CASE STUDY

Questions:

1) overview of case

2) problems students face while making financial plan

3) any suggestions

Let us start by telling you a story. It happened on a typical day of teaching. Luisa was teaching an intensive course in finance to a group of Master of Science students from RENE. RENE is a very interesting programme on Renewable Energy that is offered by four European universities:1 KTH-Royal Institute of Technology in Stockholm, Instituto Superior Tecnico in Lisbon, Ecole Polytechnique, Paris and Universita` Polite cnica de Catalunya, Barcelona. As part of their Masters degree, some of the students have an intensive week on entrepre- neurship at ESADE Business School, in Barcelona.It was a very intensive day, at the end of a very intensive week, for the RENE students. It meant eight hours of basic accounting and finance for some very smart students, who were highly motivated to find a brilliant idea that could help to reduce pollution, to provide cleaner energy or to make our world more sustainable. The topics that we covered in class that Friday were the balance sheet and the profit and loss account. This is part of basic accounting. Many of them (actually, nearly all of them) understood for the very first time the differ- ence between an investment and an expense a very important concept when you are thinking about starting your own business. Also, we looked at how assets and liabilities balance out and, that if you owe more money than you have, then you are in big trouble and it might be game over. I could see, as the class progressed, how all these definitions were engaging them. The fact that accounting and finance use numbers was something that engineers love. Better than marketing and strategy, right?

Later, we reviewed the concept of cash flow and how selling does not always translate into cash. This happens quite frequently, for example, if your customer is another company that is planning to pay you in 60 days. Well, thats if you are lucky. So, you might have sold, lets say, 10,000 of services, but the money has not yet been paid into your bank account. You are expecting to be paid in 60 days, so you will have a balance of 10,000 in your Accounts receivable.

Finally, in the second part of the afternoon, the students worked in groups on a case study to build the financial plan for a new company, a wind farm. It was challenging for them; it was their first contact with accounting and finance. But smart teams perform well when confronted with challenges. It was a very long day. But they survived!

As I was packing my laptop and class material, one of the students, Niklas, approached me. He was very excited because he was already working on a plan for a new company, and he felt that todays class had been very useful. Of course,I was very happy to hear that. Professors are always happy when a student tells them that the class was worthwhile. But in this case, I was very interested as the student asked me if he could show me the presentation he had prepared about his business idea.

It was Friday, 6:30 PM, but I was really keen to hear about it, especially when Niklas mentioned the name of the venture2. He went through the slides, which were very well laid out, I have to admit (Im used to seeing a lot of presentations in class), so I congratulated him. He mentioned that one of his co-founders, Eva, had experience in design. Anyway, the opportunity that he and his team had identified was to produce vegetables, such as tomatoes, broccoli, onions or even lettuce in the Nordic countries. They were planning to use new technology that they were developing in their home university as part of their Masters degree that would allow the production of Mediterranean vegetables, which need a lot of sun and warm weather, in labs close to the final customer. With this idea, they were solving two key problems. First, they could ensure stable prices for Nordic consumers, as they would not be dependent on the weather conditions in southern Europe or the effect of supply and demand in the market3. Second, they were significantly reducing transportation costs, as their plan was to pro- duce locally, close to the customer, in areas surrounding the cities, using electric vehicles or even bicycles to distribute the vegetables to the customers home or office. In addition, they could ensure attractive and competitive prices, as they were cutting out many of the intermediaries. Finally, they thought that their competitive advantage, and the reason why customers would buy from their startup, was that Nordic people were tired of not having continuous access to fresh vegetables, limiting their options for a healthy and varied diet. The last-but-one slide was full of numbers. I have to admit that I do love numbers and financial plans, but this wasnt the most appealing slide in the deck. Niklas asked me to review it. I quickly went through the numbers of his financial plan.

The following is an excerpt from the conversation we had:

Luisa: Well, Niklas, youve done a good job of putting all the numbers together. I see that you have prepared a profit and loss account here, right?

Niklas: Yes, that is what I was trying to do. Adding in the money coming from the revenue, which will be subscriptions, and then subtracting all the expenses that we think we are going to have, such as employees, rent or marketing.

Luisa: I see, so these are your assumptions.

