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21.11.2022

Customize financial modeling for your startup

Get acquainted with your company’s ultimate guide to financial modeling: tricks and components. 

By quantifying your business plan, business model, assumptions, and vision, you can discover whether you can pivot your ideas into a sustainably operating business. And in the end, isn’t it what every founder wants? 

When starting a business, a financial model is the second most crucial thing after the idea. How much do you plan to charge for your product? How much do you expect you’ll pay to acquire a customer? How much time do you need to finish development? And how much will those salaries cost until you start generating revenue? 

There are many kinds of financial models, and you can find some basic examples via the first click on Google. Here, we will discuss the principles essential for a forecasting model for financial planning and analysis. 

The effective model should:

  • Take estimated marketing & sales spend 
  • Estimate the revenue generated from marketing & sales spend 
  • Estimate the revenue’s cost: team, office, software, etc. 
  • Answer the question, “Is this combo of variables going to work?”

 If you’ve done an excellent job on your model, you should be able to scale your team and your budget > understand the revenue impact of those changes > and measure how much that will affect your runway.

A financial model usually consists of at least these three outputs: the financial statements, an operational cash flow forecast, and a KPI overview.

The financial statements: there are three of them

  1. The profit and loss statement (P&L)
  2. The balance sheet (BS) 
  3. The cash flow statement (CF). 

The P&L shows several crucial performance metrics, such as the gross margin, EBITDA, and net margin. It is a reflection of the operational performance of a company. 

Your P&L part also consists of a COGS sheet or section that stands for costs of goods sold and relates to the direct costs associated with providing your service. For e-commerce, which resales clothes, for example, COGS is the cost of the clothes or the items sold that the company pays to their suppliers. Most software companies use this section for server costs and other essential tools that the platform needs to be functional (e.i. Amazon). 

If you compare Revenue to COGS, you get the gross margin. That’s the margin your company makes before accounting for the administrative expenses. 

Revenue sheet

Let’s talk about the revenue sheet. A revenue sheet is used to track and estimate your revenue. The tricky thing is that revenue does not magically appear every month or year. You bring this baby home, depending on your business. Market your app via LinkedIn, or pay for the leads from different channels. The bottom line, show how much money you use to find and get that client. 

Look at the approach of how you put your forecast down on paper:

  • Make a list of all the products or services that you are offering.
  • Choose what units you want to present your sales: this could be lipsticks sold for a lipstick company.
  • Forecast the number of units sold. Use the top-down and bottom-up analysis.
  • Add selling prices.

Reality check

If your model estimates a $10,000 a-month marketing budget that doesn’t increase, there is no way, Jose, it makes no sense that your revenue will grow from zero to 10 million dollars by year three. 

Marketing cheat sheet for beginners: 

Facebook ads: a cost per Facebook ad can vary from a couple of cents to a couple of dollars per person, depending on the market’s competitiveness. 

Getting Google search traffic will take you not less than $1 per click, and most keywords require bits of five-six dollars per click or more, and the average conversion rate on a landing page could be around 25%. 

The more you 

For other benchmarks, please search online. 

Important: all these numbers need to be in your model.

Expectation vs. reality 

Your model should unveil the math behind the expected acquisition cost and compare it with the actual result at the end of a month. 

SG&A sheet

Almost every expense that doesn’t classify as COGS goes into the SG&E sheet. That’s sales, general and administrative expenses. It also consists of payroll, marketing costs, travel, office expenses, rent, accounting, consultants, etc. 

Important! 

Link the info from SG&A to your revenue estimations on a SAS platform. That’s a software subscription. You could say that you’ll need to hire a support agent for every 1,000 customers on the platform because the more customers you have, the bigger your support organization should be.

Also, connect the number of active users on your revenue sheet to the number of employees on your SG&A sheet. This act lets you estimate your margins in the future. 

The balance sheet is an overview of everything a company owns and owes at a specific point. It shows a particular period in time and is thus different from the profit and loss statement, which shows all revenues and costs generated during a specific period.

Liabilities show the obligations of a company and how it has financed itself using debt, whereas assets show how these funds are used within the company. 

Capex cheat. 

