How to Build a Basic Financial Model

How to Build a Basic Financial Model

This post was contributed to VentureApp by Kody Myers, business analyst at Paro, an exclusive network of highly vetted on-demand financial professionals.

The word “model” is often tossed around the business world, evoking complicated and intimidating visual images to those unfamiliar with them. But instead of depending on your “friend with an MBA” to back you up, any business owner can and should know the basics of financial modeling. So what is a financial model exactly?

A model is a means of predicting the future, and like a meteorologist forecasting rain, a financial model is really just a volatile “best guess” that should be updated frequently. Models take a set of assumptions (and sometimes your business’s performance history) and forecast a future state. Even though they are predictions, models provide a good benchmark and can help run “what-if” scenarios so you are prepared for any situation.

To start, a model doesn’t have to be exceedingly complicated and can easily be created in a program like Excel. We’ve outlined the foundation of a basic model below as well as tips for maintaining it. We’ve also attached a template to help you get started.

MODELING BASICS

4 tabs that should be in your model:

P&L (PROFIT & LOSS)

A company’s P&L statement (synonymous with an income statement) tracks your revenues and expenses to determine your net income (also known as your bottom line). If you have historical financial statements, it’s wise to make sure your model matches those. If not, stick to the standard layout of a P&L as the output. The most basic layout should follow this format:

Total Revenue $100,000
(Less: Cost of Goods Sold) $20,000
Gross Profit $80,000
(Less: Total SG&A Expenses) $65,000
Net Income $15,000

 

CASH FLOW STATEMENT

Often times, in smaller businesses with simple accounting, the net income from the P&L will be the same as the increase or decrease in cash for that period. However, a cash flow statement adds the element of projecting financing activities like business loans or capital raises. As financing activities do not hit your P&L (since they aren’t considered income), the cash flow statement is crucial to project potential future cash needs, burn rate, and runway.

Cash received from sales $100,000
Less: cash expenses $20,000
Net Operating Cash (cash burn) $80,000
Beginning Cash Balance $200,000
+/- Net Operating Cash $80,000
Plus: cash received from financing activities $50,000
Ending Cash Balance $330,000

 

DEDICATED PERSONNEL TAB

Typically the largest expense for any company is human capital. You need a place where you can accurately project out salaries, benefits, taxes, and raises. You also need to consider potential future employees as your business grows. Remember to include a start date to forecast when a new employee’s salary will be a realized expense on your P&L.

DEDICATED ASSUMPTIONS TAB:

Often, people build assumptions into formulas or scatter them throughout a model. While convenient at the time, this can be confusing in the future when you are deciding which levers you can pull to test different scenarios. Having a dedicated assumptions tab keeps things organized and makes handing off the model to someone else easier, too.

TIPS FOR MODELING

Think carefully through your assumptions

  • It is nearly impossible to accurately project future revenue, however, projecting costs is a different story
  • To make a successful model you should rely on building out costs and the logic behind those costs (i.e what will cause them to increase or decrease)
  • If you have solid logic behind how your costs grow in different sales scenarios, you can start to back into reasonable revenue projections

Nothing should be hardcoded

  • The key to a useful model is one that can function as an interactive tool to play out a variety of “what if” scenarios and accurately adjust to changes in assumptions
  • It takes a LOT of time to update hard-coded values if you want to test different scenarios such as faster growth in the first quarter of the year
  • You’ll forget what to change! If your assumptions are not driven by some cost logic, you will likely forget what needs to be updated if you were to change a revenue growth scenario

Keep things organized

  • Keeping your model organized is essential to making it a useful tool
  • Even the most basic models will have enough assumptions, data points, tabs, and unique outputs making it difficult to remember where everything is and how everything works
  • Consistent formatting and building out tabs that have a clear purpose will help you when you need to come back to your model to test a new hypothesis

It’s our hope that you now have a better understanding of what a model should include. Whether you are the CEO of a Fortune 100 company or an entrepreneur working out of your garage, build a sound financial model so that you aren’t making decisions in the blind.

