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Financial_Model_Tom_hoster_cleantech_open_academy_2012
- 2. Financial Modeling Tom Hoster June 23, 2012
- 3. Agenda Why Financial Modeling? Some Accounting Basics Financial Modeling! Metrics What Do Venture Capitalists Want? Some Recommended Reading Summary 3 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 5. 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. 5 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 6. The Financial Model Defines the Path to Success Awesome Product Business Model Great Financial Results Strategy Model The Financial Model quantifies the Business Model 6 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 7. 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 7 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 8. 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. 8 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 10. Financial Statements Financial Statements consist of three things: • Balance Sheet • Income Statement (or P&L) • Cash Flow 10 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 11. Financial Statements 12/31/12 12/31/13 12/31/14 Balance Sheet Balance Sheet Balance Sheet Income Income Statement Statement Cash Flow Cash Flow -- 2013 -- -- 2014 -- 11 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 12. Financial Statements 12/31/12 12/31/13 Balance Sheet Balance Sheet Income Statement Cash Flow -- 2013 -- 12 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 13. Financial Statements 12/31/12 Balance Sheet 12/31/13 Assets Liabilities Cash $$$ Accts. Payable $$$ Balance Sheet Balance Sheet Accts. Rec. $$$ Accrued Liabs. $$$ Income Statement Inventory $$$ Short Term Loans $$$ Fixed Assets $$$ Long Term Loans $$$ Cash Flow Equity Stock $$$ -- 2013 -- Income (Loss) $$$ 13 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 14. Financial Statements 12/31/12 Balance Sheet 12/31/13 Assets Liabilities Cash $$$ Accts. Payable $$$ Balance Sheet Balance Sheet Accts. Rec. $$$ Accrued Liabs. $$$ Income Statement Inventory $$$ Short Term Loans $$$ Fixed Assets $$$ Long Term Loans $$$ Cash Flow Equity Working Capital Stock $$$ -- 2013 -- Income (Loss) $$$ 14 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 15. Financial Statements 12/31/12 12/31/13 Balance Sheet Balance Sheet Income Statement Cash Flow -- 2013 -- 15 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 16. Financial Statements 12/31/12 12/31/13 Balance Sheet Balance Sheet Income Statement Cash Flow -- 2013 -- 16 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 17. Financial Statements Statement Income 12/31/12 12/31/13 Revenues $$$ Cost of Goods Sold $$$ Balance Sheet Balance Sheet Gross Profit $$$ Income Statement Operating Expenses Research & Development $$$ Sales & Marketing $$$ GeneralCash Flow & Administrative $$$ Net Income (Loss) $$$ -- 2013 -- 17 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 18. Financial Statements Statement Income 12/31/12 12/31/13 Revenues $$$ Cost of Goods Sold $$$ Balance Sheet Balance Sheet Gross Profit Margin $$$ %%% Income Statement Operating Expenses GAAP Natural Account Salaries & Benefits Research & Development $$$ Rent Sales & Marketing $$$ GeneralCash Flow Travel & Administrative $$$ & Entertainment Net Income (Loss) $$$ -- 2013 -- 18 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 19. Financial Statements 12/31/12 12/31/13 Balance Sheet Balance Sheet Income Statement Cash Flow -- 2013 -- 19 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 20. Financial Statements Cash Flow 12/31/12(Lots of Stuff) 12/31/13 Important Stuff: Funds Received from Investors Balance Sheet Balance Sheet Purchases of Fixed Assets Income Statement Cash Flow -- 2013 -- 20 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 21. Financial Statements 12/31/12 12/31/13 Balance Sheet Balance Sheet Income Statement Cash Flow -- 2013 -- 21 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 23. 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 23 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 24. Elements of a Financial Model • Assumptions • Revenues by Product Line • Overall Summary • COGS/Margins • Income Statement • Operating Expenses • R&D • Balance Sheet • Sales & Marketing • G&A • Cash Flow • Financial Metrics • Headcount • Non-Financial Metrics • Actuals to Date • Investor ROI/Valuation/Cap • Comparables Table Projections should go out to an exit 24 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 25. Basic Financial Model Net Revenues Gross Profit Cost of Income Goods Sold Statement Cash Flow Operating Balance Expenses Sheet Depreciation Working R&D Sales Marketing G&A Capital Expenses Expenses Expenses Expenses Capital Expenditures Headcount Expenses 25 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 26. What drives Revenues and Expenses? What drives Revenues? Net Revenues Gross Profit Cost of Income What drives Goods Sold Statement Expenses? Cash Flow Operating Balance Expenses Sheet Depreciation Working R&D Sales Marketing G&A Capital Expenses Expenses Expenses Expenses Capital Expenditures Headcount Expenses 26 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 27. Revenue Drivers: One Possibility Last Year’s Revenues Net Revenues Times Gross Profit 150% Cost of Income Goods Sold Statement Cash Flow Operating Balance Expenses Sheet Depreciation Working R&D Sales Marketing G&A Capital Expenses Expenses Expenses Expenses Capital Expenditures Headcount Expenses 27 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 28. Revenue Drivers: One Possibility Size of Market Net Growth in Revenues Market Gross Profit Company Cost of Income Statement Penetration Goods Sold Cash Flow Operating Balance Expenses Sheet Depreciation Working R&D Sales Marketing G&A Capital Expenses Expenses Expenses Expenses Capital Expenditures Headcount Expenses 28 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 