Finalizing Business Model and P&L Statements

1. This presentation is made possible by the support of the American People through the United States Agency
for International Development (USAID). The contents of this presentation are the sole responsibility of Rick
Rasmussen and do not necessarily reflect the views of USAID or the United States Government.
Building a Financial Model
1

2. The Financial Model
Investors don’t put their money into ideas.
They put their money into businesses…
Your financial model is your ‘real’ business plan
Revenues
Profits
Cash needs
Hiring plans
Runway
Plus a sensitivity analysis
2

3. Philosophy
Build your models to answer questions such as:
Is this a real business?
Can it make money?
Will it scale?
Proof Points. Show evidence and traction
Your results to date
Comparable companies in the market
Investors will test every line item
Revenues
Margins
Expenses
Cash flow

4. A typical timeline
4
Cash flow positive

5. Revenue timeline varies by market type…
Existing
Market
Re-Segmented
Market
New
Market
Year
1
Year
2
Year 3 Year 4
Year 5
Year 6
Year 7

6. Basic Financial Statements
Income Statement:
Also referred to as a profit and loss statement (P&L)
Revenues – expenses = profits
Stated over a series of reporting periods
Balance Sheet:
A "snapshot of company's financial condition”
Assets = liabilities + owner's equity
Cash Flow Statement:
Shows how changes in balance sheet accounts affect cash
Operations, Investment and Financing activities

7. Investors expect:
5-year Income Statement
CEO should build first Income Statement
Get to know the format and numbers intimately
Yearly in the presentation
Detailed breakdown for due diligence
Year 1-2 are Quarterly (or even monthly)
Year 3-5 are annual

8. Income Statement: Basic Structure
Revenue
- Cost of Goods Sold (Variable costs)
= Gross Profit (Rev – COGS)
Gross Profit
- Expenses (Fixed Costs)
R&D
Sales and Mktg
General and Administrative (G&A)
= Net Profit [Gross Profit - Expenses]
+/- Other Income (expense)
= Net Income

9. Building your financials bottom-up
Begin with things that are easy for you, fill in the rest as you go
i.e. if you know your headcount or expenses best, start there
List out your key assumptions
Revenues by product line
Cost of goods sold
Headcount (Salaries)
Overhead (Rent, Legal…)

10. Revenues
Work from your time line
Break out every one of your products or services
List assumptions
Units sold per period
Estimate ASP (avg selling price)
Length of sales cycle
Channels and commissions
Churn, Returns, etc.
Each company’s business model will differ
Benchmark vs. Competition
Make sure that it passes the “common sense” test

11. Company Timeline
Q3Q1 Q2 Q7Q6 Q8
Cash
Flow Positive
Series B $7M
Started
company
MVP
Full
Production
Q9
Series A $2M
Second
prototype
Closed
Beta
1st alliance
signed
Seed $100K
Q4 Q5
Employees: 4 6 9 10 11 14 18 22
24
Q10
1M
Users

12. Our example business: NewCo
Two product lines with a services component
First Product Line:
Fast growing “existing product”
Sales starting month 2
Lower margins à high COGS
Second Product Line:
Slower growing “new product”
7 month design cycle to MVP
Slow to get traction but high growth. high profit
Services business:
Scales with headcount

13. NewCo Short-Term Revenue Assumptions
Yr 1 Q1 Yr 1 Q2 Yr 1 Q3 Yr 1 Q4 Yr 2 Q1
Product 1 Units Sold 150 600 2400 9600 12000
ASP $15 $20 $25 $25 $25
Total $K $2.25 $12 $60 $240 $300
Product 2 Units Sold 25 75 100
ASP $0 $50 $75
Total $K $0 $3.75 $7.5
Services and
Maintenance
Total $K
$5 $10 $20 $40