As a final tip, be cognizant of your time and core competencies. If Excel isn’t your forte, consider finding someone to help you. What might cause you many nights of hair pulling frustration, would be a cinch to an experienced financial analyst and only take a few hours to build.

Editor’s note: the experts at Paro created an Excel model template that could be really useful for many businesses. You can download it here.

Read the original article by Kody Myers here. Click on “Tiếng Việt” on the menu for the Vietnamese translation provided by 500 Startups Vietnam.

San Francisco
814 Mission St., 6th Floor
San Francisco, CA 94103, USA

© 2010-2019 500 Startups

Sam Altman on Founders and the Fear of Rejection

Sam Altman on Founders and the Fear of Rejection

In this episode of Startup School Radio, host and YC partner Aaron Harris sat down with Sam Altman.

Altman has been the president of Y Combinator since February 2014. Earlier, he was the founder of Loopt, a mobile location technology startup that was founded in 2005 and was acquired by GreenDot in 2012.

Later in this episode, Harris interviewed Aarjav Trivedi, the co-founder and CEO of fleet automation startup RideCell. You can listen to the entire episode in Soundcloud right here, or via iTunes.

One particularly interesting part of the episode was hearing Sam talk about how securing contract agreements with U.S. mobile operators was a key milestone for starting Loopt, and how he went about negotiating those kinds of deals as a young founder. This portion started at around 10:00 in the episode:

Aaron : As a 19-year old, how did you get those kinds of relationships? Mobile carriers are not well-known for doing deals with small companies.

Sam : Well, I was 20 by then. And, you know, you just sort of show up. I think one mistake people make is they tell themselves why they can’t do something, rather than letting somebody else tell them no. And sometimes you find out that you can actually do it and the people will do it with you. I think people cut off a huge amount of option value in their lives because they just assume someone is going to not do something. And you may as well find out, because maybe they will do it.

Aaron : It’s something that sounds so shockingly simple, but I think in practice, it’s really, really hard for a lot of people, because of some combination of ego and not wanting to be turned down. That ability to actually say, “No, I’m just going to keep going…”

Sam : I do think it is not wanting to be turned down. And I actually think this is one of the hardest life skills to learn. I think, unlike most of these other things that are bad with bad entrepreneurs, good entrepreneurs are often particularly sensitive to rejection. They take criticism online very harshly. They are afraid to try to hire a candidate because they might say no. And you really just have to say, “You know what? Sometimes people will say yes.”

But I think people, especially first time founders, are just generally extremely insecure and they put a huge value on not even giving somebody else a chance to tell them no or reject them or whatever.

Aaron : How do you advise people to get around that drive for external validation?

Sam : It’s this deeply personal thing. I don’t think there’s any general advice that works. But at some point, people make a decision that, “You know what? I am going to trust myself. I’m going to trust myself to do the right thing. I’m going to decide that I believe in this business and that the haters are going to be wrong and I’m going to get this done.”

If you’re doing something interesting, the chances that some Internet commenter will say that it’s stupid or not going to work is 100%, and the chances that some investor is going to tell you that it’s dumb is 100%. And you either decide that’s how you’re going to live your life, in which case honestly you shouldn’t be a founder if you can’t get past that, or you just say, “You know what? I have the courage of my convictions here and I’m going to go do this.”

It takes people a little while. It takes most of the best founders not very long. It’s an intense problem for a while and then it becomes a minor problem over a course of a month or two. But some people are always…it’s always an intense problem for some people. Even today I hate reading nasty things about YC, or about me personally. But you just say, “You know what? I’d rather be me than the people writing this.” And you move on.

Read the original article by Sam Altman here. Click on “Tiếng Việt” on the menu for the Vietnamese translation provided by 500 Startups Vietnam.

