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6.2 building a financial model.pptx

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  • 1. Building a Financial Model This presentation is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this presentation are the sole responsibility of Rick Rasmussen and do not necessarily reflect the views of USAID or the United States Government. 1
  • 2. The Financial Model •  Investors don’t put their money into ideas. They put their money into businesses… •  Your financial model is your ‘real’ business plan –  –  –  –  –  –  Revenues Profits Cash needs Hiring plans Runway Plus a sensitivity analysis 2
  • 3. Philosophy •  Build your models to answer questions such as: –  –  –  –  Is this a real business? Can it make money? Will it scale? Tweak basic assumptions until it does •  Proof Points. Show evidence and traction –  Your results to date –  Comparable companies in the market –  Investors will test every line item •  •  •  •  Revenues Margins Expenses Cash flow
  • 4. A typical timeline Cash flow positive 4
  • 5. Revenue timeline varies by market type… Year 7 Year 6 Year 5 Year 1 Existing Market Year 2 Year 3 Year 4 Resegmented Market New Market
  • 6. Basic Financial Statements •  Income Statement: –  Also referred to as a profit and loss statement (P&L) –  Revenues – expenses = profits –  Stated over a series of reporting periods •  Balance Sheet: –  A "snapshot of company's financial condition” –  Assets = liabilities + owner's equity •  Cash Flow Statement: –  Shows how changes in balance sheet accounts affect cash –  Operations, Investment and Financing activities
  • 7. Investors need to know this is a viable business •  Lists of key assumptions •  5-year Income Statement –  –  –  –  CEO should build first Income Statement Get to know the format and numbers intimately Yearly in the presentation Detailed breakdown for due diligence •  Year 1-2 are Quarterly (or even monthly) •  Year 3-5 are annual •  For Due Diligence: –  Business Plan Balance Sheet –  Business Plan Cash Flow statement –  Growth assumptions and monies projected for next round(s)
  • 8. Income Statement: Basic Structure Revenue   •  •  Listed  out,  product  by  product   Net  out  returns  and  allowances   Cost  of  Goods  Sold  (Variable  costs)   Gross  Profit     (Rev  –  COGS)   Expenses  (Fixed  Costs)   •  •  •  R&D   Sales  and  Mktg   General  and  AdministraEve  (G&A)   Gross  Profit  [Rev  –  COGS]     Other  Income  (expense)     Net  Income    
  • 9. Building an Income Statement: Revenue Line •  Work from your time line •  Break out every one of your products or services •  List assumptions –  –  –  –  –  Estimate ASP (avg selling price) Length of sales cycle Units sold per period Channels and commissions Churn, Returns, etc.
  • 10. Example Assumptions Business Model assumptions deals List price discount ASP 0 $ $ sales team target team needed sales team size cost / sales team (sales + Appls engineer) nonsales person cost marketing people marketing programs R&D team G&A team size office, building & HR $ 0 $ 0 0 $ 140000 $ 0 $ 6 3 200,000 $ 3 500,000 $ 50% 250,000 $ 500,000 1.5 3 250,000 120,000 1 50,000 8 3 $ 300,000 $ $ $ $ 20 600,000 $ 30% 180,000 $ 1,500,000 2.4 4.8 275,000 120,000 2 200,000 10 5 $ 500,000 $ $ $ $ 65 650,000 $ 20% 130,000 $ 2,500,000 3.38 6.76 300,000 100,000 5 350,000 14 8 $ 800,000 $ $ $ $ 225 650,000 20% 130,000 2,500,000 11.7 23.4 320,000 100,000 7 500,000 32 11 1,200,000
  • 11. Sales Model Example 4Q 1Q 2Q 3Q 4Q 1Q 10 QL 10 QL 10 QL 10 QL 10 QL 4 PO •  •  •  •  •  •  •  4 PO 4 PO 4 PO 4 PO Typical  trained  sales  person  does  ~16  deals  per  quarter  with  ASP  of  $250K   This  translates  to  a  yearly  target  of  $4M  per  Regional  Sales  Manager  (RSM)   Cost  of  an  RSM  with  a  porEon  of  an  SE  =  $400K  (10:1  leverage)   Some  deals  will  be  a  bit  longer,  some  will  be  a  bit  shorter  –  assuming  average  of  6  month  but  will   monitor   Assuming  an  RSM  will  close  4  deals  out  of  10  that  he  is  nursing   We  must  feed  10  qualified  leads  per  quarter  to  an  RSM     Assumes  that  an  RSM  juggles  ~20  deals  at  any  given  Eme  
