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    Building a Financial Model

    June 17, 2023

    2min read Building a Financial Model Building a financial model is an important aspect of running a startup and achieving investor funding. Below, we learn how to create a quick version of the financial model, how to capture assumptions and drivers, and what mistakes to avoid in financial modeling. Quick Version of the Financial Model When setting up your fundraising plan at a high level, set a revenue target five years out. Then, draw a line from today to that five-year mark. Your fundraise and hiring plan will come from that. To calculate this quick and dirty version of the financial model, follow these steps: Start with current revenue. Apply your organic growth rate and map out your top-line revenue for five years. Calculate your revenue per person metric. Apply your expenses for five years using the revenue per person metric. Identify the negative profit line.  Set your fundraise to cover the negative working capital. If the amount is greater than one million dollars, break the fundraise into two rounds. This will give you a rough idea of how much you need to raise and how many people you will need to hire.  Assumptions and Drivers In building out your financial model, make explicit the assumptions you are using and identify the drivers in your business. Create a tab on your financial modeling spreadsheet for assumptions and drivers for the investor to review. As you build out the revenue forecast, capture the assumptions behind the growth rate. For the costs, make clear which are fixed and which are variable costs. Identify the drivers within the business. Typically, this is the number of products sold or the number of customers signed up. This drives the revenue line as well as the variable costs. For example, the more customers targeted for revenue, the higher the cost of sales and sales commission. Investors look to see if the costs align with the revenue forecast. Understanding what drives your revenue and costs will help you build out your financial model and create more accurate projections. Mistakes to Avoid in Financial Modeling Your financial model can be used not only for fundraising but also for running your startup. Avoid these mistakes in setting up your financial model: Tying your revenue to a factor that doesn’t actually drive revenue. Instead, figure out what actually drives sales and build your model around that. Trying to identify exact numbers for factors such as conversion rate. Instead, use a range of numbers to account for variations. Skipping the research into companies in your sector. Instead, spend time looking at similar companies to find out what drives their business. Trying to include too many drivers in your business model. Instead, focus on the top drivers that account for the majority of your sales. Setting up the financial model for generating financial statements only. Instead, set up the model so it also calculates key performance indicators. Design the spreadsheet for running the business in addition to raising funding.  Read More TEN Capital Education Here Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group

    Tips For Using Your Financial Model

    December 22, 2021

    2 min read Financial models contain numerical data about the past, present, and future of your business. This information can be used to make business decisions, analyze the financial health of the company, and can also be presented to potential investors. In this article, we provide tips for using your financial model. Using Your Financial Model in Your Pitch The financial model is a key component of your pitch. You should be using key financial numbers from the model to tell the story of how your business can scale up. To do this, start with your unit economics to show the business works. Show how the systems you have built drive the business using the financial model. Highlight the market size and how fast the market is growing as well as how you will go to market if you are in the early stage. Call out key cost figures to demonstrate you know the numbers that drive your customer acquisition process and retention rates. Show how you will use the funds by pointing to the costs for building products, generating leads, or closing sales. Show your cash burn and how the fundraise will give you runway. The financial projections alone don’t tell the story of your business. You have to pull out key numbers to tell the story. Using Your Financial Model in Your Pitch Deck Many founders cut and paste cells from the financial model spreadsheet into a slide. This renders the information unreadable as the spreadsheet doesn’t fit with the presentation format. To show your financial projections, consider the following: Don’t cut and paste from the spreadsheet. Investors cannot take in a detailed spreadsheet on a slide, only the high-level information. Instead, choose specific numbers from your financial model and place them into the slide using the same font and format as the rest of the deck. Choose three sets of numbers: Revenue, costs, and profits. For these categories, show last year, this year, and projections for the next three years. This provides a five-year window into the company. For each of the three categories, create a line graph. Avoid hockey sticks as investors will discount those numbers as unrealistic. Investors will look for the growth rate you are projecting. They will look to see when you go cash flow positive. Investors will look at the burn rate on the profit line and then check the fundraise to see how much cash runway you are proposing. The key takeaway regarding how to present your financial projections is the importance of calling out three key numbers such as the growth rate, months to cash flow positive, and the number of months of cash runway. How Investors Use Your Financial Model Investors use the financial model to understand not only the business but also to learn about the founder and their skills.  Here are some key points investors look for: Salaries: How well is the team compensated, and does this fit the stage of the business? Customer acquisition and retention: Have you built a system for acquiring customers and retaining them? Traction: What traction do you have going so far? Knowledge of the business: How well do you know the costs of running the business as well as what factors drive revenue? Scale factors: Based on the costs and customer acquisition model, how well can the business scale? Use of funds: How are you are going to spend the funds raised? Does it make sense for the stage of the business? Potential outcome: Is this a venture business or a lifestyle business? Consider how the investor will view your deal in building out your financial projections.  Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

