The basics of building the financial models expected by an investor with a focus on Income Statement.

1. Building a Financial Model
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.
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?
Tweak basic assumptions until it does
• 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
Cash flow positive
4

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

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. Income Statement:
Basic Structure
Revenue
•
•
Listed out, product by product
Net out returns and allowances
Cost of Goods Sold (Variable costs)
Gross Profit
(Rev – COGS)
Expenses (Fixed Costs)
•
R&D
•
Sales and Mktg
•
General and Administrative (G&A)
Net Profit [Gross Profit - Expenses]
Other Income (expense)
Net Income

8. The end deliverables
• 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
• For Due Diligence:
– Business Plan Balance Sheet
– Business Plan Cash Flow statement
– Growth assumptions and monies projected for next round(s)

9. Building your financials
• List out your key assumptions
– Revenues by product line
– Costs
– Headcount (Salaries)
– Overhead (Rent, Legal…)

10. Revenue Line
• Work from your time line
• Break out every one of your products or
services
• List assumptions
–
–
–
–
–
Estimate ASP (avg selling price)
Length of sales cycle
Units sold per period
Channels and commissions
Churn, Returns, etc.

11. Example Assumptions
Business Model assumptions
deals
List price
discount
ASP
0
$
$
sales team target
team needed
sales team size
cost / sales team (sales + Appls engineer)
nonsales person cost
marketing people
marketing programs
R&D team
G&A team size
office, building & HR
$
0 $
0
0
$
140000 $
0 $
6
3
200,000
$
3
500,000 $
50%
250,000 $
500,000
1.5
3
250,000
120,000
1
50,000
8
3
$
300,000
$
$
$
$
20
600,000 $
30%
180,000 $
1,500,000
2.4
4.8
275,000
120,000
2
200,000
10
5
$
500,000
$
$
$
$
65
650,000 $
20%
130,000 $
2,500,000
3.38
6.76
300,000
100,000
5
350,000
14
8
$
800,000
$
$
$
$
225
650,000
20%
130,000
2,500,000
11.7
23.4
320,000
100,000
7
500,000
32
11
1,200,000

12. Sales Model Example
4Q
1Q
2Q
3Q
4Q
1Q
10 QL
10 QL
10 QL
10 QL
10 QL
4 PO
•
•
•
•
•
•
•
4 PO
4 PO
4 PO
4 PO
Typical trained sales person does ~16 deals per quarter with ASP of $250K
This translates to a yearly target of $4M per Regional Sales Manager (RSM)
Cost of an RSM with a portion of an SE = $400K (10:1 leverage)
Some deals will be a bit longer, some will be a bit shorter – assuming average of 6 month but will
monitor
Assuming an RSM will close 4 deals out of 10 that he is nursing
We must feed 10 qualified leads per quarter to an RSM
Assumes that an RSM juggles ~20 deals at any given time

13. Revenue Model
R evenue
Ju n e
Ju ly
Au g u st S ep t
O ct
Nov
D ec
1Q 08
N um ber of system s
A vg S elling price
additional upgrades
R evenue
2Q 08
3Q 08
4Q 08
2009
2010
2011
2012
1
200
0
0
0
0
0
0
0
1
200
2
200
3
300
100
12
300
100
28
250
100
45
250
125
110
250
125
200
200
400
1200
4800
9800
16875
41250
• Each company‟s business model will differ
• Make sure that it passes the “common sense” test
• Benchmark vs. Competition

14. Cost of Goods Sold (COGS):
• Unit economics of each individual item sold,
aka Variable Costs
– Product based: product cost
– Service based: cost of services
– Virtual based: customer acquisition costs
• Gross Margin = Revenue – COGS
• Gross margin % =
(Revenue – COGS) / Revenue

15. Expenses: Where to start
• Expenses occur independent of units produced (Fixed costs)
• 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

16. Headcount and salaries
E m p o ye e s
CEO
V P o f E n g in e e rin g
V P o f sa le s
V P o f m k tg
V P o f o p e ra tio n s
D ir o f e n g
S W d e ve lo p e rs
A rch ite ct
CTO
H W d e ve lo p e rs
QA
C o n fig / m fg
sa le s
A p p lica tio n e n g in e e rs
h o tlin e & su p p o rt
A d m in
fin a n ce m a n a g e r
a cco u n tin g m a n a g e r
to ta l
s a la rie s
180000
150000
150000
150000
160000
130000
110000
140000
140000
120000
90000
90000
100000
110000
85000
65000
75000
75000
June
J u ly
1
Au g u s t S e p t
1
1
1
1
O ct
1
1
Nov
2Q10 Q3Q1044Q10
11Q10 2 Q 0 8
Q 08
3 08
Q 08
D ec
1
1
1
1
1
1
1
1
1
1
1
1
1
1
6
1
1
1
1
6
1
1
1
1
1
6
1
1
1
1
3
1
6
1
4
1
1
1
1
7
1
8
1
11
1
14
2
1
1
3
1
1
1
1
1
1
1
8
1
1
1
2
1
1
2
1
2
1
1
1
1
1
1
1
1
1
8
1
1
1
2
1
2
1
1
2
1
1
2
1
1
1
1
1
1
1
1
8
1
1
1
2
1
1
2
2
2
2
1
16
19
25
26
30
1
22011
009
2 2012
010
2013
2011
2014
2012
1
1
1
1
1
1
12
1
1
1
6
2
3
4
2
4
2
2
1
1
1
1
1
1
12
1
1
1
6
2
5
6
2
4
2
2
1
1
1
1
1
1
14
1
1
1
6
2
7
8
4
4
2
2
1
1
1
1
1
1
16
1
1
1
6
2
15
10
6
4
2
2
46
50
58
72