14. NewCo 5 year Revenue Assumptions
Year 1 Year 2 Year 3 Year 4 Year 5
Product 1 K Units 12.75 50 200 500 750
ASP $24.65 $25 $20 $16 $14
$K $314 $1250 $4000 $8000 $10500
Product 2 K Units 0.1 5 25 100 1000
ASP $62 $75 $60 $50 $40
Total
$K
$3.75 $375 $1500 $5000 $40000
Services and
Maintenance $35 $750 $2250 $3500 $5500
Total $K $353 $2375 $7750 $16500 $56000

15. Cost of Goods Sold (COGS):
Unit economics
Variable costs change if you produce more or fewer units
Physical products: Cost of manufacture, shipping, …
Service based: Cost of services (hours)
Virtual based: customer acquisition costs
Gross Margin = Revenue – COGS
Gross margin % =
(Revenue – COGS) / Revenue

16. Product 1: 5 year Costs and Margins
Year 1 Year 2 Year 3 Year 4 Year 5
Product 1 K Units 12.75 50 200 500 750
ASP $24.65 $25 $20 $16 $14
$K $314 $1250 $4000 $8000 $10,500
Unit Cost $20 $18 $15 $12 $10
COGS $255 $900 $3000 $6000 $7500
Gross
Margin
$59 $350 $1000 $2000 $3000
% 9.8% 28.0% 25% 25% 28.6%

17. Product 2: 5 year Costs and Margins
Year 1 Year 2 Year 3 Year 4 Year 5
Product 2 K Units 0.1 5 20 100 1000
ASP $62 $75 $60 $50 $40
Total $K $3.75 $375 $1200 $5000 $40000
Unit Cost $55 $40 $30 $22 $18
COGS $K $5.5 $200 $600 $2200 $18000
Gross
Margin $K ($1.75) $175 $600 $2800 $22000
% (46.7%) 53.3% 50% 44% 45%

18. Services: 5 year Costs and Margins
Year 1 Year 2 Year 3 Year 4 Year 5
Services and
Maintenance
Gross
Income $35 $750 $2250 $3500 $5500
COGS
$5 $25 $100 $150 $200
Gross
Margin $30 $725 $2150 $3350 $5300
Margin % 85.7% 96.7% 95.6% 95.7% 96.4%

19. Expenses: Where to start
• Fixed Cost expenses occur independent of units produced
• Salaries
• Start with a hiring chart by dept.
• Whom do you need & when
• State expected salary
• In the US add ~22% for payroll taxes, benefits, overhead
• Major line items are listed by “department”
– Research & Development (R&D)
• Engineering and development
– Sales & Marketing
• Salaries, commissions, expenses
– General & Administrative
• Management, finance, overhead, rent

20. Headcount: Product Line 1 -- Existing Product
$K Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5
Dir. Engr 150 1 1 1 1 1 1 1 1
Des Engr 120 1 2 2 3 3 2 1 1
Prod Engr 110 1 1 2 2 3 3 3
Apps Engr 100 1 2 3 3 2
Mkg 100 1 1 2 2 2 2 2 1
Sales 100 1 1 2 2 1 1
Support 70 1 1 1 1 1
Staff 50 1 1 1 1
Headcnt 3 5 7 11 14 15 13 11
Salaries
$K
$93 $150 $200 $300 $1450 $1540 $1320 $1120

21. Headcount: Product Line 2 – New Product
$K Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5
Dir. Engr 150 1 1 1 1 1 1 1
Des Engr 120 1 2 2 3 3 4 6 8
Prod Engr 110 1 2 2 3 3 3
Apps Engr 100 1 2 3 4 5
Mkg 100 1 1 1 1 2 2 2 3
Sales 100 1 2 2 2 3
Support 70 1 1 1 1 1
Staff 50 1 1 1 1
Headcnt 2 4 5 10 14 17 20 25
Salaries
$K
$55 $123 $150 $275 $1450 $1780 $2120 $2660

22. Headcount: Services and Maintenance
$K Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5
Dir. Svrcs 120 1 1 1 1 1 1
Mgrs 90 1 2 2 2 3
Cust Srvc 60 1 2 3 3 3
Engrs 80 1 1 2 2 2 3
Staff 50 1 1 1 1
Headcnt 2 4 8 9 9 10
Salaries
$K
$50 $88 $630 $690 $690 $780