San Francisco
814 Mission St., 6th Floor
San Francisco, CA 94103, USA

© 2010-2019 500 Startups

The Ideal Email Deck

The Ideal Email Deck

Since I wrote a post on how you’ll need multiple pitch decks, I’ve gotten a number of questions around what should go into them.

Today I want to spell out the ideal email deck – at least, ideal if you’re sending it to me. 🙂

Short & sweet
~5 slides is sufficient
Should be skimmable in 10-30 seconds; E.g.
Fonts/colors that are easy to read
Not too much text/content
Include your contact info

The purpose of your email deck is just to get a meeting. It’s not to try to convince me that I should invest. That comes later.

What should go into your 5 slides?

Your email deck should cover the basics. There isn’t a hard-and-fast rule around what “the basics” means. But, for most companies, it will cover something like this (not necessarily in this order):

  • Problem
  • Solution / Your Product
  • Traction / Your Unit Metrics
  • Team
  • Market

Problem – Interestingly, most people glance over this slide. But of all the slides, this is the one that is probably the most important to address and spend the most time on.

How you articulate the problem accomplishes a few things:

  • It gets me excited about your opportunity
  • It gives me a sense of how much you’ve thought about the problem / know what you’re talking about
  • It gives me a sense of your communication skills – your ability to articulate something complex into just 1-2 simple sentences

For example, one of 500 Startups’ portfolio companies called EnvoyNow does on-demand food delivery to the college market. Just when you thought you could not possibly invest in yet another on-demand food delivery company, they were convincing in articulating the problem. Simply: College students order a LOT of food, but existing on-demand delivery companies cannot locate and/or access on-campus locations including dormitories and specific buildings.

Their articulation of the problem not only is very specific and easy-to-grasp, but it also addresses the elephant in the room: there are so many existing on-demand food delivery companies – why would you need another one?

Solution – I see too many companies attempt to address all their features with this slide. Just make it simple. Follow the user experience. Step 1, step 2, step 3, voila!

Traction – Most companies who send me decks don’t include a traction slide. I think it’s because people are embarrassed that they are not very far along or they actually haven’t yet tested the waters.

First off, there’s nothing to be embarrassed by. I’m a seed investor – what would I expect? Any investor who is investing at the seed stage needs to be comfortable with the fact that there’s really not a whole lot of data at this stage, and if seed investors are not cool with this, they really should not be playing at this level.

Secondly, I think it’s important to understand what investors are looking for in this slide. I’m not looking for traction for traction-sake. Every company at this stage – regardless of whether they made $1k last month or $100k last month – is early and far far far away from being a billion dollar business. So, what I want to understand are your customer learnings.

If you are super duper early and don’t have meaningful revenue, show me what you’ve learned by testing the market. This is something that EVERY company should be able to do quickly even without a product.

What customer acquisition channels did you test?
Ads?
Cross-promotions?
What was the cost to

  • Get a signup?
  • Get a free user?
  • Get a paying user?

What has the retention been so far (if you know)?
What is the engagement?
Are people coming back everyday?
For how long?

If you don’t have a lot of information, at a minimum, you can tell me about your unit economics. I.e. What is happening w/ the few customers / signups you do have? What do those numbers look like right now?

At a bare bare bare minimum, everyone can create a coming-soon landing page and drive traffic to it and articulate the results for that. The traction slide needs to give me some idea that this is a product that people want and more importantly how badly.

If you are a post-seed company and you have quite a bit of data, graph your revenue (or users if you’re a pure-consumer company).

Note: please don’t graph cumulative revenue – this is a noob mistake! I understand that your numbers may not go up every month. In some cases, the time period of “months” may not make sense and you should slice and dice your data differently. For example, if you’re an adtech company, perhaps it might make sense to graph your results by quarter since budgets are on a quarterly basis for most ad buyers.

Tl;dr – tout your unit metrics. If you’re a post-seed company, I also want to see your data over time.

Team – You don’t need to list your whole team. Just the founders is sufficient. List only your notable advisors. If you/your co-founders have domain experience, definitely mention this on this slide. Also list out key accomplishments. This slide is fairly straightforward.