29. Revenue Drivers: Another Possibility Number of Salespeople Net Revenues Revenue Ramp Gross Profit per Salesperson Cost of Income Goods Sold Statement Cash Flow Operating Balance Expenses Sheet Depreciation Working R&D Sales Marketing G&A Capital Expenses Expenses Expenses Expenses Capital Expenditures Headcount Expenses 29 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 30. Revenue Drivers: Another Possibility Landlords Closed Net Buildings per Revenues Landlord Gross Profit Cost of Income Light Goods Sold Statement Fixtures per Cash Building Flow Operating Balance Expenses Sheet Depreciation Working R&D Sales Marketing G&A Capital Expenses Expenses Expenses Expenses Capital Expenditures Headcount Expenses 30 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 31. Revenue Drivers: Another Possibility Average Size of Deals Net Lead-to- Revenues Close Ratio Gross Profit Spend-to- Cost of Income Lead Ratio Goods Sold Statement Cash Marketing Flow Spend Operating Balance Expenses Sheet Depreciation Working R&D Sales Marketing G&A Capital Expenses Expenses Expenses Expenses Capital Expenditures Headcount Expenses 31 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 32. Modeling will Show the Linkages Net Revenues Gross Profit Cost of Income Goods Sold Statement Cash Flow Operating Balance Expenses Sheet Depreciation Working R&D Sales Marketing G&A Capital Expenses Expenses Expenses Expenses Capital Expenditures Headcount Expenses 32 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 33. Metrics
- 34. Modeling will Provide Financial Metrics Months to Revenues per Revenues per Breakeven Salesperson Net Headcount Revenues Gross EBITDA Profit Cost of Income Marketing as a Goods Sold Statement % of Revenues Cash Flow Operating Balance Expenses Sheet Depreciation Working R&D Sales Marketing G&A Capital Expenses Expenses Expenses Expenses Capital Cash Expenditures Headcount Expenses Required 34 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 35. As Well As Non-Financial Metrics Buildings per “Super Users” Landlord Net Subscriber Churn Market Revenues Share Gains Gross Profit Cost of Income Lead-to- Goods Sold Statement Close Ratio Cash Flow Operating Balance Expenses Sheet Depreciation Working R&D Sales Marketing G&A Capital Expenses Expenses Expenses Expenses Capital Expenditures Headcount Expenses 35 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 36. And … Sanity Checks You’re going to pay You’re going to generate leads each Salesperson Net at HOW much per lead? HOW much? Revenues Gross Profit Cost of Income Each Salesperson Goods Sold Statement is going to close Cash HOW much? Flow Operating Balance Expenses Sheet Depreciation Working R&D Sales Marketing G&A Capital Expenses Expenses Expenses Expenses Capital Expenditures Headcount Expenses HOW much space are you going to rent? 36 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 37. More on Metrics What Metrics Should You Track? • The Drivers! – of Revenues and Expenses Don’t be like the drunk at the lamppost … 37 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 38. An Example of an Actual Financial Model Services Rev. Sample Company ( … they can get Assumptions Number of Enterprise New- Enterprise Deal Services Financial Model Logic Sales Reps Revenues = Information is split into the three geographies Deals per Enterprise Sales Rep New Enterprise Deals Booked Enterprise New- Deal Subscription Payment Frequency Invoicing complicated …) Revenues per Revenues Enterprise Deal Total Enterprise Renewal/Churn Subscription Assumptions Enterprise Total Enterprise Revenues Existing-Deal Revenues Subs. Revenues. Existing Enterprise Deals Enterprise Existing-Deal Services Revs. Total Partner Total Spend/MQL MQL/SRL SRL/Opps Won/Lost Mid-Market New- Revenues Revenues Ratio Ratio Ratio Ratio Deal Services Revenues Marketing MM Market MM Sales Mid-Market New Mid-Market Spend on Qualified Ready Opportunities Deals Booked Mid-Market Leads Leads Payment Frequency Invoicing Mid-Market New- Deal Subscription Revenues per Revenues Total Mid-Market “Other” Mid- Mid-Market Deal Revenues Market Deals Total Mid-Market Renewal/Churn Subscription Assumptions Mid-Market Revenues Existing-Deal Subs. Revenues. Existing Mid- Market Deals Mid-Market Existing-Deal Services Revs. Income Statement Deals per Services Mid-Market Revs. per Headcount Headcount Enterprise Mid-Market Pre-Sales Customer Marketing R&D Services G&A Sales Sales Support Value Headcount Headcount Headcount Headcount Headcount Headcount Headcount Headcount Recruiting Enterprise Mid-Market Pre-Sales Customer Marketing R&D Services G&A Sales Sales Support Value Spending Spending Spending Spending Spending Spending Spending Spending Total Operating 38 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved Expenses
- 39. Model … et cetera Model Plan “What we “What we could do” should do” Budget Forecast “What we “What we will will do” actually do” Model Plan Budget Forecast 39 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 40. What do Venture Capitalists Want?
- 41. Venture Capitalists Venture Capitalists are interested in three things: 1. Their Returns 2. Their Returns 3. Their Returns 41 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 42. Venture Capitalists So your model should show maximum returns (if it can): Bad Good Huge Capital Required Modest Long Time to Profitability Short Elusive Revenue Drivers Predictable Complex Expense Drivers Straightforward High Risks/Uncertainty Low 42 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 44. Some Recommended Reading 44 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 45. More Recommended Reading 45 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved
- 46. Summary
- 47. 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 47 Cleantech Open Academy 2011 | S J | California an ose Cleantech Open Confidential Information – All Rights Reserved