The document discusses the importance of financial modeling within the business model canvas, focusing on revenues and costs to ensure sustainability. It emphasizes the necessity of creating detailed financial models using both bottom-up and top-down approaches, providing examples of cash flow, gross profit, and net profit analysis. Additionally, it highlights the significance of sensitivity analysis to address potential profit fall-offs and enhance the model's viability through strategic marketing and operational adjustments.

1. Financial Modeling
2013-07-10
Bryan Guido Hassin
Entrepreneur In Residence

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
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. 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

17. Financial Modeling
2013-07-10
Bryan Guido Hassin
Entrepreneur In Residence