Market – For your market slide, you don’t need to do a crazy analysis on this slide. In fact, I would be ok with a slide with just one big number in the middle in size 108 font. E.g. “$5B market”. For me, I also don’t need it to be a $$$ number per se. It could be something like, “2B people suffer from X”. I just need to get a sense that this could be worth a lot AND GET CONVICTION.

If you are finding that investors do not have conviction about your market and are not open to meeting, you may need to re-position the problem (hence why that problem slide is so important) or find different investors to approach.

Lastly, in addition to these 5 slides, you’ll also want to make sure your contact information is on the slides. Decks do get forwarded around. For example, if let’s say someone sends me a deck for a fintech deal, I’m going to defer to one of my colleagues who specializes in that. You’ll want to make sure there’s a way for him to get in touch with you.

Fundraising is a nebulous process that I aim to make more transparent. To learn more secrets and tips, subscribe to my newsletter.

Read the original article by Elizabeth Yin here. Click on “Tiếng Việt” on the menu for the Vietnamese translation provided by 500 Startups Vietnam.

San Francisco
814 Mission St., 6th Floor
San Francisco, CA 94103, USA

© 2010-2019 500 Startups

The only 10 Slides You Need in a Pitch

The only 10 Slides You Need in a Pitch

The purpose of a pitch is to stimulate interest, not to cover every aspect of your startup and bludgeon your audience into submission. Your objective is to generate enough interest to get a second meeting.

Thus, the recommended number of slides for a pitch is ten. This impossibly low number forces you to concentrate on the absolute essentials. You can add a few more, but you should never exceed fifteen slides – the more slides you need, the less compelling your idea.

The ten slides are:

1. TITLE
Provide company name, your name and title, address, email, and cell number.

2. PROBLEM/OPPORTUNITY
Describe the pain that you’re alleviating or the pleasure you’re promoting.

3. VALUE PROPOSITION
Explain the value of the pain you alleviate or the value of the pleasure you provide.

4. UNDERLYING MAGIC
Describe the technology, secret sauce, or magic behind your product. The less text and the more diagrams, schematics, and flowcharts the better. If you have a prototype or demo, this is the time to transition to it. As Glen Shires of Google said, “If a picture is worth 1,000 words, a prototype is worth 10,000 slides.”

5. BUSINESS MODEL
Explain who has your money temporarily in his pocket and how you’re going to get it into yours.

6. GO-TO-MARKET PLAN
Explain how you are going to reach your customer without breaking the bank.

7. COMPETITIVE ANALYSIS
Provide a complete view of the competitive landscape. Too much is better than too little.

8. MANAGEMENT TEAM
Describe the key players of your management team, board of directors, and board of advisors, as well as your major investors. It’s okay if you have less than a perfect team. If your team was perfect, you wouldn’t need to be pitching.

9. FINANCIAL PROJECTIONS AND KEY METRICS
Provide a three-year forecast containing not only dollars but also key metrics, such as number of customers and conversion rate. Do a bottom-up forecast, not top down.

10. CURRENT STATUS, ACCOMPLISHMENTS TO DATE, TIMELINE, AND USE OF FUNDS
Explain the current status of your product, what the near future looks like, and how you’ll use the money you’re trying to raise.

A word about liquidity: no entrepreneur knows when, how, or if she will achieve liquidity, and yet many include a slide that says, “There are two liquidity options: an IPO or an acquisition.” Duh. If an investor asks about your exit strategy, it means he’s clueless. If you answer with these two options, you have a lot in common.

Learn more about The Art of the Start 2.0 at GuyKawasaki.com

Read the original article by Guy Kawasaki here. Click on “Tiếng Việt” on the menu for the Vietnamese translation provided by 500 Startups Vietnam.

