Reminder: Readings and videos are your responsibility. You will be expected to come to class prepared, having read or viewed the material, and ready to participate in the discussion
Overview
- Information is organized logically into several sheets
- Columns are units of time - usually months
- Overall span is 1 (or more) years
- Rows are variables of various kinds
- Use color to distnguish between input vs computed cells
Operating Model for your business
Financial model
- A model is a simulation of the future
- It is not the same as an analysis of the past
- Although they are closely related
Building a financial model
- Not a universal recipe (none can exist!)
- These notes provide one set of guidelines and rules of thumb
- Your mileage may vary!
- Use common sense in your thinking.
- You are not google or facebook so your model should reflect that.
What do you want out of the model?
- You can think of your financial model as an MVP
- What are the hypotheses that are being tested?
- How much money do we need and when?
- How many people do we need, and when?
- How many customers do we need, and when?
General Structure of a Financial Model
- Use google sheets (excel is ok too)
- Columns will be time.
- It depends, but a good start is to have 1 year in months (and perhaps additinal years in quarters)
- Rows will be various kinds of metrics
- Some are inputs to the model (“assumptions) and some are outputs (“results”)
- Don’t be uncomfortable about very broad generalizations for your assumptions (mere guesses)
- Most of the time the best you can do is an educated guess
- Assumptions should be clearly set off
- Color coding can be helpful
- Input to the model (e.g. Cost to make one unit)
- Basis of testing scenarios
- Sometimes an input parameter is a number, a percentage, an amount of money
- Sometimes its a varies over time (i.e. Number of employees in Q1, Q2, Q3, Q4)
- The key is that it is not computed by the model, it is supplied by you
Output parameters, dependent variables or results
- Output from the model (e.g. Operating Profit in Q2)
- There will be lots of assumptions.
Customers or units and the Growth Engine
- A very typical “driver” for your model will be the number of customers served or units sold
- Your assumptions there will have a big effect on the overall model
- Consider where your new customers will come from
- Is it through search in which case you will spend money on google or facebook ads?
- Is it inherent in the use of the product, then you should be able to explain how that would work
Pricing
- As you know, pricing models can become complicated
- You need to make a judgement call about how much of it you try to model at this stage
- Annual vs. Monthly subscription
- Single purchase (what about repeat purchase?)
People Costs
- It is very common that salaries and overhead are the biggest costs for a startup
- You can choose to enter number of people “by hand” for each month
- Or make it a function of something else, like units sold or number of customers
Milesones
- Most startups go through a few phases from Day 1 to having customers and/or having funding
- E.g. Pre-revenue, Post-revenue, Pre-Funding, Post-funding
- It is useful to build your model with that in mind
Charts (graphs)
- The classic chart shows time in months (like the model) against:
- Money in the bank
- Number of customers
- Number of units
- Revenue
- Expenses
- Profits
Thank you. Questions?
(random Image from picsum.photos)