Cashflow Central: Enter the Financial Model
So you want to refine the operations of your venture for maximum growth.
UX/UI designers, website hosting, landing pages, product managers, extra admin staff all increase your venture’s utility but can carry an associated price tag.
Not to mention pursuing maximum R&D spend, launching into new territories, working to an 8 day a week schedule.
We’ve always been interested in leveraging the finite resources to get maximum return on our efforts. Lean startup methodology in action of course.
Be it outsourcing a routine task, or tapping into the expertise of masters, or even A/B testing a new platform – the more accelerated way of doing things has always piqued our imagination.
Same maxim holds true for maximising the cashflow. The most exacting founders we’ve found had a financial model in one way, shape or form.
If “what doesn’t get measured, doesn’t get managed” is true then applying a measure to your ventures future cashflow is surely scripting the future for your venture. With most early stage venture’s existences being based on a limited reservoir of cash – then the financial model is essentially the chart to freedom.
Part art, part commerce, part financial engineering; a robust financial model allows you to throw in various scenarios in the early stage venture itinerary…
“What if this grant came in?”
“What if we doubled our development team?”
“What if this FB campaign pulls through?”
and have a cashflow figure spelled out for you.
Easily the difference between thriving or surviving or being employed away from your project.
High-level, the financial model has proven itself invaluable time and time again because of its ability to:
1) Determine the financial viability of your venture
Many great business ideas have been formed on the back of a napkin. Many more have not passed the gauntlet of a financial model.
In your financial model you can factor in the business drivers, revenues and overheads based on conservative and optimistic settings and see whether your business stacks up in both environments.
How sensitive is your business to FX movements? To price competition? To rising HR costs? Make sure your business has a great foundation no matter the financial weather.
2) Allows planned expenditure into items that truly expand the business.
Building a better platform involves the efforts of motivated and talented professionals. To avoid diluting our cap table, salaries/contractor payments can be factored in so you’re prepared to make the investment in HR when ready.
Operational costs such as rent, hosting and insurances are all significant costs that ramp up based on the success of your venture – a robust model will also align these expenses with the revenue.
And marketing campaigns? With the many mediums we have to date, effective marketing can involve hefty sums in the design, research and execution. When they do generate high levels of demand, we project whether we will possess the resources to deliver when that time comes. Financial models can also be built to align the cost of user acquisition through marketing with the desired amount of users.
3) Sets targets for the required levels of growth for the venture.
Keep your team members accountable for their performance by aligning their remuneration in line with the projected figures from the model.
Reward great performances and address areas where the expectations are not met.
A plan towards a 50x, 100x, etc exit begins with a financial model.
4) Allow a headline valuation for the company.
Offering equity? If having these discussions with co-founders or groups wanting to joing the cap table then you’ll have to produce a figure for the value of the company to approximate the value of said shares on paper.
The discounted cashflow model provides a sensible first indication for a company’s value amongst many others.
5) Improve VC or institutional investor readiness.
Where third party stake holders are involved in fronting some funds for your project, it is almost certain they are going to want projected earnings on their investment.
Given that the average time for startup investment to exit takes 8 years, projecting realistic circumstances that are favourable yet achievable are key.
Great financial models are not easy.
The skill and patience involved in creating a financial model that can achieve all of the above takes a long time to master, often a lot longer than a founder has actual time to pursue.
Most models we’re seen produced privately have difficulty projecting circumstances beyond more than 12 months, being useful in ‘what if’ scenarios and are not capturing the interelationships between users, headcount or even capital expenditure.
Fullstack Advisory manages the production of investor-ready financial models to enhance financial understanding of founders and most importantly their confidence in undertaking the venture.
Chat to our team today on 1300 887 627 about how a robust financial model can work for you.