Here, you list the assets owned by the company. For example, buying a car for a company is not precisely an expense. It’s more of an asset. You no longer have cash flow, but you have the asset that you will have to log in to the model. The number of assets impacts its valuation. Other machines are often assets, not expenses, and must be logged on this sheet.

The cash flow statement

The cash flow shows all cash going in and out of a company over a specific time. The cash flow statement has three elements: 

  1. the operational cash flow,
  2. the investment cash flow
  3. the financial cash flow

These three categories explain where the money goes in and out of the company.

Operational cash flow is the cash influx & efflux generated from core business operations. 

Investment cash flow shows shifts in assets, investments, and equipment. 

Since investing in assets costs money, investment cash flow will have a cash outflow. Still, in some circumstances, investment cash flow can also be positive if a company is divesting, for example selling assets or selling real estate. 

Deep dive into KPI 

Revenue growth rate, gross margin, EBITDA margin, or profits show sales and profitability performance.

Cash flow-related KPIs include burn rate, runway, funding need breakdown, and company.

SaaS businesses typically estimate and track the customer lifetime value (LTV), customer acquisition costs (CAC), LTV/CAC ratio, and churn rate. 

Define crucial KPIs for your realm of business and include these in your financial model.

Financing

 Here are some tips on what to include at this stage:

  • Revenues affect the top line of the profit and loss statement. In the P&L, you subtract all fees, expenses, and depreciation from the payments to arrive at EBIT. EBIT will act as input for the operational cash flow in the cash flow statement. After you withdraw interest and taxes payments from EBIT, you get the net profit. Revenues define the accounts receivable position, thus impacting the balance sheet.
  • As you remember, COGS is also a section in the P&L statement. You will know the gross margin if you deduct them from the revenues. This metric is usually estimated in a percentage. The higher this percentage, the more income you have to cover costs that are not directly related to production. The cost of goods sold defines accounts payable and inventory. 
  • In the P&L section, you also have to include your operating expenses. Revenue – operating expenses – the cost of goods sold from = EBITDA: earnings before interest, taxes, depreciation, and amortization.
  • You can track Personnel either in the profit and loss statement as a separate line or include it in the cost of goods sold or operating expenses. Personnel expenses connected to delivering services or producing goods end up in the cost of goods sold section (COGS). Any other personnel is listed in operating expenses.
  • Capital expenditures (assets investment) do not belong to the profit and loss statement. They are investments, and you can leverage n leverage their value for several years. Therefore, you list them on the assets side of the balance sheet. They are devalued over time, shown as depreciation in the profit and loss statement.
  • Even though investments do not show up as a cost or expense, investing in something results in a cash outflow for your company. Therefore, list them in the cash flow statement as investment cash flow.
  • New financing and changes in debt show up in the cash flow statement as financing cash flow. 
  • Interest paid on debts ends up in the profit and loss statement.

A startup’s financial model supporting elements. 

Working capital

  • Working capital is the relativity between the value of your current assets and liabilities.

Depreciation

  • Depreciation belongs to the profit and loss statement and impacts the value of assets on your balance sheet.

Taxes

  •  Taxes are subtracted from your results in the P&L statement. 

Valuation

Some basic principles to know how much you are worth. (Just kidding, you are priceless, sweetie, but still, use the tips)

  • Step 1: create financial projections for your firm.
  • Step 2: Determine the projected free cash flows.
  • Step 3: Determine the discount factor.
  • Step 4: calculate the net present value of your free cash flows and terminal value using the discount factor.
  • Step 5: sum up all results of step 4.

Conclusion

The two main approaches towards financial modeling. 

  1. The top-down method leverages market size data to build a forecast for your company.
  2. The bottom-up approach uses internal company-specific data such as sales or internal capacity data.

As you see, financial modeling for your startup is a meticulous process, and it takes a great deal of patience to complete the steps mentioned below. From our experience at Fuelfinance, many early-age startups go through many trials and error stages. And while we root for you to learn from your mistakes, we are here to help you avoid them. 

Our finance bros can share the formulas to count CAPEX, EBIT, and churn rate and provide you with the dashboard. See what we did here? We hinted that you could be a perfect CEO without having the precious formula knowledge. 

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