insists on a well thought through business-plan. When the time comes for David to read your plan, it needs to be watertight. There may be more that he wants to know after he reads your document, but there must not be any holes in what you give him.

Mattias wants to see progress. You could have the best 'idea' since Facebook, but if you can’t show him progress and traction since your inception, than it will be a very hard deal to make.

Alliott likes big numbers - and that doesn’t mean money! If you can prove that you have impressive user volume, then this is great news for a VC.

The VCs agreed that they usually take an equity share of around 25%. VCs need a worthwhile stake, however they don’t want to take too much. If they were to ask for a 60% share, for example, Alliot explained that this would deincentivise the startup’s team and therefore hinder the progress that the investor would like to see.

The number of 25% is very flexible. Sometimes the startups can hold the whip hand. If there are several VC groups fighting for a startup, the figure can go down to around 15%. However, if there is more risk involved and no competition for the startup in question, the share can rise to around 35%.

Here are some tips from Alliott about how to conduct yourself during your VC pitch.

Number one: Do not be late! This isn’t due to manners or politeness, but a VC’s diary is completely rammed. If you spurn any precious minutes, you won’t get them back.

Number two: When you arrive, do not sit in the reception and wait to be invited in. Get into the pitch-room, set-up, and own the space.

Number three: Treat your VC like a customer. This is the biggest sale you’ll ever make!

Number four: Keep your presentation to below ten slides.

Mattias added this tip about the first contact that you should make with a VC: No more than one page. Your first email to a VC should be a set of eye-catching and provocative bullet-points. Remember, in this first email, all that you’re trying to persuade your VC to do is invest 30 more minutes in your startup. If you do that, then you’ll be able to pitch for their money at a later date.

One last point that Mattias added was an inherent 'fault' in the character of British startups. He said that startups in the UK are likely to be apologetic and self-depricatory about their shortcomings, whereas Silicon Valley startups are far more likely to laud their abilites. Mattias' advice to UK startups? Celebrate more!

Thank You

Thanks to the eight experts for their unbeatable advice! Hopefully it helps some startups out their secure their funding. The biggest thanks to the Startup Britian team for hosting such a useful and beneficial event as part of their immense Finance4SUB week!