Tag: business model

Financial modelling for start-ups. Part 5: Projected Financial Statements

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Projected Financial Statements (otherwise known as pro-forma financial statements) refers to a set of financial statements which are an important part of a business model. No, not important, ESSENTIAL. It’s actually the apotheosis of the whole business model and is the first thing that’s turned to when someone looks at it. Whatever has been done before, is only in preparation for creating these statements.

The pro-forma should contain the following three statements:

  • Profit and Loss
  • Balance Sheet
  • Cash Flow
  • (You can also include Statement of Change in equity if you are willing to, but investors usually only want to see the first three)

In this post, I am going to look at the simplest way to produce the pro-forma Balance Sheet and Profit and Loss statement. In the next blog, I will look at the Cash Flow Statement and Statement of Changes in Equity.

First thing’s first, let’s talk about the Statement of Profit and Loss. It’s the easiest one to do, which you’ll remember if you’ve followed my blog from the beginning. If not, to make a Profit and Loss statement in Excel, you should have a detailed (ideally, monthly) budget, where all your expense items are attributed to certain expense types, as they are going to appear in your final Profit and Loss statement. Then simply, by using the Sumif function, you summarise all your budgeted figures on an annual basis. The process looks like this:

 

 

Once you have your Profit and Loss statement, you can use it as a starting point for creating your Balance Sheet.

From the Profit and Loss statement you need the Net Profit figure, which you will use for your Retained Earnings in the Balance Sheet (within the Equity section). For the first year the Retained Earnings will be equal to the Net Profit figure. Every subsequent year’s Retained Earnings is the Retained Earnings from the previous year, plus Net Profit for the current year.

Then you need to work out the components of your working capital, which I covered in Financial Modelling for Start-ups. Part 3: Working Capital.

Next, I suggest you calculate your Cash line. In order to do that, you need to make sure your budget has a line for cash (or bank – doesn’t really matter how you name it) at the bottom. This is where you summarise the income, (less expenses, plus investment) you are planning to receive and any loans. Ideally you should track it on a monthly basis against your actual cash in bank. Once you have that sorted, use the amount at the end of the year for your Balance Sheet Cash account. Then it needs to be adjusted for the accounts receivable and payable by decreasing it by the amount of receivables and decreasing it by the amount of your payables.

If you have investment coming in, include it in your Capital within Equity, and corresponding amount, to the Cash line. If you have a loan, add a line for Long or Short-term loans in Liabilities and the corresponding amount goes to Cash.

Capital line should include all capital put up as of the Balance Sheet date and the same amount should either be in Receivables from the owners or Cash (included in your budget in the Cash line as well).

That’s it for this blog, in the next one we will cover the other two financial statements to make your business model look even more beautiful!

 

Financial modelling for start-ups. Part 4: Hiring plan

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A hiring plan is an essential ingredient when it comes to building a successful business model, therefore, in this post I will show you how to construct one.

Staff-related costs are a huge component of the profit and loss and the hiring plan is something that will help you to calculate these costs precisely, allowing you to later change them accordingly in line with any developments in your forecasts.

Below is an example of how a hiring plan should look:

Below is a step-by-step guide to building your own:

1 – Make a list of the job roles with salaries. Salaries can be found on any local job search website. You might want to allow for salary increases once the company is launched, bearing in mind that there will be more responsibilities which should be awarded for.

2 – Each column to the right of the salaries serves as a month where you can input the number of people that you need to fulfil a particular position. They should all start with zero and grow over time.

3 – Identify the job roles which will require more people as the business grows, and list them in order of growth in sales volume. For our company these are the positions that involve working directly with the customers one-to-one, such as on-boarding, training, and sales managers. These are highlighted in grey in the picture above. Once these roles are identified, their number should be linked to the sales volume. To do that, you can create another table where you identify the number of customers to be covered by each role, as shown below:

This information should be included into your ‘costs assumption’ sheet and will be variable, changing over time. Once you have got this for these “customer-number-dependant” job positions you need to apply the following formula:

Number of training managers required = 1 / No of customers per 1 training manager X No of customers in that particular month / period

After this is done, you don’t need to worry about changing the number of sales agents required each time there is a change in sales pipeline or in the forecast number of customers.

4 – The last step is to multiply the number of employees from each job by their salaries and then link it back to your monthly budget in the staff related costs section (or maybe you have your own name for it)! This can be easily done using the Sumif function, which I’m sure you’re familiar with by now.

Until next time – happy modelling!