  • 12. Revenue Model Revenue June July August Sept Oct Nov Dec 1Q08 1 200 Number of systems Avg Selling price additional upgrades Revenue 0 0 0 0 0 0 0 2Q08 3Q08 4Q08 1 200 2 200 3 300 100 2009 12 300 100 200 200 400 1200 4800 •  Each company’s business model will differ •  Make sure that it passes the “common sense” test •  Benchmark vs. Competition 2010 28 250 100 2011 45 250 125 2012 110 250 125 9800 16875 41250
  • 13. Cost of Goods Sold (COGS): •  Unit economics of each individual item sold, aka Variable Costs –  Product based: product cost –  Service based: cost of services –  Virtual based: customer acquisition costs •  Gross Margin = Revenue – COGS •  Gross margin % = Revenue – COGS divided by Revenue
  • 14. Expenses: Where to start •  Fixed expenses occur independent of units produced •  Salaries…! •  Start with a hiring chart by dept. •  Whom do you need & when •  State expected salary •  In the US add ~22% for payroll taxes, benefits, overhead •  Major line items are listed by “department” –  Research & Development (R&D) •  Engineering and development –  Sales & Marketing •  Salaries, commissions, expenses –  General & Administrative •  Management, finance, overhead, rent
  • 15. Headcount and salaries Empoyees CEO VP of Engineering VP of sales VP of mktg VP of operations Dir of eng SW developers Architect CTO HW developers QA Config / mfg sales Application engineers hotline & support Admin finance manager accounting manager total salaries 180000 150000 150000 150000 160000 130000 110000 140000 140000 120000 90000 90000 100000 110000 85000 65000 75000 75000 June July 1 August Sept 1 1 1 1 Oct 1 1 Nov 1Q10 2Q10 3Q10 4Q10 1Q08 2Q08 3Q08 4Q08 Dec 1 1 1 1 1 1 1 1 1 1 1 1 1 1 6 1 1 1 1 6 1 1 1 1 1 6 1 1 1 1 3 1 6 1 4 1 1 1 1 7 1 8 1 11 1 14 2 1 1 3 1 1 1 1 1 1 1 8 1 1 1 2 1 1 2 1 2 1 1 1 1 1 1 1 1 1 8 1 1 1 2 1 2 1 1 2 1 1 2 1 1 1 1 1 1 1 1 8 1 1 1 2 1 1 2 2 2 2 1 16 19 25 26 30 1 2011 2009 2012 2010 2013 2011 2014 2012 1 1 1 1 1 1 12 1 1 1 6 2 3 4 2 4 2 2 1 1 1 1 1 1 12 1 1 1 6 2 5 6 2 4 2 2 1 1 1 1 1 1 14 1 1 1 6 2 7 8 4 4 2 2 1 1 1 1 1 1 16 1 1 1 6 2 15 10 6 4 2 2 46 50 58 72
  • 16. Building out Salary Expenses G&A S&M R&D Ops & Mfg 1Q10 2Q10 3Q10 4Q08 4Q10 June July August Sept Oct Nov Dec 1Q08 2Q08 3Q08 20.4 20.4 20.4 20.4 20.4 20.4 26.7 153.3 153.3 153.3 178.3 0 0 0 0 12.5 12.5 12.5 100 136.67 173.333 206.67 9.2 38.7 48.7 57.9 77.9 107.9 114.3 457.1 556.2 556.2 556.2 0 0 0 0 0 0 0 0 83.3 83.3 140 2011 2009 740.0 1040.0 2417.1 510.0 2012 2010 740.0 1460.0 2417.1 510.0 2013 2011 740.0 1880.0 2637.1 680.0 2014 2012 740.0 2900.0 2857.1 850.0 Burden factor G&A S&M R&D Ops & Mfg 24.91 0.00 11.18 0.00 24.91 0.00 47.20 0.00 24.91 0.00 59.40 0.00 24.91 0.00 70.59 0.00 24.91 24.91 32.53 187.07 187.07 15.25 15.25 15.25 122.00 166.73 94.99 131.59 139.43 557.71 678.55 0.00 0.00 0.00 0.00 101.67 187.07 211.47 678.55 101.67 217.57 902.80 902.80 902.80 902.80 252.13 1268.80 1781.20 2293.60 3538.00 678.55 2948.91 2948.91 3217.31 3485.71 170.80 622.20 622.20 829.60 1037.00 Total Salary expense 36.09 72.11 84.31 95.49 135.14 171.74 187.21 866.78 1134.02 1178.75 1319.05 5742.71 6255.11 7243.31 8963.5
  • 17. Non-Salary expenses •  R&D •  Subcontractors and outsourced engineering •  Non-depreciated tools, servers •  Marketing and Sales •  Trade shows, mktg campaigns •  Travel or lump into G&A •  G&A •  List IP, legal, accounting expenses •  Large expenses like rent, travel •  Either put into G&A or divide among departments as a % overhead
