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Tom Hostertom.hoster@gmail.com
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?
5 Cleantech Open Confidential Information – All Rights Reserved
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.
6 Cleantech Open Confidential Information – All Rights Reserved
The Financial Model Defines the Path to Success
Awesome Product
The Financial Model quantifies the Business Model
Business Model
Great Strategy
ResultsFinancial
Model
7 Cleantech Open Confidential Information – All Rights Reserved
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
8 Cleantech Open Confidential Information – All Rights Reserved
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
10 Cleantech Open Confidential Information – All Rights Reserved
Financial Statements
Financial Statements consist of three things: • Balance Sheet • Income Statement (or P&L)• Cash Flow
11 Cleantech Open Confidential Information – All Rights Reserved
Financial Statements
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Income Statement
Cash Flow
Income Statement
Cash Flow
12/31/12 12/31/13 12/31/14
-- 2013 -- -- 2014 --
12 Cleantech Open Confidential Information – All Rights Reserved
Financial Statements
Bala
nce
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Income Statement
Cash Flow
12/31/12 12/31/13
-- 2013 --
Bala
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13 Cleantech Open Confidential Information – All Rights Reserved
Financial Statements
Bala
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Income Statement
Cash Flow
12/31/12 12/31/13
-- 2013 --
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Balance SheetBa
lanc
e Sh
eet
Assets Liabilities
Equity
Cash $$$Accts. Rec. $$$
Inventory $$$
Fixed Assets $$$
Accts. Payable $$$Accrued Liabs. $$$
Short Term Loans $$$
Stock $$$Income (Loss) $$$
Long Term Loans $$$
14 Cleantech Open Confidential Information – All Rights Reserved
Financial Statements
Bala
nce
Shee
t
Income Statement
Cash Flow
12/31/12 12/31/13
-- 2013 --
Bala
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Balance SheetBa
lanc
e Sh
eet
Assets Liabilities
Equity
Cash $$$Accts. Rec. $$$
Inventory $$$
Fixed Assets $$$
Accts. Payable $$$Accrued Liabs. $$$
Short Term Loans $$$
Stock $$$Income (Loss) $$$
Long Term Loans $$$
Working Capital
15 Cleantech Open Confidential Information – All Rights Reserved
Financial Statements
Bala
nce
Shee
t
Income Statement
Cash Flow
12/31/12 12/31/13
-- 2013 --
Bala
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Shee
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16 Cleantech Open Confidential Information – All Rights Reserved
Financial Statements
Bala
nce
Shee
t
Income Statement
Cash Flow
12/31/12 12/31/13
-- 2013 --
Bala
nce
Shee
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Income Statement
17 Cleantech Open Confidential Information – All Rights Reserved
Financial Statements
Bala
nce
Shee
t
Income Statement
Cash Flow
12/31/12 12/31/13
-- 2013 --
Bala
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Income Statement
Operating Expenses
Revenues $$$
Gross Profit $$$
Research & Development $$$Sales & Marketing $$$General & Administrative $$$
Cost of Goods Sold $$$
Net Income (Loss) $$$
18 Cleantech Open Confidential Information – All Rights Reserved
Financial Statements
Bala
nce
Shee
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Income Statement
Cash Flow
12/31/12 12/31/13
-- 2013 --
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Income Statement
RevenuesCost of Goods Sold
Gross Profit Operating Expenses
Research & Development
$$$
General & AdministrativeSales & Marketing
$$$
$$$$$$$$$
$$$
Net Income (Loss) $$$
Margin %%%
GAAPSalaries & BenefitsRentTravel & Entertainment
Natural Account
19 Cleantech Open Confidential Information – All Rights Reserved
Financial Statements
Bala
nce
Shee
t
Income Statement
Cash Flow
12/31/12 12/31/13
-- 2013 --
Bala
nce
Shee
t
20 Cleantech Open Confidential Information – All Rights Reserved
Financial Statements
Bala
nce
Shee
t
Income Statement
Cash Flow
12/31/12 12/31/13
-- 2013 --
Bala
nce
Shee
t
Cash Flow
Purchases of Fixed AssetsFunds Received from Investors
Important Stuff:
Cash Flow
(Lots of Stuff)
21 Cleantech Open Confidential Information – All Rights Reserved
Financial Statements
Bala
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Income Statement
Cash Flow
12/31/12 12/31/13
-- 2013 --
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Financial Modeling!
23 Cleantech Open Confidential Information – All Rights Reserved
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
24 Cleantech Open Confidential Information – All Rights Reserved
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
25 Cleantech Open Confidential Information – All Rights Reserved
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
26 Cleantech Open Confidential Information – All Rights Reserved
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
Capital Expenditures
Depreciation
Income Statement
Balance Sheet
Working Capital
What drives Expenses?
What drives Revenues?
27 Cleantech Open Confidential Information – All Rights Reserved
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
Capital Expenditures
Depreciation
Income Statement
Balance Sheet
Last Year’s Revenues
Times 150%
Working Capital
28 Cleantech Open Confidential Information – All Rights Reserved
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
Capital Expenditures
Depreciation
Income Statement
Balance Sheet
Size of Market
Growth in Market
Company Penetration
Working Capital
29 Cleantech Open Confidential Information – All Rights Reserved
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
Capital Expenditures
Depreciation
Income Statement
Balance Sheet
Working Capital
Number of Salespeople
Revenue Ramp per Salesperson
30 Cleantech Open Confidential Information – All Rights Reserved
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
Capital Expenditures
Depreciation
Income Statement
Balance Sheet
Working Capital
Landlords Closed
Buildings per Landlord
Light Fixtures per Building
31 Cleantech Open Confidential Information – All Rights Reserved
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
Capital Expenditures
Depreciation
Income Statement
Balance Sheet
Working Capital
Spend-to-Lead Ratio
Average Size of Deals
Lead-to-Close Ratio
Marketing Spend
32 Cleantech Open Confidential Information – All Rights Reserved
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
Capital Expenditures
Depreciation
Income Statement
Balance Sheet
Modeling will Show the Linkages
Working Capital
Metrics
34 Cleantech Open Confidential Information – All Rights Reserved
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
Capital Expenditures
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
35 Cleantech Open Confidential Information – All Rights Reserved
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
Capital Expenditures
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”
36 Cleantech Open Confidential Information – All Rights Reserved
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
Capital Expenditures
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?
37 Cleantech Open Confidential Information – All Rights Reserved
More on Metrics
What Metrics Should You Track?• The Drivers!
– of Revenues and Expenses
Don’t be like the drunk at the lamppost …
38 Cleantech Open Confidential Information – All Rights Reserved
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 …)
39 Cleantech Open Confidential Information – All Rights Reserved
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?
41 Cleantech Open Confidential Information – All Rights Reserved
Venture Capitalists
Venture Capitalists are interested in three things:
1. Their Returns2. Their Returns3. Their Returns
42 Cleantech Open Confidential Information – All Rights Reserved
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
Some Recommended Reading
44 Cleantech Open Confidential Information – All Rights Reserved
Some Recommended Reading
45 Cleantech Open Confidential Information – All Rights Reserved
More Recommended Reading
Summary
47 Cleantech Open Confidential Information – All Rights Reserved
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 Hostertom.hoster@gmail.com
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