BUS 173C
One Year Financial Planning Case V1
Three co-founders formed a company that has created a device that uses biometric technology to detect the presence of a wide range of viruses such as Covid, RSV or the common flu. This will revolutionize the diagnosis methodology as it doesn’t require a body fluid sample (blood, stool, spit etc.) To make their business a reality they need to raise enough capital through debt and equity to support the company from inception through their first year with a minimum of $500,000 cash in the bank. As a part of the process of raising the capital, they originally hired a temp CFO to help them to create a financial plan to include in their fund-raising pitch deck and to help them work out a pro forma capitalization table to assess any potential inbound investor term sheets. But that temp CFO was Ukrainian and took off to help her country. She left behind a financial plan that was incomplete. The founders, being Spartan alums, decided to hire BUS 173c students to finish the work. They have provided following information:
Income Statement:
General Assumptions:
Employee benefits and taxes are 25% of salaries
Sundry costs per headcount are $300/month (food, coffee, office supplies, travel etc.)
Recruiting cost will be a flat $20,000 for each new hire.
Revenues
The company anticipates building two products, a large version for hospitals (Large) that will sell for $300,000 and a medium clinical unit (Medium) for $100,000. The ratio of Large to Medium unit sales will be 1 to 5. When they are available, the initial number of Large units sold will be one for the first month and then the company will increase the number of units per month by one unit per month thereafter (e.g. month 2 will be 2, month 3 will be 3).
Cost of Goods
The company will use a contract manufacturer for both the products. Gross margins will be 50% and 60% for Large and Medium respectively.
Sales and Marketing
Each salesperson will be able to sell $8 million worth of product each year. A salesperson needs to be on staff three months before they start selling for training purposes. A salesperson’s base salary will be $100,000 per year with an 8% commission. Commissions are earned and paid in the same month.
Marketing program expense will run $100,000 per month for 3 months prior to initial sales, then will change to $200,000 per month thereafter.
Engineering
The company has determined that they will ultimately need an Engineering team of 10 engineers who will collectively need 50 person months of work before producing a commercially viable product. Once they reach the cumulative 50 person month threshold they can begin to sell the products the following month. Given the constraints of a very tight job market, the company expects that they cannot hire more than 2 new Engineering staff members per month. Once they reach 10 staff, they will stop hiring. The average cost of these highly skilled individuals is $180,000 per year for salary.
In Engineering they also estimate spending $30,000 per month in noncapitalizable prototypes for the entire year.
General and Administration
Rent for manufacturing space will be $2.50 per square foot per month. Businesses of similar type require need 250 sq. ft. per headcount. Due to the rental market for this type of space, they need to rent the maximum space up front. Additionally, the landlord will require a large deposit of three month’s rent. Utilities are built into the rent.
Basic business insurance is $250 per month until they begin to sell product. Then the add-on of product liability insurance the combined total with be four times the original monthly cost.
Legal costs are in two parts, $2,000 per month in general corporate legal matters (IP, contacts, board assistance etc.) and issuance costs. Counsel estimates issuance costs to be $75,000 for the Series A round and will be an offset against the proceeds in the equity section of the balance sheet.
From inception, the company will hire an office manager/bookkeeper who’s annualized salary is $120,000 per year but who will only work half-time (or $5,000/month). The office manager/bookkeeper is a friend of one of the founders so there is no recruiting cost.
Videoconferencing for the three founders and each salesperson is estimated to be $500 each per month.
There will a once per year cost of $8,000 by the outside CPAs to produce the company’s tax return due and payable in April.
The cofounders each will take a $240,000 per year salary. They will have titles of CEO, CTO and CFO respectively.
Taxes will be at 21% of net income
No interest will be earned on excess cash
Balance Sheet
Accounts Receivable: will average 60 days.
Inventory: The company will need to have 90 days of inventory on hand and its contract manufacturer does not need any advance notice for orders
Fixed Assets: Each new headcount will require $5,000 in additional capitalizable furniture and computing equipment. Assume depreciation is straight-line over 3 years with no salvage value.
Accounts Payable will be equal to the total monthly operating expenses exclusive of salaries and benefits plus the current month of cost of goods and will average 30 days.
Equity and Debt: The company will be founded on 1/1/xx at the same time of its closing a Series A round. Simultaneously with the Series A, a venture debt round is placed for 1/3 of the total capital (As an example if the company needed $6m in total capital, the financial mix would be $2m in debt with $4m in equity). Venture debt will have an annual interest rate of 9.0% with interest only for 6 months, then amortized over 30 months. There will be no issuance cost for the debt.
At the time of inception, each founder will contribute $1,000 for 1,000,000 shares of no-par common stock.
The assignment
Using the template left behind by the temp CFO, finish the 12-month plan.
Q1) In rounded millions, at a minimum, how much combined debt and equity, needs to be raised for the first year?