    What to Include in Your Financial Model

    December 22, 2021

    2 min read  Your Financial Model will consist of several KPI’s, or key performance indicators. The metrics show the business’s overall health and can influence business decisions. You will also share the metrics with investors to glean financial projections when choosing whether or not to invest. Below, we cover several KPI’s to include in your financial statements. Cost of Goods Sold (COGS) The cost to build and deliver your product or service. This includes the building costs of the product or hours to deliver the service.  Capital Expenditures  This KPI accounts for investments into assets. This includes real estate, intellectual property, equipment, facilities, buildings, computers, servers, and office equipment. Depreciation  Depreciation represents the reduced value of assets based on their useful lifetime. One can expense a portion of the value each year over the life of that asset.  Personnel Expenses  Each employee has a salary, benefits, and payroll taxes. Payroll taxes are a calculation off of the salary. In addition, commissions need to be included but are variable expenses related to sales.  Financing  Any financing you have must also be accounted for in the financial statements. So you’ll need to set up a tab in your spreadsheet to capture the details of a loan or other types of financing, such as accounts receivable financing. Valuation  For later-stage startups with revenue, one can use the financial projections to estimate the company’s valuation for fundraising purposes. Your financial projections should have the key elements, including projected cash flows, a chosen discount factor, and a net present valuation of the free cash flows to generate the DCF valuation. Operating Expenses Operating expenses are the day-to-day expenses a business incurs. They support the operational side of the business covering sales, marketing, product development, and administration. Working Capital Working capital is the capital you need to run the business’s daily operations and includes anything converted to cash. This includes cash, accounts receivables, and inventory. Accounts payable reduces your working capital as you must pay it out each month. Taxes  Taxes include payroll and social security taxes, which are based on employees’ salaries and are paid monthly. In addition, income taxes are taken from your profit and loss statement results.  Revenues  For sales forecasting, begin with your current sales funnel and revenue history. Next, use your current sales process for the first two years and then switch to your growth initiatives in years three to five.   Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

    Financial Models for Startups

    December 16, 2021

    2 min read A financial model is a summary of a company’s financial performance for a set duration of time. Financial models can be used externally to share information with investors and internally to make important business decisions. In this article, we look at what you need to include when building your financial model, the benefits of using an up-to-date financial model, and possible uses. What To Include in a Financial Model When you are building your financial model, make sure to include the following: Revenue projections: This is an estimate of revenue from all sources. Cost of Goods Sold: This projects how much it will cost to build and deliver the product or service. Customer acquisition costs: This is an estimate of the sales and marketing expenses required to acquire the customer. Operating expenses: This is the cost of running your business, such as the monthly price for office space and utilities.  Capital expenditures: This is an estimate of the cost to acquire physical assets such as equipment and machinery. Cash runway: This refers to the amount of cash available based on operations as well as any fundraises. It is also useful to include metrics such as customer acquisition cost and customer lifetime value. Benefits of Using a Financial Model An up-to-date financial model is a must-have for every startup as it can help you make management decisions. It can be used to: Determine what positions to hire and when. Measure the performance of the team and highlight problem areas. Shows areas that are out of their target cost or performance zone such as having too much of a given resource. Determine your valuation range for a fundraise or exit event Find ways to reduce the risks in the business. Create consistent results by managing both cost and revenue drivers. Provide ongoing monitoring of the business. Consider setting up the financial model for daily and monthly operational use as well as for fundraising. Ways To Use a Financial Model After building your financial model you can use it in several ways. Examples of use cases include: Raising funding for the business by determining how much you need to raise and when. Generating financial forecasts and projections for managing the business. Projecting key financial statements such as profit and loss statements, balance sheets, and cash flow statements. Setting up budgets for daily management of the business, particularly around cash flow. Determining hiring decisions including what roles to fill and when. Setting strategic plans for growing the business. Estimating the value of the business for negotiating acquisitions by other companies.    Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

