Startup Financial Modeling

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Global Cleantech Entrepreneur Bryan Guido Hassin lays out the basics of modeling cashflow for a sustainable, scalable startup. This is preparation for one session of a 10-week entrepreneurship program taught at Rice University.

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Startup Financial Modeling

  1. 1. Financial Modeling 2013-07-10 Bryan Guido Hassin Entrepreneur In Residence
  2. 2. Two Areas of the Business Model Canvas require more detail • The Business Model Canvas is a great high-level tool • But revenues and costs require more detailed work to ensure your business is sustainable • These two areas comprise the Financial Model (simplified) 2
  3. 3. 3 images by JAM customer segments key partners cost structure revenue streams channels customer relationships key activities key resources value proposition Courtesy of Steve Blank
  4. 4. R – C = P REVENUES – COSTS = PROFIT UNITS X PRICE MATERIALS LABOR FACILITIES A basic Financial Model focuses on your venture’s income Your Goal: Source: John Pimentel 4
  5. 5. The best Financial Models are built from the bottom up Top Down • “If we capture x% of the market, we can make y profit” Bottom Up • “If we employ x sales people, paying them y and expecting z1 sales per person in month 1, z2 sales in month 2, … etc” • This is a wish • But is useful for reality checking Source: John Pimentel 5
  6. 6. Example Financial Model1 2 3 4 5 6 7 8 9 10 11 12 REVENUE Units 1 2 3 4 5 6 7 8 9 10 11 12 Price $100 $90 $81 $73 $66 $59 $53 $48 $43 $39 $35 $31 Total Revenue $100 $180 $243 $292 $328 $354 $372 $383 $387 $387 $384 $377 COSTS Cost of Goods Sold Raw Materials $10 $20 $30 $40 $50 $60 $70 $80 $90 $80 $88 $96 Direct Labor $50 $50 $50 $50 $50 $100 $100 $100 $100 $100 $150 $150 Facilities & Equipment $20 $20 $20 $20 $20 $25 $25 $25 $25 $25 $30 $30 Total COGS $80 $90 $100 $110 $120 $185 $195 $205 $215 $205 $268 $276 Gross Profit $20 $90 $143 $182 $208 $169 $177 $178 $172 $182 $116 $101 Gross Margin 20% 50% 59% 62% 63% 48% 48% 46% 45% 47% 30% 27% Fixed Overheads Research & Development $0 $0 $0 $0 $0 $0 $50 $50 $50 $50 $50 $50 Marketing $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 General & Administrative $100 $100 $100 $100 $100 $100 $100 $100 $100 $200 $200 $200 Total Fixed Overheads $100 $100 $100 $100 $100 $100 $150 $150 $150 $250 $250 $250 Total Costs $180 $190 $200 $210 $220 $285 $345 $355 $365 $455 $518 $526 Net Profit ($80) ($10) $43 $82 $108 $69 $27 $28 $22 ($68) ($134) ($149) Net Margin -80% -6% 18% 28% 33% 20% 7% 7% 6% -17% -35% -40% Cash Balance ($80) ($90) ($47) $35 $143 $212 $239 $267 $289 $221 $87 ($62) 6
