Financial Management of Business Incubators Jim Greenwood, President Greenwood Consulting Group, Inc. Sanibel, Florida [email protected] .

Financial Management of Business Incubators

Jim Greenwood, PresidentGreenwood Consulting Group, Inc.

Sanibel, [email protected]

www.g-jgreenwood.com

Copyright © 2012 by Greenwood Consulting Group, Inc.

mailto:[email protected]

http://www.g-jgreenwood.com/

Agenda

1. Sources & Uses of Incubator Funding2. Estimating incubator financial needs &

tracking operations3. Recommendations on financial self

sustainability4. Questions & discussion

Sources & Uses of Incubator Funding• Sources

– Grants• Federal, state, local government• Foundations• Corporations• Other: _____________________

– Loans• Bank, consortium of banks• Local government through “bonding”• Building sellers• Private parties• Other: ______________________

– Donations• Furniture & equipment from banks, corporations• Use of vacant building at no charge by owners, universities, government• Free/reduced cost services from architects, engineers, construction

contractors • Other: ______________________

– Other sources• __________________________________________________• __________________________________________________

Sources & Uses of Incubator Funding

• Uses1. Planning

• Feasibility study• Business plan

2. Development• Acquisition• Construction/renovation• Furnishings & equipment• Operating deficit

3. Operations• Day-to-day operations of the incubator

Estimating Incubator Financial Needs & Tracking Operations

• Use #1: Planning– Feasibility study

• Answers the question “will an incubator be successful in our community?”

• Typical cost: US $24,000 to $28,000– Business plan

• Answers the question “now that we know the incubator will be feasible, how do we develop and begin to operate it?”

• Typical cost: US $17,000 to $20,000

Business plan is less expensive because uses data collected in feasibility study (especially the market surveys)


• Use #1: Planning– To keep planning costs lower

1. Don’t require a lot of interim reports2. Don’t require a lot of presentations3. Don’t require analysis in feasibility study that doesn’t need

to be done until business plan– Example: no reason to discuss tenant entrance criteria in the

feasibility study 4. Don’t authorize consultant to do business plan until

feasibility of the incubator is proven– No reason to do the business plan if feasibility study says this

incubator should not be developed5. Use same consultant to do business plan as you did for the

feasibility study– They can use in the business plan what they learned in the

feasibility study


• Use #2: Development– Acquisition cost based

on expected purchase price

– Incubator occupies 10% of site, so assume 10% of acquisition cost

– No renovation, because existing structure unusable and will be demolished

Cost Category Amount Comment

Building/land acquis $ 200,000 10% of est cost of whole site

Renov, wall constr n/a

Furn/equip/phone 50,000 Phone, copier, etc

New construction $ 5,000,000 $200/sf allowance

Demolition $ 1,000,000 Pete's estimate

Closing/a&e/Soft cost $ 50,000 Pete's projection

Contingency 404,000 8% of renov, constr & furnishings

Facility Cost 6,704,000

Operating subsidy 150,000 From operations projections

Total Cost $ 6,854,000


• Use #2: Development– Include allowance for

equipment & furniture in common areas, telecommunication system

– Assumes new construction of 25k sf at $200/sf using estimates for local construction cost

– Demolition of existing structures very costly in this example













• Use #2: Development– Include allowance for

legal, survey & similar “soft costs”

– Include contingency allowance for unknown, unexpected, overlooked costs

– Add together these costs to estimate cost of developing the incubator facility













• Use #2: Development– Now add in an estimated

amount to cover ALL operating deficits that will occur before incubator reaches “break even”• Where incubator revenues

finally begin to exceed its operating costs

• Pull this number from operating financials (see Use #3 slides)













• Use #2: Development– Add facility development

cost to operating subsidy to have a total estimated development cost of your new incubator

– Note this is an expensive project because• Site must be bought• New construction is very

expensive in this community

• Demolition is very expensive on this site

– Therefore, you probably should explore alternative locations!













Use #3: Incubator Financial Operations– What will incubator generate in revenues & costs as it

operates?– When (or even if) the incubator revenues will begin to

exceed costs?– Is the incubator financially viable in its operations, or is it

a bad project that shouldn’t even be undertaken??

