Building a Financial Model That You’ll Actually Use

Bottom Up Financial ModelThis week at, Dan Allred, Senior Relationship Manager of Silicon Valley Bank, and Matthew Nichols, EVP Operations/ Board Member at Gemvara were in the house tag-teaming as they walked students through a “Bottom-Up” approach to financial analysis. From revenue to expenses, they used hard examples to illustrate the importance well-informed assumptions and separating fact from fiction (we all want to aim for success, but c’mon, ya gotta be realistic!). Clearly a critical topic for startups looking to grow, we saw the biggest turnout we’ve seen yet!

Top-Down vs. Bottom-Up
Starting with a top-down approach is all about gauging your startup’s opportunity and your potential market share. A bottoms-up market analysis means you’re more focused on what it will take for your business to capture it. Money promised is rarely the same thing as money received, so analyzing financial variables, such as investments and expenses, becomes much more simple. In the end, you should have a model that will allow you to project reliable results that are highly manageable.

Key Assumptions When Forming Your Financial Model
Money, money, money, money. Think about how you make it. Do you offer a service? Sell a product? Who are your prospects? This includes sales, both inside and direct, channels, freemium/premium, and traffic. Consider the range of products that you have to offer and how they’re each priced relative to their value. Which class of clients buys which product? Customers often times aren’t one-time buyers, even if they one buy one product (think subscriptions, upgrades, or product maintenance). Make sure to account for all your revenue channels.

On the flip side of money made, there’s money lost. Ask yourself what Cost of Goods Sold (COGS) are associated with your sale. This includes implementation, customization, material cost, and commissions, to name a few. Look for any opportunity to lower COGS, like network effects of volume inflection points.

Fully understanding how your sales funnel works allows for more accurate sales assumptions.  How many more prospects you need to convert the projected revenue based on your current conversion rates? Are there previously overlooked costs associated with reaching and converting these prospects? Don’t forget that there’s also a period of adjustment for channels and sales people before they become productive. On the marketing front, what do you need to do to optimize for your success metrics? When you’ve figured out what your specific business needs to address to answer all of these questions, your revenue, sales, and marketing expense assumptions should work together to help you manage your business and move forward, providing a much needed reality check.

Tips for Building Your Model

  1. Build a monthly model all the way across
  2. Standardize your employee build
  3. Clearly identify inputs
  4. Check a random moth- BY HAND
  5. Spot check big jumps
  6. Re-check your out years vs. public companies