two hour financial model

TwoHourFinancialModel.com

Best practicesof financial modeling

for startups


Why build a financial model?


To communicate your business


Businesses take, need and make $$$


$$$ is counted with numbersnot words, or pictures


To develop a clear understanding and thought process


To evaluate and make major decisions about your business


It’s not that* hard


Your model will be wrong


But you will learn something valuable


Focus on:

Process (esp. revenue)Major assumptionsKey driversCash (near-term budget, balance, etc.)


Budget vs. Model

(or both)


Budget

Next 6-24 months

What you plan to spend with your

funds

Syncs to meaningful achievements

(product, customers, revenue)

“The Plan”


Model

Longer term

Much less certainty

Shows the realm of possibilities

Helps you identify impactful key

metrics and drivers


How good is “good enough”?


The checklist:

Easy to follow - by somebody else Bottom-up revenue forecast Unit economics Positive cash balance at all times All major assumptions verified with data Simple, understandable charts & graphs Pass a sniff test


Unit economics

What is the key unit of revenue?

Ex: Revenue per User (web model)– Revenue sources:

• Subscription upgrades (product tiers)• Ads, Data, Other non-paying sources

– Costs• Acquisition• Service & retention• COGS


Revenue forecasts

Bottom-up

Sales per customer or channel (B2B)

Funnels, customer acquisition costs

Viral growth (with math)

DO THIS

Top-down

X% of market size

Good for sniff testing, not for forecasts

Use to check your bottom-up forecasts,

not to project


Verify key inputs

Ideal = sync key metrics to what you have achieved, and scale over time

Next best = benchmark to other people’s key metrics

Focus mostly on the metrics you think will be the drivers of your business


Link to more benchmarking resources: http://www.springexcel.com/benchmarking-model-inputs.html

http://www.springexcel.com/benchmarking-model-inputs.html






Scenarios (advanced)

What are the high, med. and low outcomes based on a range of expectations?

Which levers have a large impact on growth and profits (e.g. viral growth coefficient, churn, customer acquisition costs)

Use to help develop targets and stretch goals for your key metrics


Formatting matters


Your presentation materials: Know your audience KISS Show the basics of your budget & milestones. This is

what you are expected to be able to control. Maybe show your long-term projections (have in

backup slides for sure) Be able to explain each the details and key

assumptions, when asked Many VC investors rarely want audit your model. But

they might, so be ready. Corporate investors usually will.


Sniff test

Does everything seem reasonable?– If no, why?– Double-check,

make changes– Discuss with

advisers before presenting to investors

– Listen to feedback


Additional Reading

SpringExcel.com/Resources.html

http://www.SpringExcel.com/Resources.html




2-hour Financial

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