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6.2 building a financial model.pptx
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
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
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
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