17. Building out Salary Expenses
June
G&A
S&M
R&D
O p s & M fg
J u ly
Au g u s t S e p t
O ct
2 0 .4
1 2 .5
7 7 .9
0
Nov
2 0 .4
1 2 .5
1 0 7 .9
0
D ec
2 6 .7
1 2 .5
1 1 4 .3
0
1Q10 2 Q 0 8
2Q10 3 Q 0 8
3Q10 44Q10
1Q 08
Q 08
2 0 .4
0
9 .2
0
2 0 .4
0
3 8 .7
0
2 0 .4
0
4 8 .7
0
2 0 .4
0
5 7 .9
0
1 5 3 .3
100
4 5 7 .1
0
G&A
S&M
R&D
O p s & M fg
2 4 .9 1
0 .0 0
1 1 .1 8
0 .0 0
2 4 .9 1
0 .0 0
4 7 .2 0
0 .0 0
2 4 .9 1
0 .0 0
5 9 .4 0
0 .0 0
2 4 .9 1
0 .0 0
7 0 .5 9
0 .0 0
T o ta l S a la ry e x p e n s e
3 6 .0 9
7 2 .1 1
8 4 .3 1
9 5 .4 9 1 3 5 .1 4 1 7 1 .7 4 1 8 7 .2 1 8 6 6 .7 8 1 1 3 4 .0 2
20119
200
2012
2010
20131
201
2014
2012
7 4 0 .0
1 0 4 0 .0
2 4 1 7 .1
5 1 0 .0
7 4 0 .0
1 4 6 0 .0
2 4 1 7 .1
5 1 0 .0
7 4 0 .0
1 8 8 0 .0
2 6 3 7 .1
6 8 0 .0
7 4 0 .0
2 9 0 0 .0
2 8 5 7 .1
8 5 0 .0
1 5 3 .3
1 5 3 .3
1 3 6 .6 7 1 7 3 .3 3 3
5 5 6 .2
5 5 6 .2
8 3 .3
8 3 .3
1 7 8 .3
2 0 6 .6 7
5 5 6 .2
140
1 8 7 .0 7
1 6 6 .7 3
6 7 8 .5 5
1 0 1 .6 7
2 1 7 .5 7 9 0 2 .8 0 9 0 2 .8 0 9 0 2 .8 0 9 0 2 .8 0
2 5 2 .1 3 1 2 6 8 .8 0 1 7 8 1 .2 0 2 2 9 3 .6 0 3 5 3 8 .0 0
6 7 8 .5 5 2 9 4 8 .9 1 2 9 4 8 .9 1 3 2 1 7 .3 1 3 4 8 5 .7 1
1 7 0 .8 0 6 2 2 .2 0 6 2 2 .2 0 8 2 9 .6 0 1 0 3 7 .0 0
B u rd e n fa cto r
2 4 .9 1 2 4 .9 1 3 2 .5 3 1 8 7 .0 7
1 5 .2 5 1 5 .2 5 1 5 .2 5 1 2 2 .0 0
9 4 .9 9 1 3 1 .5 9 1 3 9 .4 3 5 5 7 .7 1
0 .0 0
0 .0 0
0 .0 0
0 .0 0
1 8 7 .0 7
2 1 1 .4 7
6 7 8 .5 5
1 0 1 .6 7
1 1 7 8 .7 5 1 3 1 9 .0 5 5 7 4 2 .7 1 6 2 5 5 .1 1 7 2 4 3 .3 1
8 9 6 3 .5

