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Financial Modeling for Startups: An Introduction

fivecastfinancial.com

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Re: Financial Modeling for Startups: An Introduction

#21

Post by superice »

projectramo wrote: post #19

The issue is forecasting revenues. Zoom in and the issue is forecasting unit sales. Zoom in and the issue is forecasting new unit sales. In the example, this line does a lot of the work in the model: "Forecasting New Subscriptions (line 10). We've just entered hardcodes here for simplicity, but these could be the result of calculations related to a marketing / sales funnel" I submit that this single assumption will c…

Yes, that is the unknown variable. However, your costs can be steered pretty accurately in software startups through hiring and firing. This means you can easily track whether your sales are still hitting the targets you expected, and if not, how much reduction you can accept into on the costs side before you need to look into getting additional capital investments.

Edit: For existing businesses this metric is much more predictable by the way, but especially in B2B it might be obfuscated because the finance department does not know how much value has been provided for which there was not an invoice created for it yet.

Re: Financial Modeling for Startups: An Introduction

#22

Post by FailMore »

icedchai wrote: post #16

In my experience with early stage startups, these models are often pure fiction and completely divorced from reality. They look nice to investors. Reality is very, very different.

(Ex VC here)

Before you launch, yes (ish) - it can give you an idea of where you'd like to start charging and why. Models come into their own post launch. They provide a clear structure on how to optimise the economics of your business. E.g. If you are currently selling at $20 and losing $3/sale due to support costs and returns, it provides a great structure to focus on a) increasing the price, b) reducing support costs / order and c) reducing returns.

A dream for any VC is a startup with fantastic economics at day 0, but this is rare. The majority of high quality companies have negative unit economics during their infancy. We liked investing in companies with negative unit economics with founders that understood the drivers of their economics deeply and were optimising them aggressively on a weekly/monthly basis (and doing all this inside of a H-U-G-E market). (The best ones did it on a weekly basis.)

An interesting example is Just Eat, one of Europe's best performing startups (IPOed at £1.5bn). This company had negative economics for ~3 years, but the market was very big and investors could see a pathway to positive unit economics through optimisation. This allowed them to fund the company through the negative UE period.

Re: Financial Modeling for Startups: An Introduction

#23

Post by thinkingkong »

cleansy wrote: post #11
thinkingkong wrote: post #3

This is great. If you like this sort of thing you can go one step down the modeling path and take a great coursera course called “Model Thinking” [1] which totally gave me a different appreciation for spreadsheet nerdery (you use lots of different tools). 1. https://www.class-central.com/course/coursera-model-thinking...

Why is it linked to an affiliate website and not coursera itself? EDIT: here the original coursera link: https://www.coursera.org/learn/model-thinking

I was on my phone and couldnt copy the target link without the app opening the page instead. :/

Re: Financial Modeling for Startups: An Introduction

#24

Post by ig1 »

projectramo wrote: post #19

The issue is forecasting revenues. Zoom in and the issue is forecasting unit sales. Zoom in and the issue is forecasting new unit sales. In the example, this line does a lot of the work in the model: "Forecasting New Subscriptions (line 10). We've just entered hardcodes here for simplicity, but these could be the result of calculations related to a marketing / sales funnel" I submit that this single assumption will c…

Broadly speaking you should have a MQL -> SQL -> Deal model (i.e assumptions for ratios between the three) and assumptions for CPL and SQL per SDR/AE.

With these you can tie sales forecasts to marketing spend and sales hires.

Obviously these won't be perfect, but when you're off target you can see why (i.e which assumption was false) and then either try to fix it or correct the false assumption giving you a more accurate model going forward.

Re: Financial Modeling for Startups: An Introduction

#25

Post by ABS »

grenoire wrote: post #9
presscast wrote: post #8

Earlier quoted context omitted.

I've heard that it's rather common to be technically profitable (i.e.: a company has a greater income than expenses), but nonetheless insolvent due to bills coming due before clients pay their invoices. From what I was told, this mostly affects supply-chain heavy companies; software companies are mostly spared this kind of consideration. What are some of the red flags that founders should be aware of when reading the…

I'm currently handling bookkeeping for software companies and one thing that's often overlooked is your clients consistently making late payments on their invoices. Make sure that you know who those client are and schedule accordingly.

DSO (Days Sales Outstanding) is one of the most important numbers to track for any company. If you are a small company it is arguably the most important one to manage cash flow

Re: Financial Modeling for Startups: An Introduction

#26

Post by briancof »

projectramo wrote: post #19

The issue is forecasting revenues. Zoom in and the issue is forecasting unit sales. Zoom in and the issue is forecasting new unit sales. In the example, this line does a lot of the work in the model: "Forecasting New Subscriptions (line 10). We've just entered hardcodes here for simplicity, but these could be the result of calculations related to a marketing / sales funnel" I submit that this single assumption will c…

Won't argue with that, but it's nice to be able to put bounds on the result by using best- and worst-case guesses here.

Re: Financial Modeling for Startups: An Introduction

#27

Post by briancof »

jimnotgym wrote: post #6

Finance person here, this is a good grounding of the basics. The hardest part to take forward is working out the timing of things. A company is constantly owed and owing money, and this is the real trick to working out your funding requirements. On top of the model every business needs an operational cash flow forecast going out say 3 months at least. For every day you enter the brought forward balance from yesterday…

It seems like modeling could help get an idea of the size and frequency of each cash shortfall and thus inform how large a short-term credit line you needed?

Re: Financial Modeling for Startups: An Introduction

#28

Post by jimnotgym »

projectramo wrote: post #19

The issue is forecasting revenues. Zoom in and the issue is forecasting unit sales. Zoom in and the issue is forecasting new unit sales. In the example, this line does a lot of the work in the model: "Forecasting New Subscriptions (line 10). We've just entered hardcodes here for simplicity, but these could be the result of calculations related to a marketing / sales funnel" I submit that this single assumption will c…

Indeed, but when your sales don't meet expectations in month one the model gives you a very strong clue as to what to cut or defer in future months. The model is not the business, it is something to measure the business against.

Re: Financial Modeling for Startups: An Introduction

#29

Post by jimnotgym »

briancof wrote: post #27
jimnotgym wrote: post #6

Finance person here, this is a good grounding of the basics. The hardest part to take forward is working out the timing of things. A company is constantly owed and owing money, and this is the real trick to working out your funding requirements. On top of the model every business needs an operational cash flow forecast going out say 3 months at least. For every day you enter the brought forward balance from yesterday…

It seems like modeling could help get an idea of the size and frequency of each cash shortfall and thus inform how large a short-term credit line you needed?

Indeed negotiating a line of credit often requires a model.

Re: Financial Modeling for Startups: An Introduction

#30

Post by tw1111 »

jimnotgym wrote: post #6

Finance person here, this is a good grounding of the basics. The hardest part to take forward is working out the timing of things. A company is constantly owed and owing money, and this is the real trick to working out your funding requirements. On top of the model every business needs an operational cash flow forecast going out say 3 months at least. For every day you enter the brought forward balance from yesterday…

Hi @jimnotgym, [Using a throwaway account] We built an active cash flow management tool to bridge the gap between finance and non finance people. We would love to hear your feedback on our product. Can you help?
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