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Intro to Financial Modeling - EI

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What is Financial Modeling
What is Financial Modeling
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Intro to Financial Modeling - EI

  1. 1. Intro to Financial Modeling Eastside Incubator February 20th, 2013 Martin Zych Finance Director, Limeade @martinzych
  2. 2. what is financial modeling?
  3. 3. + = Financial Modeling?
  4. 4. + = Financial Modeling?
  5. 5. you wish
  6. 6. almost
  7. 7. A Financial Model answers key questions 1. How big can this business really get? 2. How fast can it grow? 3. What will it take to achieve this?
  8. 8. A Financial Model answers key questions 1. How big can this business really get? 2. How fast can it grow? 3. What will it take to achieve this? = How much can this company be worth in the future?
  9. 9. Two methodologies 1st – Top Down Market “If we can get only 1% of a $10 billion dollar market = we could make $100 million dollars a year! Let’s Go!” - Startup Financial Modeling Newbies
  10. 10. What investors hear… 1st – Top Down Market “If we can get only 1% of a super competitive, already saturated, $10 billion dollar market = we could have a 1 in 100 chance to make $100 million dollars a year! Let’s Go!” - Startup Financial Modeling Newbies
  11. 11. And most investors will think…
  12. 12. 2nd methodology Bottoms up modeling Inputs Model Revenue
  13. 13. Measurable Inputs are actionable. When they occur (the model), an Output = Revenue occurs
  14. 14. How much does each customer spend? = ARPU (Average Revenue / Customer) How will we acquire customers? At what conversion rates? How much do we spend to get each customer? How long will it take? = CAC (Customer Acquisition Cost) How many customers try out, then stop using our product? = Churn Rate % Inputs What is the average life time of a customer? 1/Churn Rate = Avg Customer Life Time (CLT) How much does it cost to support a customer? =COGS $ / # of Customers
  15. 15. The Basic Math [ Remember to define the proper period for each (/mo, qtr, yr) ] ARPU (Average Revenue / User) = Revenue / # Users CAC$ = S&M Costs Q(1) / # of New Users Q(1) CAC (Customer Acquisition Cost) Ratio =(Gross MarginQ(2)– GMQ(1))*4 / (Sales & Marketing Costs Q(1)) Bad: CAC < 1/3 = Sales & Mktg costs pay for themselves in over 3 years Good: CAC > 1 = Sales & Mktg costs pay for themselves within a year Churn Rate = Σ(Users who stop using service in period) / Σ(Total Users @ start of period) Avg Customer Life Time (CLT) = 1/Churn Rate
  16. 16. Customer Lifetime Value = [(ARPU-COGS/User) x CLT] – CAC) = Customer Lifetime Value If CLTV > 0 means you have a potentially profitable business. Yippee! Note: with more info, or on more mature companies we’d use Contribution Margins and NPV
  17. 17. More Math Growth Rate # of Users P(1) - # of Users P(0) r= # of Users P(0) Estimated Users in N periods = Users x (1+r)^n Brain Teaser: How do you quantify an avg monthly growth rate into how many weeks to double user base?
  18. 18. More Math Growth Rate # of Users P(1) - # of Users P(0) r= # of Users P(0) Estimated Users in N periods = Users x (1+r)^n Brain Teaser: How do you quantify an avg monthly growth rate into how many weeks to double user base? log(2) Est. Weeks to Double = 52 x log(1+r)
  19. 19. Test these basic metrics on a small scale as early as possible.
  20. 20. Then infer what your model can do once funded and at scale
  21. 21. Now how do I model this?
