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?
9. 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?
10. 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
11. 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
15. Measurable Inputs are actionable.
When they occur (the model),
an Output = Revenue occurs
16. 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
17. 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
18. 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
19. 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?
20. 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)
24. 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
27. 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
28. 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!
29. Demo Company
• SaaS B2C Business
• Acquires customers via
– SEM
– Affiliates
• Customers pay via
– Subscription model
• 1%/mo churn
(SaaS industry standard)
30. Excel Model Tab
Create calculations for:
• SEM
• Affiliate sign ups
– New users from affiliates
• Churn
– 1%/mo
Result = # of Customers!
31. 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
32. Excel Revenue tab
Subscription Model
Basic Plan Pro Plan
•$10/mo •$50/mo
• Core product •Core +
•90% purchase •Premium
Analytics
•10% purchase
33. 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.
34. 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
35. 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
36. 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
37. 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
38. HOMEWORK - Excel Charts tab
Bring Data In Calculate
• Revenue • ARPU
• Expenses • CAC
• Net Income • CLT
• Customers • CLTV
• Cash
39. Once done, the model provides:
• Pro-Forma Income Statements
• Pro-Forma Balance Sheets
• Pro-Forma Cash Flows
• Business Charts & Metrics
39
40. 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%
41. 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
42. 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
43. Summarized in Charts such as:
Company
2010-11 Rev/GM/NIBT
$4
Rev
GM
$3 NIBT
Cash
$2
Millions
$1
$0
($1)
47. 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….
48. Questions
I’d like to know…. ?
contact
? Ask Me Now
http://about.me/martinzych
martin.zych@limeade.com
@martinzych 48
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 & metrics.Common Metrics & 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