Financial_Model_Tom_hoster_cleantech_open_academy_2012

Tom [email protected]

Financial ModelingTom Hoster

June 23, 2012

3 Cleantech Open Confidential Information – All Rights Reserved

Agenda

Why Financial Modeling?

Some Accounting Basics

Financial Modeling!

Metrics

What Do Venture Capitalists Want?

Some Recommended Reading

Summary

Why Financial Modeling?


Financial Modeling

You can’t save the world if you go out of business.

• To stay in business, you need funding.• To get funding, you need a business model.• A solid business model needs a financial model.


The Financial Model Defines the Path to Success

Awesome Product

The Financial Model quantifies the Business Model

Business Model

Great Strategy

ResultsFinancial

Model


Financial Model: Optimizing Strategy

• It communicates the model and the vision– Just as an “Architect’s Model” conveys a building’s design

• Documents the company’s business model– Translates the strategy into an investor’s return

• Calculates cash requirements to meet milestones• Provides critical metrics for tracking achievement

– Promoting operational discipline• It shows that you understand your business


The Financial Model: Critical for Companies at All Stages

• You are already generating revenues and you are starting to ramp the operation:– The model provides a roadmap to your

milestones, with the required metrics. • You are still at the development stage:

– The model shows that you understand the business you are creating.

They’re investing in a business, not a product.

Accounting Basics


Financial Statements

Financial Statements consist of three things: • Balance Sheet • Income Statement (or P&L)• Cash Flow



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Income Statement

Cash Flow

Income Statement

Cash Flow

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Income Statement

Cash Flow

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Income Statement

Cash Flow

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Balance SheetBa

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Assets Liabilities

Equity

Cash $$$Accts. Rec. $$$

Inventory $$$

Fixed Assets $$$

Accts. Payable $$$Accrued Liabs. $$$

Short Term Loans $$$

Stock $$$Income (Loss) $$$

Long Term Loans $$$



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Income Statement

Cash Flow

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Balance SheetBa

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Assets Liabilities

Equity

Cash $$$Accts. Rec. $$$

Inventory $$$

Fixed Assets $$$

Accts. Payable $$$Accrued Liabs. $$$

Short Term Loans $$$

Stock $$$Income (Loss) $$$

Long Term Loans $$$

Working Capital



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Income Statement

Cash Flow

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Income Statement

Cash Flow

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Income Statement



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Income Statement

Cash Flow

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Income Statement

Operating Expenses

Revenues $$$

Gross Profit $$$

Research & Development $$$Sales & Marketing $$$General & Administrative $$$

Cost of Goods Sold $$$

Net Income (Loss) $$$



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Income Statement

Cash Flow

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Income Statement

RevenuesCost of Goods Sold

Gross Profit Operating Expenses

Research & Development

$$$

General & AdministrativeSales & Marketing

$$$

$$$$$$$$$

$$$

Net Income (Loss) $$$

Margin %%%

GAAPSalaries & BenefitsRentTravel & Entertainment

Natural Account



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Income Statement

Cash Flow

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Income Statement

Cash Flow

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Cash Flow

Purchases of Fixed AssetsFunds Received from Investors

Important Stuff:

Cash Flow

(Lots of Stuff)



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Income Statement

Cash Flow

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Financial Modeling!


Putting Together a Financial Model

When I Build a Financial Model:• I use Microsoft Excel• I start with a blank spreadsheet

– and go from there • No templates

– No “how-to” books

“The Value is in the Journey, not in the Destination”

- Tom Hoster, June 2012


Elements of a Financial Model

• Assumptions• Overall Summary • Income Statement • Balance Sheet• Cash Flow• Headcount • Actuals to Date• Comparables

• Revenues by Product Line• COGS/Margins • Operating Expenses

• R&D• Sales & Marketing• G&A

• Financial Metrics• Non-Financial Metrics • Investor ROI/Valuation/Cap

Table

Projections should go out to an exit


Basic Financial Model

Income Statement

Balance Sheet

Cash Flow

Gross Profit

Net Revenues

Cost of Goods Sold

Operating Expenses

R&D Expenses

Sales Expenses

Marketing Expenses

G&A Expenses

Headcount Expenses

Capital Expenditures

Depreciation Working Capital


What drives Revenues and Expenses?