  22. 22. Standards / Inputs • Use Consistent Coding Standards • Never hardcode variables • Focus on format & structure first. Inputs can come later. • Start model off with standard inputs – Company Name, Departments (if applicable) – Make all data flow throughout the model
  23. 23. Common Excel Functions you should learn • Logical functions: – IF(), AND(), OR(), SUMIF() • Arrays {} • {Transpose()} • Offset() • Countif() • Vlookup(), Hlookup(), lookup() • Index(), Match() • Financial: – PMT(), PPMT(), IPMT() • Date Functions: – EOMONTH(), EDATE(), Day(), Month(), Year() 25
  24. 24. Fire up Excel and create…. individual tabs for: • Inputs • Market (today’s example) • Revenue (today’s example) • Staffing • Costs • CapEx • Debt • SumFS [Summary Financials] • Charts [& Metrics]
  25. 25. Inputs / Processing • The Inputs tab takes all sections + adds headcount driven expenses and creates one place to process the outputs of P&L, Cash Flows, Balance Sheet
  26. 26. Market • Clearly define: – What you’re producing and selling The Marketing Funnel – Who your customer is Social Media – How you’re going to grow your PR customer base (mktg funnel) or product production • Some Revenue Model Calculation Methods: Leads – Referral / Viral Growth – Biz Dev / Sales Deals – Marketing Spend (CPA model) – Subscription Model Opportunities – Store Counts – Production driven inputs (Manufacturing) New Customers!
  27. 27. Demo Company • SaaS B2C Business • Acquires customers via – SEM – Affiliates • Customers pay via – Subscription model • 1%/mo churn (SaaS industry standard)
  28. 28. Excel Model Tab Create calculations for: • SEM • Affiliate sign ups – New users from affiliates • Churn – 1%/mo Result = # of Customers!
  29. 29. Revenue • Once we know how many customers we have at any given time or products we’ll produce, we can calculate: – Product Mix / Parallel products – Average $ per Transaction – Average # of Transactions/mo – Renewal rates – Traffic driven revenue (i.e. advertising revenue) and much more… 31
  30. 30. Excel Revenue tab Subscription Model Basic Plan Pro Plan •$10/mo •$50/mo • Core product •Core + •90% purchase •Premium Analytics •10% purchase
  31. 31. Costs – we won’t model in detail but: • Once Revenue section is built out: – We understand the rough size/scale of the business revenue-wise – With customer or user counts, we can put together COGS for Production/Hosting – Can infer staffing needs through sanity check of X Customers = Y Service reps/QA/Account mngrs... – Add outsourced costs / special projects in the plan (contractors, engineering pushes, PR pushes & campaigns, etc.) – Set expenses driven per headcount and/or per dept.
  32. 32. Costs • Common Dept Cost Categories: – Staffing • Salaries • Payroll Taxes & Benefits • Other Staffing – Travel – Facilities – Equipment • Equipment Depreciation Exp • One Time Non-Capital Exp • Equipment Employee Exp – Outside Support – Marketing
  33. 33. HOMEWORK - Excel Costs tab CREATE… • Staffing Expenses for: – Staff of: • CEO, Marketing Manager, Dev, and a few blanks TBH – Payroll taxes (Social Sec, Medicare, ESD, etc) – Benefits • Outside support for – Legal, Admin, Engineering Contractor
  34. 34. CapEx We’re not going to model CapEx today but… • Capital Expenditures are driven by: – Large one time purchases (facilities, equipment etc) or per New Hire (computer, software, office equipment, licensing, etc). – Create a section with a cap limit & schedules. • Anything under this is immediately expensed. (Usually set between $500-1500. Ask your CPA.) • Anything over this limit is depreciated (MACRS, Straight-line etc.) Depends on standards you set for your company. 36