18. 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

19. Adding in other expenses
June
re n t
tra ve l
le g a l
a c c o u n tin g
M is c
IT C a p e x
S e rve rs & C o m m
M a rk e tin g C a p e x
M a rk e tin g T ra d e s h o w s
M k tg C a m p a ig n s
c o n s u lta n ts
E m p lo ye e s s lu s h
bonus
J u ly
2
0 .9
2
3
2 .5
10
Au g u s t S e p t
2
1 .8
2
3
2 .5
9
10
2
2 .1
2
3
2 .5
3
O ct
2
2 .4
8
3
2 .5
3
Nov
5
3 .3
2
3
2 .5
9
4Q10
11Q10 2 2Q10 3 Q3Q10 4 Q 0 8
Q 08
Q 08
08
D ec
5
4 .2
2
3
2 .5
9
5
4 .8
5
3
2 .5
6
10
20
1 7 .1
10
5
6
9
20
2 2 .5
10
5
6
18
20
2 3 .4
10
5
6
3
30
20120
201
2013 1
201
2014
2012
180
1 1 0 .4
50
15
15
48
50
180
120
150
15
15
12
50
180
1 3 9 .2
150
15
15
24
150
180
1 7 2 .8
150
15
20
42
150
50
60
20
27
10
5
6
12
2011 9
200
100
100
200
150
200
150
20
9
200
20
9
300
20
9
400
20
9
500
10
10
20
20
2
1
4
1
4
1
4
1
4
1
40
4
1
4
1
10
3
10
3
10
3
10
3
100

20. Profit & Loss Statement
Revenue
June
July
August Sept
Oct
Nov
1Q10 2Q10
3Q10 4Q08
4Q10 2011
1Q08 2Q08 3Q08
2009
1
1
2
8
24
200
200
200
300
300
50
50
Dec
Number of systems
Avg Selling price
Main & Serices
Revenue
2012
2010
36
250
50
2013
2011
45
250
60
2014
2012
110
250
60
0
0
0
0
0
0
0
200
200
400
2800
8400
10800
13950
34100
Sales & Mktg
Prod Development
G&A
0
21
38
0
66
41
10
62
42
10
74
48
35
104
46
15
141
47
15
155
58
122
567
258
187
697
365
251
712
366
252
691
569
1379
3047
2124
1981
3011
2334
2644
3391
2661
3888
3678
3007
Total Expenses
59
107
114
131
185
202
229
947
1249
1329
1512
6550
7326
8696
10572
$
5,254
$ 23,528
$
150
Total Expenses
Net Income
$
Employees
Expense per employee
Revenue per employee
$ 238
$ 215
$ 195
$ 197
$ 202
$ 174
$ 171
$ 199
$
200
$
204
$
202
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ 11
$
8
$
15
$
93
(59) $ (107) $ (114) $ (131) $ (185) $ (202) $ (229) $ (747) $ (1,049) $
3
6
7
8
11
14
16
19
25
(929) $ 1,288
26
$
1,850
$
142
30
$
3,474
$
147
46
$ 183
50
$ 216
58
$ 241
72
$
147
$ 474
20

21. Basic Income Statement
2005
2010
Revenues
2006
2011
-
2007
2012
2008
2013
2009
2014
Gross Margin
Gross Profit
-
Research and development
840,000
Technology payment
300,000
Sales and marketing
-
750,000
3,600,000
8,450,000
29,250,000
225,000
Costs of sales
900,000
2,112,500
7,312,500
525,000
2,700,000
6,337,500
21,937,500
960,000
1,200,000
1,400,000
3,200,000
-
-
-
25%
11%
-
Net income (loss) from operations
Other income (expense)
2,878,000
8,688,000
30%
660,000
1,100,000
1,600,000
2,300,000
8%
1,760,000
2,540,000
4,060,000
5,878,000
14,188,000
(1,760,000)
Total operating expenses
1,760,000
620,000
General and admin
920,000
(2,015,000)
(1,360,000)
459,500
7,749,500
420,000
100,000
50,000
(940,000)
559,500
7,799,500
139,875
1,949,875
699,375
9,749,375
200,000
Net income (loss) before taxes
(1,560,000)
Taxes
-
Net income (loss)
(1,560,000)
21
300,000
(1,715,000)
(1,715,000)
(940,000)
33%

22. Example: Salesforce.com

23. Balance Sheet
A snapshot at a point
in time.
Assets =
Liabilities
plus shareholder‟s
equity
End of month,
quarter, year.
Marked by similar
periods

24. Cash Flow Statement
Lack of cash kills many businesses
Organized similar to a balance sheet but
looks at:
Cash from
• Operations (day-to-day)
• Investing (investing your cash)
• Financing (how much you‟ve raised)
Statement similar to a Balance Sheet but
a concentration on how much cash is in
the bank.
Reconciles Accounts Receivable as the
single biggest variable.
Important for an ongoing concern but not
critical for financing

25. VC Financial Metrics
•
Market size
– Total Addressable Market
– Initial target market
– Growth
•
Customer acquisition cost
($/customer)
•
Customer Lifetime Value
($/customer)
•
The current round of financing
(e.g., “Seed,” “Series A”)
Revenue
– Focus on year 1, 3 and 5
•
•
Steady State model percentages
for:
–
–
–
–
Gross margin
Sales and marketing expenses
R&D Expenses
Operating income
– How much are you planning to
raise ($)
– What % of company do the new
investors receive (%)
– How long does that money last?
– What milestones are achieved with
that money?

26. A Word of Caution
• This course material discusses a model to predict
company performance
• This 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