More Related Content Similar to Startup Financial Modeling (20) More from Bryan Hassin (16) Startup Financial Modeling2. 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
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Discussion
• Generate a rough financial model for
your venture
• Use sensitivity analysis to identify your
key financial drivers
16