  • 18. Adding in other expenses June rent travel legal accounting Misc IT Capex Servers & Comm Marketing Capex Marketing Trade shows Mktg Campaigns consultants Employees slush bonus July 2 0.9 2 3 2.5 10 August Sept 2 1.8 2 3 2.5 9 10 2 2.1 2 3 2.5 3 Oct 2 2.4 8 3 2.5 3 Nov 5 3.3 2 3 2.5 9 1Q10 2Q10 3Q08 3Q10 4Q08 4Q10 1Q08 2Q08 Dec 5 4.2 2 3 2.5 9 5 4.8 5 3 2.5 6 10 20 17.1 10 5 6 9 20 22.5 10 5 6 18 20 23.4 10 5 6 3 30 2012 2010 2013 2011 2014 2012 180 110.4 50 15 15 48 50 180 120 150 15 15 12 50 180 139.2 150 15 15 24 150 180 172.8 150 15 20 42 150 50 60 20 27 10 5 6 12 2011 2009 100 100 200 150 200 150 20 9 200 20 9 300 20 9 400 20 9 500 10 10 20 20 2 1 4 1 4 1 4 1 4 1 40 4 1 4 1 10 3 10 3 10 3 10 3 100
  • 19. Profit & Loss Statement Revenue June July August Sept Oct Nov 1Q10 2Q10 3Q10 4Q08 4Q10 2011 1Q08 2Q08 3Q08 2009 1 1 2 8 24 200 200 200 300 300 50 50 Dec Number of systems Avg Selling price Main & Serices Revenue 2012 2010 36 250 50 2013 2011 45 250 60 2014 2012 110 250 60 0 0 0 0 0 0 0 200 200 400 2800 8400 10800 13950 34100 Sales & Mktg Prod Development G&A 0 21 38 0 66 41 10 62 42 10 74 48 35 104 46 15 141 47 15 155 58 122 567 258 187 697 365 251 712 366 252 691 569 1379 3047 2124 1981 3011 2334 2644 3391 2661 3888 3678 3007 Total Expenses 59 107 114 131 185 202 229 947 1249 1329 1512 6550 7326 8696 10572 $ 5,254 $ 23,528 $ 150 Total Expenses Net Income $ Employees Expense per employee Revenue per employee $ 238 $ 215 $ 195 $ 197 $ 202 $ 174 $ 171 $ 199 $ 200 $ 204 $ 202 $ - $ - $ - $ - $ - $ - $ - $ 11 $ 8 $ 15 $ 93 (59) $ (107) $ (114) $ (131) $ (185) $ (202) $ (229) $ (747) $ (1,049) $ 3 6 7 8 11 14 16 19 25 (929) $ 1,288 26 $ 1,850 $ 142 30 $ 3,474 $ 147 46 $ 183 50 $ 216 58 $ 241 72 $ 147 $ 474 19
  • 20. Basic Income Statement 2005 2010 Revenues 2006 2011 - 2007 2012 2008 2013 2009 2014 Gross Margin Gross Profit - Research and development 840,000 Technology payment 300,000 Sales and marketing - 750,000 3,600,000 8,450,000 29,250,000 225,000 Costs of sales 900,000 2,112,500 7,312,500 525,000 2,700,000 6,337,500 21,937,500 960,000 1,200,000 1,400,000 3,200,000 - - - 25% 11% - Net income (loss) from operations Other income (expense) 2,878,000 8,688,000 30% 660,000 1,100,000 1,600,000 2,300,000 8% 1,760,000 2,540,000 4,060,000 5,878,000 14,188,000 (1,760,000) Total operating expenses 1,760,000 620,000 General and admin 920,000 (2,015,000) (1,360,000) 459,500 7,749,500 420,000 100,000 50,000 (940,000) 559,500 7,799,500 139,875 1,949,875 699,375 9,749,375 200,000 Net income (loss) before taxes (1,560,000) Taxes - Net income (loss) (1,560,000) 20 300,000 (1,715,000) (1,715,000) (940,000) 33%
  • 21. Example: Salesforce.com
  • 22. Balance Sheet A snapshot at a point in time. Assets = Liabilities plus shareholder’s equity End of month, quarter, year. Marked by similar periods
  • 23. Cash Flow Statement Lack of cash kills many businesses Organized similar to a balance sheet but looks at: Cash from •  Operations (day-to-day) •  Investing (investing your cash) •  Financing (how much you’ve raised) Statement similar to a Balance Sheet but a concentration on how much cash is in the bank. Reconciles Accounts Receivable as the single biggest variable. Important for an ongoing concern but not critical for financing
  • 24. VC Financial Metrics •  Market size –  Total Addressable Market –  Initial target market –  Growth •  Customer acquisition cost ($/customer) •  Customer Lifetime Value ($/customer) •  The current round of financing (e.g., “Seed,” “Series A”) Revenue –  Focus on year 1, 3 and 5 •  •  Steady State model percentages for: –  –  –  –  Gross margin Sales and marketing expenses R&D Expenses Operating income –  How much are you planning to raise ($) –  What % of company do the new investors receive (%) –  How long does that money last? –  What milestones are achieved with that money?
  • 25. A Word of Advice •  This course material discusses a model to predict company performance •  This is not sufficient to run your day-to-day operations •  If you haven’t already… –  It’s worth taking a basic accounting course –  No need for Double Entry Bookkeeping - too low-level –  Focus on Financial Statements and Reporting