building a financial model that actually works
Post on 19-Oct-2014
1.589 views
DESCRIPTION
What is a financial model? Learn about how to create a bottoms up financial model, revenue assumptions, sales assumptions, marketing assumptions, general and administrative assumptions, and cash flow statements and balance sheets. Building a Financial Model That Actually Works. A class taught by Dan Allred (SVB) and Matt Nichols (Gemvara) at Intelligent.ly's Boston campus. To learn more from the experts, visit http://intelligent.ly/learnTRANSCRIPT
![Page 1: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/1.jpg)
Building A Financial Model That Works
DAN ALLRED MATT NICHOLS@dgallred @mnichols47
![Page 2: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/2.jpg)
About Dan: Start-up “guy” -> Banker
• Council for Entrepreneurial Development– March 1998 – September 2002
– Start-up training programs, conferences, etc.
– Raised $4.5mm capital campaign
• Silicon Valley Bank – Research Triangle NC– September 2002 – May 2007
– Banker to NC’s tech, life science & VC community
– 250% loan growth over 4 years
• Silicon Valley Bank – Boston MA
– May 2007 – Present
– Started new early stage group, replicated as SVB “Accelerator” nationally
– 400+ clients, over $100mm in loans and $1 billion in deposits
![Page 3: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/3.jpg)
About Matt: Banker -> VC -> Startup CFO
• Investment Banker: Morgan Stanley (CA)– Google IPO team
• Morgan Stanley Venture Partners (CA)– Avamar (EMC), Tarari (LSI), Perceptive Software (Lexmark)
– Cross-industry, later stage venture capital
• Highland Capital Partners (MA)– Investments: Bullhorn (Vista Equity), Gemvara, OpenSky, Pixable
– Founding Advisor: Boundless Learning
– Digital media/Internet, early and late stage venture capital
• Gemvara CFO/Board Member (MA)– Raised last two rounds of funding ($15MM then $25MM)
![Page 4: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/4.jpg)
How Did We Get Here?
![Page 5: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/5.jpg)
How Did We Get Here?
![Page 6: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/6.jpg)
How Did We Get Here?
![Page 7: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/7.jpg)
How Did We Get Here?
![Page 8: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/8.jpg)
How Did We Get Here?
![Page 9: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/9.jpg)
How Did We Get Here?
![Page 10: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/10.jpg)
Our Goals
![Page 11: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/11.jpg)
Our Goals
• Teach key concepts around building a bottoms up financial model for a start-up.
![Page 12: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/12.jpg)
Our Goals
• Teach key concepts around building a bottoms up financial model for a start-up.
• Provide guiding principles around the assumptions you will make in building your model.
![Page 13: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/13.jpg)
Our Goals
• Teach key concepts around building a bottoms up financial model for a start-up.
• Provide guiding principles around the assumptions you will make in building your model.
• Equip you with a model template that you can use as you build your own model.
![Page 14: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/14.jpg)
Tops Down vs. Bottoms Up?
• What do we mean?
![Page 15: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/15.jpg)
Tops Down vs. Bottoms Up?
• What do we mean?
• Tops Down: more of a market analysis – how big is the opportunity and what market share could the start-up reasonably gain?
![Page 16: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/16.jpg)
Tops Down vs. Bottoms Up?
• What do we mean?
• Tops Down: more of a market analysis – how big is the opportunity and what market share could the start-up reasonably gain?
• Bottoms Up: more of a plan for HOW the start-up will gain that market share.
![Page 17: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/17.jpg)
Tops Down vs. Bottoms Up?
• What do we mean?
• Tops Down: more of a market analysis – how big is the opportunity and what market share could the start-up reasonably gain?
• Bottoms Up: more of a plan for HOW the start-up will gain that market share.
• Do both, but spend most of your effort on the Bottoms Up view of the business.
![Page 18: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/18.jpg)
A Bottoms Up Financial Model will:
• Force the entrepreneur to think through the key drivers of value in the business.
• Allow the entrepreneur to consider variability in the business related to various costs, investments, etc.
• Illustrate how much capital is needed and when in order to achieve the projected results.
• Manage results versus the financial model.
![Page 19: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/19.jpg)
Revenue Assumptions
![Page 20: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/20.jpg)
Revenue Assumptions• Start with the business model – how do you make money & how are
opportunities converted into revenue. Examples: direct sales, inside sales, channels, freemium/premium, converting “traffic”.
