While concept, business model, impact, and
Not only do the numbers need to make sense, but they need to be presented in a way that is familiar, and digestible, to investors.
Unfortunately, financial modeling requires significant expertise in accounting, planning, and spreadsheet creation and use. Few entrepreneurs have the skills or experience to tackle this task. But it must be done, and it must be done well.
This section provides a framework of how we would like to see your financials presented. It is as much for our “Deal Leads” and temporary CFO expert partners as it is for entrepreneurs. If you think you’re up for it, bravo. If you need some help, let’s talk. We can introduce you to folks that can review your existing actuals and plans and help you think through the implications of one set of initiatives or another.
In Excel (or Numbers for Mac users) create a spreadsheet with multiple “tabs”:
From your accounting system, Quickbooks for example, find reports for your P&L, Balance Sheet, and Cash Flow Statements. Set those reports to show Annual numbers… i.e. 2016, 2017, etc.
Get the two full prior years, and current year-to-date.
Use the “Expanded Mode”, so all the detailed line items show. Don’t use the “transaction detail” mode, we don’t need to see every entry.
Export each of those reports (P&L, Balance Sheet, Cash Flow) to Excel. Copy those sheets into the Financial Planning Spreadsheet you created in Step 1, in the “Actuals” tab. Be sure that the column headings line up (so all the 2017 figures are in the 2017 column, for example).
If you don’t have an accounting system, you’re not ready to even begin thinking about investors. Rather, contact SCORE to get help setting up and accounting system.
We developed this template for two reasons:
You’ll notice that we have included ALL the core financial statements on one page, but that each statement is very short and very high level. It is extremely valuable to be able to tell the story of your company, with numbers, on one page. The detail can be there, in backup reports (and on detail-level tabs in your master spreadsheet), but investors want to quickly grasp the high level position of the company.
Oftentimes we’ll see company financials with the “actuals” and “forecasts” presented separately. Investors hate that. One thing investors always look at is change from period to period. “Is it reasonable this company is going from $5,000 to $5M in sales in one year?”, we’ll ask? (Spoiler alert: probably not…) Similarly, the first step in analyzing financial forecasts is looking at how they compare to actual past performance.
Financial forecasting starts with 4 things:
If you don’t have those 4 things, create them before starting to do financial forecasting.
With those 4 things, open the “Business Model” tab and either copy in your existing financial forecasting work, or create it.
While creating that detailed forecast, here are a couple hopefully helpful hints:
Within the P&L section of the Template, you’ll notice that both Revenue and COGS have two line items: one is for your current, existing business and the other is for the incremental Revenue or COGS that you expect to happen enabled by the proposed investment.
So, put all your historical actuals (including “Current YTD”) in the row “Revenue: Current and Growth of Current Business”, as well as your forecasts for the future for that part of your business. All the revenue you expect the investment will enable should go in the row “Change in Revenue (+/-) based on Use of Funds”.
Similarly, all of your historical cost of goods sold (including “Current YTD”) should go in the row “COGS”, and all the COGs associated with the “Change in Revenue…” row should go in the “COGS Change (+/-) based on Use of Funds” row.
It might be that you have more than one bundle of activities (what we think of as “Projects”) you’ll use the investment money for. If so, in the “Use of Funds” section, list each of those Projects, list how much you’ll spend on that Project, and show how it will affect Revenue, COGS, or Expenses in the forecast years.
In the example above, the company is raising $100k to do three projects: buy production equipment, hire a sales rep, and re-engineer the factory floor for greater production efficiencies. They expect:
The net result of all this?
Why do this? We’re trying to get a handle on the efficiency of capital usage, in other words, how much bang do you expect to get for the buck.
Revenue typically drives financial results. At a high level, we’ll look at the relative size of the business (“is this a $20k a year business or a $20M a year business”) and the growth rates from period to period. Super high growth rates, particularly between actuals and forecasts, always raise red flags.
At a detail level, on your “Business Model” tab, we’ll want to see Units and Selling Price/Unit per product line, with particular attention to period to period changes in both and the mix of product lines within the total.
Since revenue is so important, we’ll look hard at the amount of new revenue you expect to generate because of the investment.
The main problem we typically see with COGS projections are wildly optimistic projections of how fast, and how much, COGS will change because of the Projects enabled by the Investment.
Our first pass look at this will be reviewing Gross Margin %, which is the ratio of Gross Margin (Rev – COGS) to Revenue. Gross Margin %’s typically change slower, and less, than people think they’re going to. If you have big changes in Gross Margin %, be prepared to justify those with more spreadsheet detail.
Gross Margin % also impacts the eventual choice of financing vehicle. For example, investors typically think businesses suitable for Revenue-Based Financing should have Gross Margin % above 60%.
Here’s what Investors like to see:
Here’s what Investors don’t like to see:
Managing Receivables, Payables, and Inventory can have a significant effect on a company’s cash flow. We’ll look to see the level of these items. If they’re material, we’ll want to investigate further.
Existing debt load is very, very important to us. We need to know the number and amounts of all the debt you hold, including:
The Cash Flow Statement is probably the most important of all the financial statements. When you run out of cash, you’re toast! When you have lots of extra cash, you can invest in the business, or take money off the table and enjoy a well earned vacation.
Many accounting programs, like Quickbooks, create a Cash Flow Statement that is super hard to read and understand. We prefer to break out the cash flow story into three sub-stories:
What we’re looking for here is that you understand you cash situation, both by managing it well in history and in balancing the level of investment with the cash needs of the business.
Oftentimes we’ll see Ending Cash Balances go up very dramatically. You’d think this would be good, but in reality it usually signals an unrealistic revenue/margins forecast, or the lack of thinking about re-investing excess cash in the business, or forgetting that a growing business needs “working capital”.