  7. 7. 1 2 3 4 5 6 7 8 9 10 11 12 REVENUE Units 1 2 3 4 5 6 7 8 9 10 11 12 Price $100 $90 $81 $73 $66 $59 $53 $48 $43 $39 $35 $31 Total Revenue $100 $180 $243 $292 $328 $354 $372 $383 $387 $387 $384 $377 COSTS Cost of Goods Sold Raw Materials $10 $20 $30 $40 $50 $60 $70 $80 $90 $80 $88 $96 Direct Labor $50 $50 $50 $50 $50 $100 $100 $100 $100 $100 $150 $150 Facilities & Equipment $20 $20 $20 $20 $20 $25 $25 $25 $25 $25 $30 $30 Total COGS $80 $90 $100 $110 $120 $185 $195 $205 $215 $205 $268 $276 Gross Profit $20 $90 $143 $182 $208 $169 $177 $178 $172 $182 $116 $101 Gross Margin 20% 50% 59% 62% 63% 48% 48% 46% 45% 47% 30% 27% Fixed Overheads Research & Development $0 $0 $0 $0 $0 $0 $50 $50 $50 $50 $50 $50 Marketing $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 General & Administrative $100 $100 $100 $100 $100 $100 $100 $100 $100 $200 $200 $200 Total Fixed Overheads $100 $100 $100 $100 $100 $100 $150 $150 $150 $250 $250 $250 Total Costs $180 $190 $200 $210 $220 $285 $345 $355 $365 $455 $518 $526 Net Profit ($80) ($10) $43 $82 $108 $69 $27 $28 $22 ($68) ($134) ($149) Net Margin -80% -6% 18% 28% 33% 20% 7% 7% 6% -17% -35% -40% Cash Balance ($80) ($90) ($47) $35 $143 $212 $239 $267 $289 $221 $87 ($62) How much investment capital is needed? 7
  8. 8. 1 2 3 4 5 6 7 8 9 10 11 12 REVENUE Units 1 2 3 4 5 6 7 8 9 10 11 12 Price $100 $90 $81 $73 $66 $59 $53 $48 $43 $39 $35 $31 Total Revenue $100 $180 $243 $292 $328 $354 $372 $383 $387 $387 $384 $377 COSTS Cost of Goods Sold Raw Materials $10 $20 $30 $40 $50 $60 $70 $80 $90 $80 $88 $96 Direct Labor $50 $50 $50 $50 $50 $100 $100 $100 $100 $100 $150 $150 Facilities & Equipment $20 $20 $20 $20 $20 $25 $25 $25 $25 $25 $30 $30 Total COGS $80 $90 $100 $110 $120 $185 $195 $205 $215 $205 $268 $276 Gross Profit $20 $90 $143 $182 $208 $169 $177 $178 $172 $182 $116 $101 Gross Margin 20% 50% 59% 62% 63% 48% 48% 46% 45% 47% 30% 27% Fixed Overheads Research & Development $0 $0 $0 $0 $0 $0 $50 $50 $50 $50 $50 $50 Marketing $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 General & Administrative $100 $100 $100 $100 $100 $100 $100 $100 $100 $200 $200 $200 Total Fixed Overheads $100 $100 $100 $100 $100 $100 $150 $150 $150 $250 $250 $250 Total Costs $180 $190 $200 $210 $220 $285 $345 $355 $365 $455 $518 $526 Net Profit ($80) ($10) $43 $82 $108 $69 $27 $28 $22 ($68) ($134) ($149) Net Margin -80% -6% 18% 28% 33% 20% 7% 7% 6% -17% -35% -40% Cash Balance ($80) ($90) ($47) $35 $143 $212 $239 $267 $289 $221 $87 ($62) What’s wrong with this model? Profit peaks in month 5 => not scalable! 8
  9. 9. Use sensitivity analysis to identify key financial model drivers • Prices ↑ or ↓ (10%? 20%?) • Unit volume ↑ or ↓ (10%? 20%?) – Consider Marketing options • COGS ↑ or ↓ – Consider alternative suppliers • Fixed Overheads ↑ or ↓ – Delay hiring, buy used equipment 9
