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Building Your Financial Model Key Startup Metrics


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Does your financial model explain how your business really works? Give you clear insight into the financial health of your startup? Tell a story that inspires investor confidence and will help you to raise capital?

As Guy Kawasaki said so well in his entrepreneurial bible Art of the Start, “the point of financial projections is to tell a story with numbers—a story about opportunity, resource requirements, market forces, growth, milestone achievements, and profits."

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Building Your Financial Model Key Startup Metrics

  1. 1. 1 Sirk Roh COO Building Your Financial Model: Key Startup Metrics #StartupMetrics
  2. 2. 2 “Startups face a huge burden in today’s economy, often having to choose between funneling resources toward creating their goods and services or managing the often complex accounting, tax and financial strategy planning necessary to run a successful business. ~ David Ehrenberg, Founder and CEO Early Growth Financial Services
  3. 3. Building Your Story with Numbers “The point of financial projections is to tell a story with numbers—a story about opportunity, resource requirements, market forces, growth, milestone achievements, and profits. Your job is to create a numerical framework that complements and reinforces the vision you’ve painted with words.” – Guy Kawasaki 3
  4. 4. Presentation Overview The essentials of startup financial management • What are investors looking for in your finances? • What is a financial model? • Setting financial goals and objectives • Milestone funding • Bottom-up financial projections • Spend • Budgeting • Top-down projections • Cost assumptions • Reforecasting 4
  5. 5. Why a 3-Year Financial Model? A comprehensive financial pictures serves as the road-map for your business • Helps you understand your cash burn • Forces you to evaluate key performance drivers • Validates your assumptions • Puts challenges into perspective • Iterative process continuously improves your assumptions • Insight into your business model • Clarifies decision-making process (short-term and long-term) • Gives you leverage of accurate baseline valuation 5
  6. 6. What Goes Into a 3-Year Financial Model? Essential components to your model 3
  7. 7. Identify Major Objectives for Your Company Assess where you are and what you want to achieve Venture funding and negative cash burn Positive cash burn and no venture funding What do you want to accomplish with next raise? What are the goals you want to achieve during this time period?
  8. 8. Process for Creating Your Financial Model How to approach the process and get buy-in 1. Go to stakeholders and members of executive team – what do they need to achieve objectives (revenue, product, market, strategic, etc.)? 2. What is needed from a programmatic perspective? 3. Compile information and discuss with CEO (maybe executive team): total amount requested relative to milestone 4. Dialogue about wants and tradeoffs 5. Use dialogue to create bottom-up forecasting budget 8
  9. 9. Bottom-Up Financial Projection Forecast for realistic revenue potential 9
  10. 10. Spend for Bottom-Up Projections Consider relevant operational costs • Customer/Cost details • Human resource costs • Consultant and professional services • Research and development • Office and admin • Sales and marketing • Capital spending 10
  11. 11. Budgeting Use your budget to plan your actions 11 • Budgeting created on accrual basis: budgeting versus actual results • Difference between cash and accrual is around capital expenditures • Report budget by department and major cost drivers (expense categories and revenue categories) • Plan actions: how quickly will this impact revenue and what will you be able to achieve based on spending • Identify key variables • Identify key revenue assumptions • Run different scenarios
  12. 12. Budgeting Exercise Start from a milestone perspective • If company has been around for a while, look at historical costs • What do you need to accomplish before you run out of money, or in a specific time period • Ask budget owners what they need to accomplish goals • Tradeoffs • Trending analysis • Trending initiative 12
  13. 13. Top-Down Projection? Not particularly useful, but necessary for investors to show market potential 13
  14. 14. Reforecasting Your financial plan is always evolving • Don’t do a 5-year plan, at most 3-year • Update your budget on a quarterly basis (at least) • For investors budget on a quarterly basis for first year and then annually • What’s realistic in terms of timeline and reforecasting on monthly or quarterly basis? 14
  15. 15. Thank You and Q&A 15 Sirk Roh 415-234.3437 Follow us @EarlyGrowthFS