Basic Financial Modeling
Fundamentals of the financial plan

Money

  • Life blood of a business are resources
  • You consume resources and you generate value
  • Remember Gazintas > Gazoutas

Very basic financial modeling

  • Basic terms
    • Costs
    • Revenues
    • Profits
  • Core calculation:
    • Profits = Revenues - Costs
  • Types of costs
    • Fixed
    • Variable
    • Division is not always clear cut
  • Fixed Costs
    • Cost you have to get to the first ‘thing’
    • First release? First sale? First Orange Juice Sold?
    • Rent
    • Communications
  • Variable Costs
    • Marketing expenses
    • Salaries
    • Raw Materials
  • Independent variables
    • Units sold?
    • Units manuctured?
    • Number of employees?
    • Number of customers?
    • Target new customers per month

‘Programming’

  • Learn to be very comfortable with a spreadsheet
  • Google Sheets is fine, excel is fancier

Groupwork: Lemonade Stand 2.0

  • Form groups of 5 students and model
  • Forecast over 1 year in excel
  • Answer these questions
    • What is minimum initial investment to avoid going out of business
    • With an initial investment of $100, how much money in piggy bank at end of year
  • Input assumptions. Design model to allow these to be tweaked
    • Staff: 2 kids
    • Price: $1.50 per cup
    • Workweek: 40 hours
    • Hourly wage: $6
    • Cost for a paper cup: $0.05
    • Cost for making lemonade: $0.10 per cup, including labor and raw materials
    • First day sales: 100
    • Organic growth: 5% per month
    • Ad-driven growth: 1% per month for $25 spent on ads
    • Advertising spend: $25
    • Initial investment from parents: $100

More complicated example

More realistic template

Key Points

  • Developing a plan that balances capital/time/milestones
  • Deciding what need to do now, and what can be deferred
  • Defining your financing milestones
  • Determining how much capital to raise for your first milestone
  • Insuring you position yourself for the next financing, ideally at a step-up