23. Headcount: General & Administrative
$K Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5
CEO 150 1 1 1 1 1 1 1 1
COO 120 1 1 1 1
CFO 110 1 1 1 1
Controller 100 1 1 1 1 1 1 1
Finance 70 1 1 1 2 4 4 5 5
VP Ops 110 1 1 1 1
Operations 70 1 3 5 7 8
Staff 50 1 1 2 4 4 4
Headcnt 2 3 4 6 14 18 21 22
Salary $K $55 $80 $98 $133 $1200 $1440 $1650 $1720

24. Building out Salaries
Q1 Q2 Q3 Q4 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
R & D 97 222 250 337 906 1860 2080 2300 2740
Sales &
Mktg
50 50 130 194 524 1360 1420 1320 1510
G & A 55 80 98 133 366 1350 1590 1800 1870
Overhead X 1.22
R & D 119 271 305 411 1105 2269 2538 2806 3443
Sales &
Mktg
61 61 195 237 639 1659 1732 1610 1842
G & A 67 98 120 162 446 1647 1940 2196 2281
Salaries 247 430 620 810 2190 5575 6210 6612 7566

25. Non-Salary Expenses
R&D
Subcontractors and outsourced engineering
Non-depreciated tools, servers
Marketing and Sales
Trade shows
Mktg campaigns
G&A
List IP, legal, accounting expenses
Large expenses like rent, legal, travel
Either put into G&A or divide among departments as a % overhead

26. Adding in other expenses
Q1 Q2 Q3 Q4 Yr 2 Yr 3 Yr 4 Yr 5
Rent 2 3 4 4 20 30 40 50
Travel 1 1 2 3 20 40 50 60
Legal 10 5 8 8 40 60 80 100
Accounting 5 3 3 4 20 30 40 50
IT 5 5 5 5 20 25 30 35
Consultants 2 4 6 40 50 60 70
Marketing
Campaigns
2 8 20 20 100 100 100 100
Reserves 10 10 15 15 100 150 200 300
Total 35 37 51 65 360 485 600 765

27. NewCo Profit & Loss
Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 5%
Revenues Product Line 1 $314 $1250 $4000 $8000 $10500 18.8%
Product Line 2 $4 $375 $1500 $5000 $40000 71.4%
Srvcs & Maint $35 $750 $2250 $3500 $5500 9.8%
Total Revenue $353 $2375 $7750 $16500 $56000 100%
Cost of Sales $265 $1125 $3700 $8350 $25700 45.9%
Gross Income $88 $1250 $4050 $8150 $30300 54.1%
Expenses R&D $411 2269 2538 2806 3443 6.1%
S&M $237 1659 1732 1610 1842 3.3%
G&A $162 1647 1940 2196 2281 4.1%
Other $65 360 485 600 765 1.4%
Net Income (787) (4685) (2645) 938 21969 39.2%

28. Questions:
Is this a venture fundable business?
What is the likelihood of an exit?
Was it reasonable to run three separate product lines?

29. Later on:
For Due Diligence:
Business Plan Balance Sheet
Business Plan Cash Flow statement
Growth assumptions and monies projected
for next round(s)

30. Financial Traps
• Underestimating marketing and sales expenditures
– Especially while “Crossing the Chasm”
– Engineers: I’m speaking to you
• Underestimating time to:
– Raise money
– Hire key personnel
– Collect Accounts Receivable
• Underestimating cash burn

31. Financial Team Timing
Bootstrap Revenues/seed Series A/B exit
CPA
setup
You or
part-time
bookkeeper
CPA and
Attorney
Review
Full-time
Bookkeeper
or Controller
Controller
and
Part-Time
CFO
Hire
CFO

32. A Word of Caution
This material is not sufficient to
run your day-to-day operations
If you haven’t already…
It’s worth taking a basic accounting
course
Focus on Financial Statements,
Reporting, Auditing
Be Smart. Money is
Important..!