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Table of Contents
1. Foreword
2. The Venture - A Profit Machine
3. Assessment Elements
3.1 Market Opportunity
3.2 Product/Solution
3.3 Execution Plan
3.4 Financial Engine
3.5 Human Capital
3.6 Potential Return
3.7 Margin of Safety
4. Mathematical Model
5. Score, Confidence & Weight Criteria
6. Disclaimer
7. Acknowledgements
8. Author
9. Copyright
10. References


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3.  Assessment Elements









- 3.4. Financial Engine – Would capital infusion make it happen?

Mapping out a finance strategy is a vital and often overlooked part of business planning. It's easy to project growth in sales and staff, but until those sales are made and paid, where will the cash come from to buy raw materials, pay salaries and provide overhead? It is this planning that will allow a business to stay afloat early on when it is the hardest to survive.

The capitalization of a business is satisfied by its internal cash flow generation or through external capital infusion. Mapping out this cash flow early on allows a business to survive to achieve its long term goals and at the same time evaluate its current expenditures.

The assessment process has to cover existing and projected cash flows, capital requirement and detailed allocation of proceeds. It can reveal the company's long-term strategy for making money, or uncover potential places a business is inefficiently allocating their resources.

That includes:

  • Historic and forecasted P&L (first two years by quarters)
  • Projected cash flow (first two years by quarters)
  • Current balance sheet
  • Projected head count by functional area

3.4.1. Reasonable Initial Expenses

Initial expenses are usually defined as the amount of money needed to develop an idea into a finished product, setup office, develop corporate identity, buying equipments and tools or setting up inventory before beginning the actual production, sales and marketing activities.

Initial overspending can burn working capital the may be needed for marketing or pay future salaries as the business grows. Also, these initial expenses are usually when money is at its most scarse. While the business has to project a professional image and attract customers, but the spending has to be realistic and conservatively planed.

It is important to know:
Are the startup capital requirements reasonable?
How long will it take to recover the initial costs?

3.4.2. Moderate Fixed Costs

The heavy burden of fixed costs (overhead) is mainly contributed by salaries, lease, maintenance fees and marketing expenses. The resource allocation outlined in the execution plan should align properly with the fixed costs.

It is important to know:
Are all potential expenses identified and categorized?
Are the burn rate and residual expenses reasonable and accurately projected?
Has the cost structure been established and does it compare with companies in similar business areas in terms of percent of sales for R&D, G&A, and selling & marketing expenses?

3.4.3. Scalable Variable Costs

Variable Cost includes the cost of goods sold (materials, supplies and delivery) and its direct labor costs (i.e. customer service), which represents the business productivity. Of course, productivity and variable costs are inversely related, so the variable costs will decrease as the productivity increases.

It is important to know:
Are all production and distribution expenses identified and categorized?
Are the variable costs scalable and proportionally reduced with business growth?

3.4.4. Manageable Debt and Obligation

Not all startups are debt-free. Companies with a great deal of long-term debt introduce additional risk. Accordingly any existing obligation or liability has to be carefully examined when evaluating investments.

It is important to know:
Are there any existing debt or commitments?
What does it take for the company to recover from such commitments?
What are the terms and conditions of lenders or prior investors?

3.4.5. Available Cash and Survivability

At the early stages, a business is like an egg that has not yet hatched -- and the incubation process can be expensive. The assessment process has to provide a clear picture of available, accessible and required cash of the company.

It is important to know:
Is the required cash flow in place or can it be achieved as planned?
Would the plan have sufficient cash in place to buffer potential hiccups?

3.4.6. Value-adding Use of Fund

Beware; it is very easy to spend money. There is really no room for excess of any kind in a young business. A well-prepared plan will demonstrate how the sought capital will increase the value of company. There has to be a strong justification for use of the proceeds.

It is important to know:
What is the capital requirement and what is the intended use of it?
Would its use directly contribute to company’s valuation?
Would the sought investment be sufficient to move the venture to the next level (milestone or financing round) as its intended use laid out?
What if the expected amount can’t be raised?

3.4.7. Defensible Future Capitalization Need

For many reasons (including unnecessary dilution) startups may plan multiple rounds of financing. Such decision might benefit the company and investors, if carefully planned. However it could as well put the company at risk, if mismanaged.

It is important to know:
Are there any future capital needs anticipated and potential capital infusion planned?
Are the projected times to breakeven and profit realistic?
Would the plan have sufficient buffer to survive potential delays in the next round?