Niklas: Yes. And we have also estimated that we will need 460,000 for the land where we are growing the vegetables, around 5,000 square metres, in six different locations, to start with.

Luisa: Very good, and you have already checked that this is the appropriate size for the production that you are forecasting?

Niklas: Yes, we have talked to an agricultural expert who has confirmed that this is the right size. So, we basically need 460,000 to start this company. And we think that we can get this money from a grant, or maybe from crowdfunding.

Luisa: Niklas, let me ask you a question: do you need all the money upfront? Or can this investment be staged?

Niklas: Umm, well, I dont know. I just know that this is the money we need.

Luisa: Ok. Now, going back to your numbers, I see that in year 1 you are already selling your entire production, exactly the same amount as in year 2.

Niklas: Well, yes, we are being very conservative here, as we are charging 15% less than supermarkets and we are assuming only 1,500 subscriptions paying a fixed fee of 60 per month.

Luisa: Hahaha, entrepreneurs always say their figures are conservative . . .

Niklas: But they actually are!

Luisa: Maybe you are right, but let me go back to my point. If you are starting in year 1, then you will need to find the land. You mentioned six locations. Then you need to build your labs. That will probably not happen overnight. Once the labs are ready, you will most likely have to do some testing of the quality of the crop, which, by the way, takes some weeks to grow. Im not an expert, but a tomato will not be ready in a week for sure . . .

Niklas: Oh, yes, well, true.

Luisa: But that is not all. Once the crop has been tested and the quality is high enough, you can start advertising your company and your service. Again, even if you think 1,500 people is not many, you will have to reach them somehow, and then convince them to buy from you.

Niklas: Yes, but we are counting on our friends from University and also our families to be our customers.

Luisa:Of course, they will be your first customers, but the point Im trying to make here is that most likely, your first year will be a full year of expenses and that the revenues will not come in in January. Maybe in June. Maybe in October. You need to take all the steps into account one after the other. Some of them might work in parallel. Therefore, you are going to need more money than just the one needed for the big investment, as you will not have income on the very first day.

Niklas: I see.

At this point, I could see that Niklas was looking sad. He was kind of disappointed with himself because he hadnt realized all of this. But of course, how can you know before somebody explains it to you. So Luisa tried to encourage him.

Luisa: Yes, sorry, I dont mean to give you bad news here. As we saw in class today, the profit and loss account is one thing, especially once the business is up and running at full speed, and the cash flow is another. But dont worry, it is normal; youve never heard of this before. Believe me, putting down some numbers, as you have already done, is the first step, and a very important one, and you are certainly on the right path.

Niklas: Thanks, we were just trying to build a financial plan, without really knowing exactly what that was. We looked on the internet. But I feel that now, having gone through this afternoons exercise of building a financial plan, I will be able to go back and re-work the numbers for my startup.

Luisa: Of course you can! And you can count on me to review them. Now, my quick calculation, from looking at your numbers, and taking into account everything that we just talked about, is that you are going to need between 1 and 1.2 million. So, what do you say to that?

Niklas: That much? Uff, I hope you are not right! We have heard about accelerators, business angels and venture capital, and if we need that amount of funding it sounds like we will need to go down that road rather than follow our initial idea of getting a grant or raising some money from crowdfunding. I dont think the banks will give us a loan. This is very complicated!

Luisa: Niklas, dont worry, it is not complicated, it is just a question of learning about the different options. What you do in your Masters in Renewable Energy is complicated. You are looking for new ways of creating energy! This thing about business angels and venture capital sounds complex because you have heard about it but you dont know how it works. Look, congratulations on your project, I truly believe you have something very interesting here! It is Friday evening. You are in Barcelona. Now, enjoy the weekend and try to re-do your numbers next week. After that, contact me again, and lets see how can we move things forward.

Niklas: Thanks a lot! And yes, it is Friday. I was so tied up with what we saw today that I almost forgot! Have a great weekend as well. Ill send you an email next week from the North!

Niklas story illustrates some of the first questions faced by entrepreneurs once they have come up with an amazing idea and they start to put their plans into action. At some point in time, you will need to estimate the resources needed to make your dream a reality. Resources such as talent, assets or contacts will be part of the equation, and money, whilst not necessarily your first priority, will be needed to make it work.