• Best way to answer these questions:

The Cash Flow Forecast

• Simple definition: projecting what your checkbook balance will look like year-to-year


Use #3: Incubator Financial Operations

The General Format of a Cash Flow Forecast:Year #1

1. How much money do you have at the start of the first year? $1000


Use #3: Incubator Financial OperationsThe General Format of a Cash Flow Forecast:

Year #11. How much money do you have at the start

of the first year? $10002. How much money will you bring in from sales & other sources that year? +500




of the first year? $10002. How much money will you bring in from sales & other sources that year? +5003. How much money do you have to pay out that year to employees, suppliers, etc? -1750




of the first year? $10002. How much money will you bring in from sales & other sources that year? +500 3. How much money do you have to pay out that year to employees, suppliers, etc? -1750 4. Take #1, add #2, subtract #3. This is the checkbook balance at the end of the year - 250



Year #1 Year #21. How much money do you have at the start

of the first year? $1000 -$ 2502. How much money will you bring in from sales & other sources that year? +500 3. How much money do you have to pay out that year to employees, suppliers, etc? -1750 4. Take #1, add #2, subtract #3. This is the checkbook balance at the end of the year - 250 5. Ask the same questions for the second year, using the answer to #4 as the amount of cash you will start with in Year 2




of the first year? $1000 -$ 2502. How much money will you bring in from sales & other sources that year? +500 +1500 3. How much money do you have to pay out that year to employees, suppliers, etc? -1750 4. Take #1, add #2, subtract #3. This is the checkbook balance at the end of the year - 250 5. Ask the same questions for the second year, using the answer to #4 as the amount of cash you will start with in Year 2




of the first year? $1000 -$ 2502. How much money will you bring in from sales & other sources that year? +500 +1500 3. How much money do you have to pay out that year to employees, suppliers, etc? -1750 -18004. Take #1, add #2, subtract #3. This is the checkbook balance at the end of the year - 250 5. Ask the same questions for the second year, using the answer to #4 as the amount of cash you will start with in Year 2




of the first year? $1000 -$ 2502. How much money will you bring in from sales & other sources that year? +500 +1500 3. How much money do you have to pay out that year to employees, suppliers, etc? -1750 -18004. Take #1, add #2, subtract #3. This is the checkbook balance at the end of the year - 250 -550 5. Ask the same questions for the second year, using the answer to #4 as the amount of cash you will start with in Year 2




of the first year? $1000 -$ 2502. How much money will you bring in from sales & other sources that year? +500 +1500 3. How much money do you have to pay out that year to employees, suppliers, etc? -1750 -18004. Take #1, add #2, subtract #3. This is the checkbook balance at the end of the year - 250 -550 5. Ask the same questions for the second year, using the answer to #4 as the amount of cash you will start with in Year 26. Repeat for subsequent years



Sample of an Incubator’s Cash Flow Forecast



Where the Operating Deficit Estimate Comes From- for Use #2, Development Costs-Rounded up to $150k in this example

Take the largest number in this row

Recommendations on Financial Self Sustainability

• Self sustainability– An incubator’s ability to cover its operating costs from

reasonably reliable sources of revenue

• Vs. Self sufficiency– Self sufficiency = incubator revenues exceed costs– Self sustainability = revenues from incubator and other,

non incubator sources exceed costs• Non incubator sources such as economic development services,

revolving loan fund management, real estate leasing to clients outside of the incubator

– Self sustainability is easier to achieve (more realistic goal)


• Importance– If your incubator requires an on-going operating

subsidy year-after-year to cover its costs, what happens when• A new mayor is elected?• A new university president is hired?• Your parent organization changes its priorities?• Your funders get tired of paying your on-going expenses?• You need to take a stand that is in the best interests of your

incubator clients but isn’t popular with your funders?• Your tenants don’t respect your advice because you are not

running a financially sound business?


• Advice on achieving self sustainability1. Make it a priority in your incubator design & operations2. Don’t put the incubator in an infeasible building3. Evaluate multiple incubator alternatives, then select one that

is financially self sustainable in its operations4. Don’t include expensive common equipment or labs in your

incubator unless tenants willing to pay full cost5. Don’t charge cheap rent (or worse, no rent!)6. Collect rent like a real landlord7. Look for other sources of revenue8. Look at sharing staffing with other programs9. Constantly update cash flow forecasts, trim costs, delay

payments until due date

• Questions??

Financial Management of Business Incubators Jim Greenwood, President Greenwood Consulting Group, Inc. Sanibel, Florida [email protected] .

Documents

incubator slide

feasibility study slide

incubator funding sources

typical cost

business plan example

closingaesoft cost

est cost

development acquisition