Building Sound Financial Models

Adam B. HarrisPrincipal

Calacles Consulting Groupwww.calacles.com

Narrate

Ask yourself, what story does the business plan need to tell?

Translation

A good financial model is simply a translation of business plan wording into numbers.

Goal

Build a financial model with variables and links between variables, creating the ability to easily manipulate both variables and links to tell your business story.

Benefits

Flexibility in allowing for month to month operational changes

Clarity in showing client return on investment calculations.

Agility in building visualizations for pitches

Build

Putting it all together.

Deduction

Induction

Variables vs. Assumptions

Assumption

Online Ads will drive my business revenues to 10M by year 5

Variable

“Click-Through-Rates” for online ads are .05%, therefore my site, which receives 100,000 page visits, can convert roughly 50 potential sales

leads per ad campaign.

X

Outline• list the key driving variable of your business

-- group into categories

Marketing Plan•Online Ads•Guerilla Marketing•Sales Calls•Super Bowl Ad

Revenue per Sales•Forecast & Projections•Conversion Statistics•Marketing Plan•Misc.

Product(s) / Service(s)•Cost of Goods•Manufacturing •Development•Milestones

• list how each variable fits together– begin to develop links between key factors

Outline

Ex:

ControlBuild using control inputs to drive the variables, this will allow for easy manipulation making the model useful for monthly management of the business

2008 2009 2010 2011 2012TOOL 10,000$ 35,000$ 50,000$ 75,000$ 125,000$ PR NETWORK 200,000$ 400,000$ 800,000$ 1,500,000$ 2,500,000$ AD BLOCK $s -$ -$ -$ -$ -$

Client Network Spend: 2008 2009 2010 2011 2012LRG CLIENTS - AVG 15,000$ 30,000$ 60,000$ 120,000$ 200,000$ MID CLIENTS - AVG 10,000$ 20,000$ 40,000$ 80,000$ 150,000$ SML CLIENTS - AVG 5,000$ 10,000$ 20,000$ 30,000$ 50,000$

2008 2009 2010 2011 2012LRG 2% 4% 6% 8% 10%MID 4% 6% 8% 10% 12%

SML 10% 15% 20% 25% 30%

2008 2009 2010 2011 2012LRG 10% 15% 25% 25% 25%MID 20% 26% 31% 32% 32%SML 25% 30% 44% 42% 41%

REVENUES CONTROLS

ACME INC. MARKETING BUDGET

PR NETWORK: CLIENT CAMPAIGN BUDGETS

B2B SERVICE: MARKETING $s CONV

B2B SERVICE : CLIENT TYPE CONV

Key Components of a Financial Model• The Core Five

– Revenues: the channels from which your business generates revenue and how much from each stream

• Sales & Marketing Plan

– Cost of Goods (COGS): the cost of selling your product or service

– Operational Expenditures (OPEX): how much your business spends in order to properly operate

– Income Statement: how much net profits or losses your business will incur during a period of time

– Cash Flow: how much cash your business generates and uses during a given time period

Other Components of a Financial Model• In a Later Phase

– Capital Expenditures (CAPEX): money spent acquiring or upgrading physical assets i.e. Property

– Balance Sheet: summary of a company’s assets, liabilities and share holders equity at a given time period

– Working Capital: how well a company manages its current assets vs. current liabilities

Note: These are all important components however each are late stage accounting statements -- mostly required by investors when raising capital or for monitoring purposes after raising a venture round

Case Study• PalmerRogovHarris Laboratories

Concept vs. Company

Adam B. Harris | PrincipalCalacles Consulting Group | www.calacles.com

E: aharris@calacles.com P: 510.821.4499