  35. 35. Debt We’re not going to model a debt tab today but… • Debt financing schedules – Contain calcs to figure out loan/note repayments – Interest Expense for Pro-Formas – Commonly used excel formulas of: • PMT(), PPMT(), IPMT() Use these together and you can easily figure out principal vs interest paid over time on debt. 37
  36. 36. HOMEWORK - Excel Charts tab Bring Data In Calculate • Revenue • ARPU • Expenses • CAC • Net Income • CLT • Customers • CLTV • Cash
  37. 37. Once done, the model provides: • Pro-Forma Income Statements • Pro-Forma Balance Sheets • Pro-Forma Cash Flows • Business Charts & Metrics 39
  38. 38. Company Name PRO-FORMA INCOME STATEMENTS ($000's) FY Ended FY Ended FY Ended FY Ended FY Ended FY Ended ($1,000s) Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 REVENUE By Revenue Type Ad revenue --w eb (Total) $1 $301 $2,341 $4,510 $5,621 $6,635 Site Skinning Sales $ $3 $30 $553 $1,147 $1,538 $1,923 Content Rev $0 $178 $6,897 $12,683 $18,885 $20,729 Featured Fyreball Rev $0 $38 $370 $1,233 $2,750 $5,820 Total Revenue $3 $547 $10,160 $19,572 $28,794 $35,107 COST OF GOODS SOLD Content Costs $0 $0 $0 $0 $0 $0 Bandw idth Costs Monthly $6 $24 $36 $60 $96 $180 Ad serving cost - Total $ $0 $3 $18 $36 $44 $52 Operations $0 $178 $511 $811 $988 $1,407 Total Cost of Goods Sold $6 $205 $566 $907 $1,128 $1,639 GROSS MARGIN ($3) $342 $9,595 $18,666 $27,666 $33,468 % of Revenue -101% 63% 94% 95% 96% 95% OPERATING EXPENSES Sales $0 $171 $652 $952 $2,430 $3,951 % of Revenue 0% 31% 6% 5% 8% 11% Marketing $16 $286 $755 $1,101 $2,435 $4,000 % of Revenue 507% 52% 7% 6% 8% 11% Development $272 $1,563 $2,212 $3,070 $5,229 $7,544 % of Revenue 8607% 286% 22% 16% 18% 21% Admin $83 $585 $1,060 $1,699 $2,385 $2,976 % of Revenue 2629% 107% 10% 9% 8% 8% Total Operating Expenses $371 $2,605 $4,679 $6,822 $12,479 $18,472 % of Revenue 11743% 476% 46% 35% 43% 53% Incom e Before Int & Taxes ($374) ($2,263) $4,916 $11,844 $15,187 $14,996 % of Revenue -11845% -413% 48% 61% 53% 43% Interest Income $4 $64 $70 $346 $782 $1,249 Other Expense ($2) ($6) ($54) ($102) ($148) ($180) Other Taxes ($0) ($8) ($152) ($294) ($432) ($527) Incom e Before Taxes ($371) ($2,213) $4,779 $11,795 $15,389 $15,539 Income Taxes $0 $0 $768 $4,128 $5,386 $5,439 NET INCOME ($371) ($2,213) $4,011 $7,667 $10,003 $10,100 % of Revenue -11763% -404% 39% 39% 35% 29%
  39. 39. Company Name PRO-FORMA BALANCE SHEETS ($000's) FY Ended FY Ended FY Ended FY Ended FY Ended FY Ended Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 ASSETS Current Assets Cash $170 $470 $4,047 $11,396 $21,117 $31,092 Receivables $0 $77 $1,109 $1,764 $2,523 $3,098 Other Current Assets $0 $0 $0 $0 $0 $0 Total Current Assets $170 $548 $5,155 $13,160 $23,640 $34,190 Other Assets Property, Plant & Equipment $13 $67 $84 $117 $202 $229 Accumulated Depreciation ($1) ($14) ($39) ($71) ($112) ($161) Other Noncurrent Assets $0 $0 $0 $0 $0 $0 Total Other Assets $11 $53 $45 $46 $91 $67 TOTAL ASSETS $182 $600 $5,201 $13,207 $23,731 $34,257 LIABILITIES Current Liabilities Credit Line $0 $0 $0 $0 $0 $0 Accounts Payable $17 $29 $38 $94 $268 $395 Accrued Expenses $0 $0 $0 $0 $0 $0 Salaries Payable $23 $122 $164 $244 $459 $493 Payroll Taxes Payable $5 $24 $33 $49 $92 $99 Income Tax Payable $0 $0 $530 $718 $808 $1,065 Deferred Revenue $0 $0 $0 $0 $0 $0 Other Current Liabilities $0 $0 $0 $0 $0 $0 Total Current Liabilities $44 $176 $765 $1,105 $1,626 $2,052 Long Term Liabilities Capital Lease $0 $0 $0 $0 $0 $0 Note Payable $0 $0 $0 $0 $0 $0 Other Noncurrent Liabilities $0 $0 $0 $0 $0 $0 Total Long Term Liabilities $0 $0 $0 $0 $0 $0 TOTAL LIABILITIES $44 $176 $765 $1,105 $1,626 $2,052 Stockholders' Equity Preferred Stock $410 $2,910 $2,910 $2,910 $2,910 $2,910 Common Stock $0 $0 $0 $0 $0 $0 Retained Earnings $0 $0 $0 $0 $0 $0 YTD Profit (loss) ($273) ($2,485) $1,525 $9,192 $19,195 $29,295 Total Stockholders' Equity $137 $425 $4,435 $12,102 $22,105 $32,205 LIABILITIES & EQUITY $182 $600 $5,201 $13,207 $23,731 $34,257