    Building A Financial Model

    December 7, 2021

    2 min read Building a financial model is an important aspect of running a startup and achieving investor funding. Below, we learn how to create a quick version of the financial model, how to capture assumptions and drivers, and mistakes to avoid in financial modeling. Quick Version of The Financial Model When setting up your fundraising plan at a high level, set a revenue target five years out. Then, draw a line from today to that five-year mark. Your fundraise and hiring plan will come from that. To calculate this quick and dirty version of the financial model, follow these steps: Start with current revenue. Apply your organic growth rate and map out your top-line revenue for five years. Calculate your revenue per person metric. Apply your expenses for five years using the revenue per person metric. Identify the negative profit line.  Set your fundraise to cover the negative working capital. If the amount is greater than one million dollars, break the fundraise into two rounds. This will give you a rough idea of how much you need to raise and how many people you will need to hire.  Assumptions and Drivers In building out your financial model, make explicit the assumptions you are using and identify the drivers in your business. Create a tab on your financial modeling spreadsheet for assumptions and drivers for the investor to review. As you build out the revenue forecast, capture the assumptions behind the growth rate. For the costs, make clear which are fixed and which are variable costs. Identify the drivers within the business. Typically, this is the number of products sold or the number of customers signed up. This drives the revenue line as well as the variable costs. For example, the more customers targeted for revenue, the higher the cost of sales and sales commission. Investors look to see if the costs align with the revenue forecast. Understanding what drives your revenue and costs will help you build out your financial model and create more accurate projections. Mistakes To Avoid in Financial Modeling Your financial model can be used not only for fundraising but also for running your startup. Avoid these mistakes in setting up your financial model: Tying your revenue to a factor that doesn’t actually drive revenue. Instead, figure out what actually drives sales and build your model around that. Trying to identify exact numbers for factors such as conversion rate. Instead, use a range of numbers to account for variations. Skipping the research into companies in your sector. Instead, spend time looking at similar companies to find out what drives their business. Trying to include too many drivers in your business model. Instead, focus on the top drivers that account for the majority of your sales. Setting up the financial model for generating financial statements only. Instead, set up the model so it also calculates key performance indicators. Design the spreadsheet for running the business in addition to raising funding.   Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

    Key Points to Know Before Building Your Financial Model

    December 6, 2021

    2 min read The financial model summarizes a company’s performance using key factors such as revenues, assets, cost of goods sold, and more. The information derived from this model is used to create financial projects about future years’ performance. In this article, we look at key metrics including cash flow, financial model outputs, and the purpose of financial projections derived from the financial model. Key Metrics to Capture Your financial statements will generate a wealth of metrics on your business called Key Performance Indicators (KPI). Investors want to know these metrics, and they are useful to you as a business owner as well. Metrics help you focus your efforts on the important things. You can use them to identify new opportunities for growing sales and reducing costs. Key metrics for the overall health of the business include sales growth, gross margin, and profitability. For cash flow, you’ll find the burn rate, runway, and fundraise requirements will be useful. For recurring revenue, businesses measure the cost of customer acquisition, track the lifetime value of a customer, and indicate the churn rate.  Cash Flow The most important financial statement is the cash flow statement as cash is the most important financial metric for the business. If you run out of cash, you most likely will have to put the business on hold or shut it down entirely. There are two ways to account for cash: cash-based accounting and accrual-based accounting. As a startup, you’ll want to focus on cash-based accounting as it matches expenses with cash more tightly. The cash flow statement will give a runway number of months of operation. Run what-if scenarios based on different outcomes of the sales funnel. If your runway falls to six months or less, you must take steps such as launching a round of fundraising. It’s also helpful to understand your costs — you have variable and fixed expenses. Variable expenses rise and fall with sales activity, while fixed expenses stay the same regardless of activity. In the early days of the startup, you want to push as many expenses into the variable side as you can. As you grow larger, you’ll want to move from variable to fixed expenses as the overall cost will be lower.  Outputs of The Financial Model A financial model provides three outputs- key financial statements, an operational cash-flow forecast, and key metrics for the business. Key financial statements include the profit and loss statement (P&L), the balance sheet (BS), and the cash-flow statement (CF). The P&L shows revenue matched with costs and indicates whether or not you are profitable over a period of time. It can be used to compare different time periods such as this year versus last year or this quarter versus last quarter. It’s often used to compare the actual results with the budget.  The balance sheet shows the company’s assets and liabilities. This is a snapshot in time. The difference between assets and liabilities must always equal shareholder equity (assets = liabilities + equity). The cash-flow statement shows cash inflows and outflows over a period of time. Key metrics include gross margin, profit margin, cash runway, and more.  Purpose of Financial Projections Your company’s financial projections document, also called the pro forma, is a key document you’ll need for your fundraise. Investors will want to see a detailed, five-year financial projection to show that you’ve thought through the financial side of the business.  A quality financial projection shows investors you know your business and have a good idea about what things cost and what customers will pay. Investors also glean from the financial projections how you are going to use the funds they offer you. Financial projections are not about predicting the future with great accuracy, but instead showing the causalities and interdependencies of your business. This document answers questions such as: If sales double, what is the impact on costs? If sales drop by 50%, what happens to cash flow?  Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://staging.startupfundingespresso.com/calculators/ Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: hallmartin@tencapital.group.

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