Income Statement

Balance Sheet

Cash Flow

Operating Expenses

Gross Profit

R&D Expenses

Net Revenues

Cost of Goods Sold

Sales Expenses

Marketing Expenses

G&A Expenses

Headcount Expenses


Depreciation

Income Statement

Balance Sheet

Working Capital

What drives Expenses?

What drives Revenues?


Revenue Drivers: One Possibility

Income Statement

Balance Sheet

Cash Flow

Operating Expenses

Gross Profit

R&D Expenses

Net Revenues

Cost of Goods Sold

Sales Expenses

Marketing Expenses

G&A Expenses

Headcount Expenses


Depreciation

Income Statement

Balance Sheet

Last Year’s Revenues

Times 150%

Working Capital


Revenue Drivers: One Possibility

Income Statement

Balance Sheet

Cash Flow

Operating Expenses

Gross Profit

R&D Expenses

Net Revenues

Cost of Goods Sold

Sales Expenses

Marketing Expenses

G&A Expenses

Headcount Expenses


Depreciation

Income Statement

Balance Sheet

Size of Market

Growth in Market

Company Penetration

Working Capital


Revenue Drivers: Another Possibility

Income Statement

Balance Sheet

Cash Flow

Operating Expenses

Gross Profit

R&D Expenses

Net Revenues

Cost of Goods Sold

Sales Expenses

Marketing Expenses

G&A Expenses

Headcount Expenses


Depreciation

Income Statement

Balance Sheet

Working Capital

Number of Salespeople

Revenue Ramp per Salesperson



Income Statement

Balance Sheet

Cash Flow

Operating Expenses

Gross Profit

R&D Expenses

Net Revenues

Cost of Goods Sold

Sales Expenses

Marketing Expenses

G&A Expenses

Headcount Expenses


Depreciation

Income Statement

Balance Sheet

Working Capital

Landlords Closed

Buildings per Landlord

Light Fixtures per Building



Income Statement

Balance Sheet

Cash Flow

Operating Expenses

Gross Profit

R&D Expenses

Net Revenues

Cost of Goods Sold

Sales Expenses

Marketing Expenses

G&A Expenses

Headcount Expenses


Depreciation

Income Statement

Balance Sheet

Working Capital

Spend-to-Lead Ratio

Average Size of Deals

Lead-to-Close Ratio

Marketing Spend


Income Statement

Balance Sheet

Cash Flow

Operating Expenses

Gross Profit

R&D Expenses

Net Revenues

Cost of Goods Sold

Sales Expenses

Marketing Expenses

G&A Expenses

Headcount Expenses


Depreciation

Income Statement

Balance Sheet

Modeling will Show the Linkages

Working Capital

Metrics


Income Statement

Balance Sheet

Cash Flow

Operating Expenses

Gross Profit

R&D Expenses

Net Revenues

Cost of Goods Sold

Sales Expenses

Marketing Expenses

G&A Expenses

Headcount Expenses


Depreciation

Income Statement

Balance Sheet

Modeling will Provide Financial Metrics

Revenues per Headcount

Marketing as a % of Revenues

Revenues per Salesperson

EBITDA

Working Capital

Cash Required

Months to Breakeven


Income Statement

Balance Sheet

Cash Flow

Operating Expenses

Gross Profit

R&D Expenses

Net Revenues

Cost of Goods Sold

Sales Expenses

Marketing Expenses

G&A Expenses

Headcount Expenses


Depreciation

Income Statement

Balance Sheet

As Well As Non-Financial Metrics

Buildings per Landlord

Lead-to-Close Ratio

Subscriber Churn Market

Share Gains

Working Capital

“Super Users”


Income Statement

Balance Sheet

Cash Flow

Operating Expenses

Gross Profit

R&D Expenses

Net Revenues

Cost of Goods Sold

Sales Expenses

Marketing Expenses

G&A Expenses

Headcount Expenses


Depreciation

Income Statement

Balance Sheet

And … Sanity Checks

Working Capital

Each Salesperson is going to close

HOW much?

