Financial Forecasting – Engineering Example

Case Description

The three women had known each other from the beginning of their studies at University and knew that they wanted to build and construct something together after their studies. They planned to use the knowledge acquired from their academic research in different engineering disciplines and combine into 1 single product. One was an expert in solar energy and battery technologies, another in machine engineering and robotics and the final one in software development and AI. With their combined knowledge they wanted to build a robot for industrial use that could run for a full day with recharging. Working together at University, they had already developed a prototype that however needed major enhancements to work in a commercial setting. The group came to the conclusion that they wanted to control as much as possible of the value chain and produce the robot themselves but outsource service contracts for the robots in use.

They expected 1-2 years to enhance the product to commercial specifications, during which time they would finance the required investments and minimal salaries from green grants as well as from friends and family. They could use a garage in one of the parent’s houses for free as a provisional laboratory and workshop. The annualized cost in this period was expected to amount to 500t CHF for a total of 1m CHF over 2 years, which also included costs associated with developing a manufacturing line design. They estimated a market demand of 800 units per year at a selling price of 12 000 CHF for the basic version (material cost of 3 000 CHF) and 16 000 CHF for the premium version (material cost of 3 500 CHF). They would need to hire an experienced production supervisor at a cost of 150 000 CHF per year as well as two assembly line workers at a cost of 90 000 CHF each. Initial estimates of the requirement investments to build a production line in a suitable location amounted to 2.5m CHF, whereof 1m CHF would be financed through a crowd funding platform. They would therefore need to find equity investors for the remaining 1.5m CHF. With a finished commercial specified prototype and forecasted annual sales potential of 11.2m CHF in the DACH region within 2-3 years, they felt that they would have a compelling investment case to pitch to investors.

A key aspect in pursuing this business idea was to have a fully functioning prototype and a clear view of the market potential before raising equity capital. Being able to live off friends and family for 2 years reduced the ownership dilution substantially and thereby enabling the founders to retain control of their “baby” at the cost of a slower time to market. Keeping the production in-house would allow the founders to continuously enhance the product while limiting information leaks as they were very afraid of copycats. Assuming that the bulk of sourced parts could be sub-assembled, the internal production did not require a complex production process. With no previous manufacturing experience, all founders found that this was a good trade-off between control and operational risks. They wanted to build something sustainable that would remain over the longer term.

How to use the case

Download the example spreadsheet in “Attachments” below to see how the case is represented as a financial forecast. Then. for a quick overview of how the financial forecast has been built, watch this film:

Note: The example sheet is built in version 4.00 of the tool and may contain some bugs that have since been fixed. You can download the latest blank version of the spreadsheet and get more instructions for the tool by going to the Financial Forecasting Template learning nugget.