San Francisco
814 Mission St., 6th Floor
San Francisco, CA 94103, USA

© 2010-2019 500 Startups

Thinking Beyond VC Funding

Thinking Beyond VC Funding

The word ‘startup’ is currently used to describe technology companies or technology-enabled companies that have the potential to get funding from angel investors or VCs. However, using that definition for a startup narrows the possibilities that the entrepreneur can pursue as a business because the kind of companies that VCs can invest in is a very small subset of the many kinds of businesses that entrepreneurs can pursue.

While many ventures can be good businesses for the entrepreneurs, they need not necessarily be a good investment for VCs. And to understand why that is so, it is important to understand the business model of angel investors and VCs.

The VC Business Model

Possibility Of An ‘Exit’ Is Critical

Investors make money when they sell shares they hold in your company. NOT when they buy the shares by investing in your company. So, unless there is a reasonable chance that they will be able to sell the shares to someone else – next round of investors, strategic buyers or, in very rare cases, IPO, there is no reason for the investor to invest, even if the venture becomes a reasonably successful business.

There Must Be A Reasonable Chance To Get More Than 10x Returns

Because many of the ventures they invest in will fail, unless the few successful ones return 10 – 20 times the amount invested, the investor won’t make money on the overall portfolio.

Market Leadership Is Important:

To get 10-20 times return on the amount invested, the venture must achieve a commanding position in a potentially large market … else the next round of investors won’t have any reason to buy the earlier round investor’s equity at a significant premium. So, even if a venture is a reasonably profitable company, but not in a reasonably dominant position, the investor will not be able to sell shares (certainly unlikely at a good premium) even if the business is a reasonably satisfying one for the entrepreneur.

Scale Is Important

Else the numbers just won’t work for the investors to get a decent return on their investment.

And therefore, the only kind of businesses that angel investors and VCs can invest in are businesses that can scale up massively and who can have a dominant position in a very large market and in which they can sell their stake to someone else for 10 – 20 times the amount they had bought the stake at.

Not all businesses will qualify on these criteria, even if the venture is a reasonably happy outcome for the entrepreneur. So, when entrepreneurs start with VC funding as a focus for their business, it narrows their choices to a small sub set of possibilities rather than a large number of possibilities that an entrepreneur can pursue if VC funding was not a criterion.

A restaurant or a handmade shoe making company or a boutique or a furniture store or a jewellry brand or an ad agency or a manufacturing unit, or indeed any legitimate business that the founder is happy doing and satisfied with the financial outcomes is a good business. But these, and many other businesses, may not qualify for venture capital. And that is okay.

In my view, any legitimate business that creates employment and generates wealth (to whatever extent that is satisfactory to the founder) is an entrepreneurial venture i.e. a startup.

My advice to entrepreneurs is to think of the business they will enjoy doing, assess if the financial returns that the business can give will satisfy them, and then access the right funding option for that business. If your venture is not fundable by VCs, and many good businesses will not be, think of how else you can fund your aspirations. Some pointers:

  • Many businesses can get to profitability with very, very limited initial capital.
  • Focus on getting to profitability the quickest, focus on profitability rather than ‘scaling up’. If you sustain, you will get a chance to participate in the market as it evolves.
  • It takes a decade to become an overnight success. Don’t be in a hurry. Build a strong business patiently. If external capital is not available for growth, scale up as best as you can with internal accruals.
  • Be frugal in your expenses. Spend on what’s necessary.
  • Creative marketing ideas necessarily must cost a lot.
  • Venture debt and collateral-free loans for working capital are now available… not as easily as one would want it to be, but things are getting brighter on this front.
  • Crowdfunding is an option in certain categories
  • Some ventures may be able to attract initial investments from strategic investors i.e. companies that may benefit from what the venture does. E.g. a pharma company may find value in investing in a startup that is creating a network of doctors.

Read the original article by Prajakt Raut here. Click on “Tiếng Việt” on the menu for the Vietnamese translation provided by 500 Startups Vietnam.

San Francisco
814 Mission St., 6th Floor
San Francisco, CA 94103, USA

© 2010-2019 500 Startups