You’re going to pay each Salesperson

HOW much?

You’re going to generate leads at HOW much per lead?

HOW much space are you going to rent?


More on Metrics

What Metrics Should You Track?• The Drivers!

– of Revenues and Expenses

Don’t be like the drunk at the lamppost …


An Example of an Actual Financial Model

Total Revenues

Services Rev. Assumptions

Renewal/Churn Assumptions

Total Operating Expenses

Won/Lost Ratio

SRL/Opps Ratio

MQL/SRL Ratio

Spend/MQL Ratio

Deals per Enterprise Sales Rep

Number of Enterprise Sales Reps

New Enterprise Deals Booked

InvoicingPayment

Frequency

Revenues per Enterprise Deal

Total Enterprise Subscription Revenues

Existing Enterprise Deals

Enterprise Existing-Deal

Subs. Revenues.

Enterprise Existing-Deal

Services Revs.

New Mid-Market Deals Booked

Mid-Market Opportunities

MM Sales Ready Leads

MM Market Qualified

Leads

Marketing Spend on

Mid-Market

“Other” Mid-Market Deals

Existing Mid-Market Deals

InvoicingPayment

Frequency

Renewal/Churn Assumptions

Revenues per Mid-Market Deal

Mid-Market New- Deal Services

Revenues

Mid-Market New- Deal Subscription

Revenues

Mid-Market Existing-Deal

Subs. Revenues.

Mid-Market Existing-Deal

Services Revs.

Total Mid-Market Subscription Revenues

Enterprise New-Deal Services

Revenues

Enterprise New-Deal Subscription

Revenues

Sample CompanyFinancial Model Logic

R&D Headcount

R&D Spending

Enterprise Sales

Headcount

Enterprise Sales

Spending

Total Enterprise Revenues

Total Mid-Market Revenues

= Information is split into the three geographies

Mid-Market Sales

Headcount

Mid-Market Sales

Spending

Services Headcount

Services Spending

Services Revs. per

Headcount

Customer Value

Headcount

Customer Value

Spending

Pre-Sales Support

Headcount

Pre-Sales Support

Spending

Marketing Headcount

Marketing Spending

G&A Headcount

G&A Spending

Total Partner Revenues

Deals per Mid-Market Headcount

Income Statement

Recruiting

( … they can getcomplicated …)


Model … et cetera

Model

Budget

Plan

Forecast

Model

“What we could do”

Plan

“What we should do”

Forecast

“What we will actually do”

Budget

“What we will do”

What do Venture Capitalists Want?


Venture Capitalists

Venture Capitalists are interested in three things:

1. Their Returns2. Their Returns3. Their Returns


Venture Capitalists

So your model should show maximum returns (if it can):

Bad GoodHuge Capital Required Modest

Long Time to Profitability Short

Elusive Revenue Drivers Predictable

Complex Expense Drivers Straightforward

High Risks/Uncertainty Low





More Recommended Reading

Summary


Financial Model:

• Critical to understanding your business model– And showing that you do understand it!

• Provides a detailed roadmap of next several years– Promotes operational discipline for execution

• Provides dozens of – Financial Metrics – Non-Financial Metrics– Sanity Checks … for credibility

• Important to communicating the business model

Tom [email protected]

Financial_Model_Tom_hoster_cleantech_open_academy_2012

Economy & Finance

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