![Page 21: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/21.jpg)
Revenue Assumptions• Start with the business model – how do you make money & how are
opportunities converted into revenue. Examples: direct sales, inside sales, channels, freemium/premium, converting “traffic”.
• How many products? How are they priced? Which classes of clients buy which product?
![Page 22: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/22.jpg)
Revenue Assumptions• Start with the business model – how do you make money & how are
opportunities converted into revenue. Examples: direct sales, inside sales, channels, freemium/premium, converting “traffic”.
• How many products? How are they priced? Which classes of clients buy which product?
• How long do you make money on customers and how? Subscription, maintenance, upgrades, upsells, cross-sells, etc.?
![Page 23: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/23.jpg)
Revenue Assumptions• Start with the business model – how do you make money & how are
opportunities converted into revenue. Examples: direct sales, inside sales, channels, freemium/premium, converting “traffic”.
• How many products? How are they priced? Which classes of clients buy which product?
• How long do you make money on customers and how? Subscription, maintenance, upgrades, upsells, cross-sells, etc.?
• COGS – what does it cost you to deliver product? Materials, implementation, customization, commissions.
![Page 24: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/24.jpg)
Revenue Assumptions• Start with the business model – how do you make money & how are
opportunities converted into revenue. Examples: direct sales, inside sales, channels, freemium/premium, converting “traffic”.
• How many products? How are they priced? Which classes of clients buy which product?
• How long do you make money on customers and how? Subscription, maintenance, upgrades, upsells, cross-sells, etc.?
• COGS – what does it cost you to deliver product? Materials, implementation, customization, commissions.
• Any network effects or inflection points that alter revenue or COGS?
![Page 25: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/25.jpg)
Sales Assumptions
![Page 26: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/26.jpg)
Sales Assumptions
• How does your sales funnel work? Based on your conversion rates, how many prospects do you need to convert the projected revenue?
![Page 27: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/27.jpg)
Sales Assumptions
• How does your sales funnel work? Based on your conversion rates, how many prospects do you need to convert the projected revenue?
• What is the cost associated with reaching and converting this number of prospects – sales people, commissions, etc.?
![Page 28: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/28.jpg)
Sales Assumptions
• How does your sales funnel work? Based on your conversion rates, how many prospects do you need to convert the projected revenue?
• What is the cost associated with reaching and converting this number of prospects – sales people, commissions, etc.?
• Think about cycles:
![Page 29: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/29.jpg)
Sales Assumptions
• How does your sales funnel work? Based on your conversion rates, how many prospects do you need to convert the projected revenue?
• What is the cost associated with reaching and converting this number of prospects – sales people, commissions, etc.?
• Think about cycles: 1) How long to get new sales people / channels productive?
![Page 30: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/30.jpg)
Sales Assumptions
• How does your sales funnel work? Based on your conversion rates, how many prospects do you need to convert the projected revenue?
• What is the cost associated with reaching and converting this number of prospects – sales people, commissions, etc.?
• Think about cycles: 1) How long to get new sales people / channels productive? 2) How long to for a productive resource to close a sale?
![Page 31: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/31.jpg)
Marketing Assumptions
![Page 32: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/32.jpg)
Marketing Assumptions• How do you drive prospects to the top of the funnel?
![Page 33: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/33.jpg)
Marketing Assumptions• How do you drive prospects to the top of the funnel? Channels – how long to develop channels?
![Page 34: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/34.jpg)
Marketing Assumptions• How do you drive prospects to the top of the funnel? Channels – how long to develop channels?
Inside sales – how much SEM, lists, etc.?
![Page 35: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/35.jpg)
Marketing Assumptions• How do you drive prospects to the top of the funnel? Channels – how long to develop channels?
Inside sales – how much SEM, lists, etc.? Direct – see sales cycle notes on prior slide.
![Page 36: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/36.jpg)
Marketing Assumptions• How do you drive prospects to the top of the funnel? Channels – how long to develop channels?
Inside sales – how much SEM, lists, etc.? Direct – see sales cycle notes on prior slide.
• Everything on the prior three slides (revenue assumptions and sales & marketing expense assumptions) should work together to help you manage your business.
![Page 37: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/37.jpg)
Marketing Assumptions• How do you drive prospects to the top of the funnel? Channels – how long to develop channels?
Inside sales – how much SEM, lists, etc.? Direct – see sales cycle notes on prior slide.
• Everything on the prior three slides (revenue assumptions and sales & marketing expense assumptions) should work together to help you manage your business.
• As you compare results, it should also provide a reality check for you relative to your business model assumptions.