  40. 40. Company Name PRO-FORMA STATEMENT OF SOURCES AND USES ($000's) FY Ended FY Ended FY Ended FY Ended FY Ended FY Ended Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 BEGINNING CASH $0 $170 $470 $4,047 $11,396 $21,117 SOURCES OF CASH Net Income ($273) ($2,213) $4,011 $7,667 $10,003 $10,100 Add Depreciation and amort. $1 $13 $24 $32 $41 $50 Issuance of Stock $410 $2,500 $0 $0 $0 $0 Issuance of Debt $0 $0 $0 $0 $0 $0 Plus Changes in: Accounts Payable $17 $12 $9 $56 $174 $127 Accrued Expenses $0 $0 $0 $0 $0 $0 Salaries Payable $23 $99 $42 $80 $215 $35 Payroll Taxes Payable $5 $20 $8 $16 $43 $7 Income Taxes Payable $0 $0 $530 $188 $89 $257 Deferred Revenue $0 $0 $0 $0 $0 $0 Other Current Liabilities $0 $0 $0 $0 $0 $0 Other Noncurrent Liabilities $0 $0 $0 $0 $0 $0 Capital Lease Obligations $0 $0 $0 $0 $0 $0 Notes Payable $0 $0 $0 $0 $0 $0 Total Sources of Cash $183 $432 $4,625 $8,038 $10,565 $10,576 Uses of Cash Less Changes in: Receivables ($0) $77 $1,031 $656 $759 $575 Inventory $0 $0 $0 $0 $0 $0 Other Current Assets $0 $0 $0 $0 $0 $0 Other Noncurrent Assets $0 $0 $0 $0 $0 $0 Property and Equipment ($13) $55 $17 $33 $85 $26 Total Uses of Cash ($13) $132 $1,048 $689 $844 $601 CHANGES IN CASH $170 $300 $3,576 $7,349 $9,721 $9,975 ENDING CASH $170 $470 $4,047 $11,396 $21,117 $31,092
  41. 41. Summarized in Charts such as: Company 2010-11 Rev/GM/NIBT $4 Rev GM $3 NIBT Cash $2 Millions $1 $0 ($1)
  42. 42. Business Metrics & Targets 44
  43. 43. Business Metrics & Targets 45
  44. 44. That’s just the tip of the iceberg
  45. 45. That’s just the tip of the iceberg Adding in department level spending Accrual basis AR/AP Depreciation & Amortization Taxes & NOL Inflation adjustments Milestone & Fundraising timing SUPER DEEP DCF: Discounted Cash Flow Analysis Current and Future Valuations ROI: Return on Investment And more….
  46. 46. Questions I’d like to know…. ? contact ? Ask Me Now http://about.me/martinzych martin.zych@limeade.com @martinzych 48
  47. 47. Questions contact http://about.me/martinzych martin.zych@limeade.com @martinzych 49

Hinweis der Redaktion

  • How big can this business get? Is this a $10M run rate business or a $100M business at maturityHow fast can it grow? What are our key KPI’s in the business, the things that show leverage = more $ = exponential growthWhat will it take to achieve this? How much $ do I have to raise?
  • How big can this business get? Is this a $10M run rate business or a $100M business at maturityHow fast can it grow? What are our key KPI’s in the business, the things that show leverage = more $ = exponential growthWhat will it take to achieve this? How much $ do I have to raise?
  • Company wide inputs (depts, financing activities, HC/dept driven expenses)RevenueCOGSOperating ExpensesTaxesNet IncomeCash Flow ProcessingBalance Sheet ProcessingAR/AP collectionsSchedules for Tax Payments
  • The model will identify key business drivers &amp; metrics.Common Metrics &amp; Reports:Revenue / Net Income / Gross MarginRevenue by Type / Market# of Users / Customers / Store Count etcAvg. Purchase PriceHeadcount / Staffing CostsMarketing Spend / User or CustomerRevenue per Employee+ any industry specific metrics

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