  10. 10. 1 2 3 4 5 6 7 8 9 10 11 12 REVENUE Units 1 2 3 4 5 6 7 8 9 10 11 12 Price $100 $90 $81 $73 $66 $59 $53 $48 $43 $39 $35 $31 Total Revenue $100 $180 $243 $292 $328 $354 $372 $383 $387 $387 $384 $377 COSTS Cost of Goods Sold Raw Materials $10 $20 $30 $40 $50 $60 $70 $80 $90 $80 $88 $96 Direct Labor $50 $50 $50 $50 $50 $100 $100 $100 $100 $100 $150 $150 Facilities & Equipment $20 $20 $20 $20 $20 $25 $25 $25 $25 $25 $30 $30 Total COGS $80 $90 $100 $110 $120 $185 $195 $205 $215 $205 $268 $276 Gross Profit $20 $90 $143 $182 $208 $169 $177 $178 $172 $182 $116 $101 Gross Margin 20% 50% 59% 62% 63% 48% 48% 46% 45% 47% 30% 27% Fixed Overheads Research & Development $0 $0 $0 $0 $0 $0 $50 $50 $50 $50 $50 $50 Marketing $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 General & Administrative $100 $100 $100 $100 $100 $100 $100 $100 $100 $200 $200 $200 Total Fixed Overheads $100 $100 $100 $100 $100 $100 $150 $150 $150 $250 $250 $250 Total Costs $180 $190 $200 $210 $220 $285 $345 $355 $365 $455 $518 $526 Net Profit ($80) ($10) $43 $82 $108 $69 $27 $28 $22 ($68) ($134) ($149) Net Margin -80% -6% 18% 28% 33% 20% 7% 7% 6% -17% -35% -40% Cash Balance ($80) ($90) ($47) $35 $143 $212 $239 $267 $289 $221 $87 ($62) Why does profit fall off? Two cost lines are out of control and pricing doesn’t scale 10
  11. 11. 1 2 3 4 5 6 7 8 9 10 11 12 REVENUE Units 1 2 3 4 5 6 7 8 9 10 11 12 Price $100 $90 $81 $73 $66 $59 $53 $48 $43 $39 $35 $31 Total Revenue $100 $180 $243 $292 $328 $354 $372 $383 $387 $387 $384 $377 COSTS Cost of Goods Sold Raw Materials $10 $20 $30 $40 $50 $60 $70 $80 $90 $80 $88 $96 Direct Labor $50 $50 $50 $50 $50 $100 $100 $100 $100 $100 $150 $150 Facilities & Equipment $20 $20 $20 $20 $20 $25 $25 $25 $25 $25 $30 $30 Total COGS $80 $90 $100 $110 $120 $185 $195 $205 $215 $205 $268 $276 Gross Profit $20 $90 $143 $182 $208 $169 $177 $178 $172 $182 $116 $101 Gross Margin 20% 50% 59% 62% 63% 48% 48% 46% 45% 47% 30% 27% Fixed Overheads Research & Development $0 $0 $0 $0 $0 $0 $50 $50 $50 $50 $50 $50 Marketing $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 General & Administrative $100 $100 $100 $100 $100 $100 $100 $100 $100 $200 $200 $200 Total Fixed Overheads $100 $100 $100 $100 $100 $100 $150 $150 $150 $250 $250 $250 Total Costs $180 $190 $200 $210 $220 $285 $345 $355 $365 $455 $518 $526 Net Profit ($80) ($10) $43 $82 $108 $69 $27 $28 $22 ($68) ($134) ($149) Net Margin -80% -6% 18% 28% 33% 20% 7% 7% 6% -17% -35% -40% Cash Balance ($80) ($90) ($47) $35 $143 $212 $239 $267 $289 $221 $87 ($62) How should we address the profit fall-off? A marketing investment should buoy price, increase sales 11
  12. 12. Now this is an investable model!1 2 3 4 5 6 7 8 9 10 11 12 REVENUE Units 1 3 5 7 9 11 13 15 17 19 21 23 Price $100 $95 $90 $86 $81 $77 $74 $70 $66 $63 $60 $57 Total Revenue $100 $285 $451 $600 $733 $851 $956 $1,048 $1,128 $1,197 $1,257 $1,308 COSTS Cost of Goods Sold Raw Materials $10 $30 $50 $70 $90 $110 $130 $150 $170 $152 $168 $184 Direct Labor $50 $50 $50 $50 $50 $100 $100 $100 $100 $100 $150 $150 Facilities & Equipment $20 $20 $20 $20 $20 $25 $25 $25 $25 $25 $30 $30 Total COGS $80 $100 $120 $140 $160 $235 $255 $275 $295 $277 $348 $364 Gross Profit $20 $185 $331 $460 $573 $616 $701 $773 $833 $920 $909 $944 Gross Margin 20% 65% 73% 77% 78% 72% 73% 74% 74% 77% 72% 72% Fixed Overheads Research & Development $0 $0 $0 $0 $0 $0 $50 $50 $50 $50 $50 $50 Marketing $10 $11 $12 $13 $15 $16 $18 $19 $21 $24 $26 $29 General & Administrative $100 $100 $100 $100 $100 $100 $100 $100 $100 $200 $200 $200 Total Fixed Overheads $110 $111 $112 $113 $115 $116 $168 $169 $171 $274 $276 $279 Total Costs $190 $211 $232 $253 $275 $351 $423 $444 $466 $551 $624 $643 Net Profit ($90) $74 $219 $347 $458 $500 $533 $603 $661 $647 $633 $666 Net Margin -90% 26% 49% 58% 63% 59% 56% 58% 59% 54% 50% 51% Cash Balance ($90) ($16) $203 $550 $1,008 $1,508 $2,041 $2,644 $3,306 $3,953 $4,586 $5,252 12
  13. 13. 1 2 3 4 5 6 7 8 9 10 11 12 REVENUE Units 1 3 5 7 9 11 13 15 17 19 21 23 Price $100 $95 $90 $86 $81 $77 $74 $70 $66 $63 $60 $57 Total Revenue $100 $285 $451 $600 $733 $851 $956 $1,048 $1,128 $1,197 $1,257 $1,308 COSTS Cost of Goods Sold Raw Materials $10 $30 $50 $70 $90 $110 $130 $150 $170 $152 $168 $184 Direct Labor $50 $50 $50 $50 $50 $100 $100 $100 $100 $100 $150 $150 Facilities & Equipment $20 $20 $20 $20 $20 $25 $25 $25 $25 $25 $30 $30 Total COGS $80 $100 $120 $140 $160 $235 $255 $275 $295 $277 $348 $364 Gross Profit $20 $185 $331 $460 $573 $616 $701 $773 $833 $920 $909 $944 Gross Margin 20% 65% 73% 77% 78% 72% 73% 74% 74% 77% 72% 72% Fixed Overheads Research & Development $0 $0 $0 $0 $0 $0 $50 $50 $50 $50 $50 $50 Marketing $10 $11 $12 $13 $15 $16 $18 $19 $21 $24 $26 $29 General & Administrative $100 $100 $100 $100 $100 $100 $100 $100 $100 $200 $200 $200 Total Fixed Overheads $110 $111 $112 $113 $115 $116 $168 $169 $171 $274 $276 $279 Total Costs $190 $211 $232 $253 $275 $351 $423 $444 $466 $551 $624 $643 Net Profit ($90) $74 $219 $347 $458 $500 $533 $603 $661 $647 $633 $666 Net Margin -90% 26% 49% 58% 63% 59% 56% 58% 59% 54% 50% 51% Cash Balance ($90) ($16) $203 $550 $1,008 $1,508 $2,041 $2,644 $3,306 $3,953 $4,586 $5,252 How much investment capital is needed? 13
  14. 14. Investors look for key metrics in a financial model • Cash Burn or Burn Rate • Revenues less costs • Know on monthly or quarterly basis • Runway • # of months operating at a loss before all cash is gone • Cash Flow Break Even • Point at which cash from revenues = or > Cash Burn • Cap Ex • Cash required to build the product, facility, PP&E Source: John Pimentel 14
  15. 15. Modeling the costs of hiring is more art than science • A good estimate is $100,000 (fully burdened, including healthcare, payroll tax, etc.) per employee 15
  16. 16. Discussion • Generate a rough financial model for your venture • Use sensitivity analysis to identify your key financial drivers 16
  17. 17. Financial Modeling 2013-07-10 Bryan Guido Hassin Entrepreneur In Residence

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