![Page 38: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/38.jpg)
General & Administrative (G&A) Assumptions
![Page 39: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/39.jpg)
General & Administrative (G&A) Assumptions
- Small in the beginning, greater over time as business becomes more complex. These are the costs to run the business.
![Page 40: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/40.jpg)
General & Administrative (G&A) Assumptions
- Small in the beginning, greater over time as business becomes more complex. These are the costs to run the business.
- Consider systems, services, policies that you need in place to operate and the costs associated with each.
![Page 41: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/41.jpg)
General & Administrative (G&A) Assumptions
- Small in the beginning, greater over time as business becomes more complex. These are the costs to run the business.
- Consider systems, services, policies that you need in place to operate and the costs associated with each.
- Certain types of financing may require additional expenses to be incurred – i.e. finance & accounting professionals for VCs, banks, etc.
![Page 42: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/42.jpg)
General & Administrative (G&A) Assumptions
- Small in the beginning, greater over time as business becomes more complex. These are the costs to run the business.
- Consider systems, services, policies that you need in place to operate and the costs associated with each.
- Certain types of financing may require additional expenses to be incurred – i.e. finance & accounting professionals for VCs, banks, etc.
- Much of this can be outsourced in the early days – contract CFOs, book-keepers, HR, etc.
![Page 43: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/43.jpg)
Group Breakout
• Groups of 5
• Identify 1 Company in your group
• What are your key drivers of revenue and cost?
![Page 44: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/44.jpg)
Big Questions
• How detailed of a model?
• How aggressive should my assumptions be?
• Item level build up, or % of revenue
• Are a cash flow statement or balance sheet necessary?
![Page 45: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/45.jpg)
How Detailed?
• “The VC One (maybe two) Level Deeper Test”
• Match to comparable companies
• Depends on what data you have
• Minimize # of complete guesses
• Not all your data/buildup has to live in the model
![Page 46: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/46.jpg)
Cash Flow Statement and Balance Sheet?
• No.. Unless
• Income statement + cash balance estimate
• Unless:
– Cash flow is meaningfully different from net income/EBITDA
– You are trying to model exactly how many payrolls you have left
– You are a later stage company
![Page 47: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/47.jpg)
Specific Line Items vs. % of Revenue
• Specific detail, as long as you can reasonably predict it, then bail…and go to % of revenue
• Important metrics for YOUR biz, model further
![Page 48: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/48.jpg)
Key Tenets1. Consistent w/ publicly available data
2. Compare drivers to YOUR historical data
3. Supplement w/ cohort data
4. Create the narrative to explain it all
![Page 49: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/49.jpg)
Key Tenet 1: Compare to Public Data
Sources
• Public company filings
• Research reports
• Blog posts, etc.
If Different – Need an Explanation
• Difference in business model
• Technology
• Different market
![Page 50: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/50.jpg)
Key Tenet #2: Compare Drivers to Your Historical Data
May June July (Est) August (Est) Sept. (Est)
Traffic 10,000 15,000 30,000
Conversion Rate 5% 7% 7%
AOV $30.00 $30.00 $30.00
Bookings/Rev. $3,426 $9,566 $15,000 $31,500 $63,000
Temp3ng to omit..
![Page 51: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/51.jpg)
Key Tenet #3: Supplement w/ Cohort Data
Months Since Start of Cohort
Cumula3ve Repeat Rate
![Page 52: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/52.jpg)
Key Tenet #4: Create a Narrative to Explain it All
• Outline reasons for changes in each major driver of the model
• Includes comparable data
• Ties back to planned initiatives/investments
![Page 53: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/53.jpg)
Tips and Tricks1. Build monthly model all the way across
2. Standardize your employee build
3. Clearly identify inputs
4. Check a random month- BY HAND
5. Spot check big jumps
6. Re-check your out years vs. public companies
![Page 54: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/54.jpg)
Getting Started…
• Identify key drivers (top line and bottom line)
• Gather historical data
• Design revenue build
• Look for comparables to build out-year cost assumptions
• Bridge gap between out years and today w/ specific assumptions
![Page 55: Building a Financial Model That Actually Works](https://reader034.vdocument.in/reader034/viewer/2022051512/54438b25b1af9fbc0e8b4592/html5/thumbnails/55.jpg)
Model TemplateSource
• Founder Friendly Venture Capital (FFVC.com)
• http://articles.businessinsider.com/2012-02-08/markets/30381256_1_model-cash-flow-statement-startups
My Modifications
• Removed some non-essential debt components
• Changed revenue build-up section
• Removed fundraising tabs