Since we’ve seen the first steps of developing a financial model let’s move into the second half- how to finalize a financial model. We’re going to take the assumptions, revenue forecast, and expense forecast that we developed last time and jump right in on creating an income statement, statement of cash flows, and key charts for data visualization. Grab your spreadsheet, open your formula tabs, and let’s get started!
Create a multi-year income statement
An income statement is a snapshot of your business health. It takes your revenue model and maps your expense forecast directly underneath it. Here you start with revenue, factor out your product costs (storage, bandwidth, support) to arrive at your gross margin at a product level. From there line up your selling, general, and administrative expenses to see your total operating income.
Here’s a sample of what that finished product will look like:
|Sales||$ 1,533,000||$ 4,599,000||$ 9,198,000|
|COGS||$ 383,250||$ 1,149,750||$ 2,299,500|
|Gross Margin||$ 1,149,750||$ 3,449,250||$ 6,898,500|
|Selling, General, Administrative||$ 1,750,000||$ 3,500,000||$ 3,937,500|
|Operating Income||$ (600,250)||$ (50,750)||$ 2,961,000|
This report at a glance will tell prospective investors and stakeholders a lot about your business. It combines all of your sales and expense assumptions and provides a quick summary of where you want to be at the end of the next few years.
Develop a statement of cash flows
The statement of cash flows is crucial for your business. It not only gives you insight into how you can better manage the cost side of your business, but also which investments pay back the fastest, and ultimately how much money you need to raise. To create a statement of cash flows you’ll need to look through cash inflows (Sales and accounts receivables) and cash outflows (wages, rent, legal, etc). The delta between your cash inflow and cash outflow is the monthly cash burn for your business.
|Beg Cash||$ 325,000||$ 308,917||$ 292,333||$ 277,250|
|Monthly sales||$ 127,750||$ 127,750||$ 127,750||$ 127,750|
|Monthly AR||$ 2,000||$ 1,500||$ 3,000||$ 1,500|
|Cash Outflows||$ 145,833||$ 145,833||$ 145,833||$ 145,833|
|Cash Remaining||$ 308,917||$ 292,333||$ 277,250||$ 260,667|
|Cash Burn||$ (16,083)||$ (16,583)||$ (15,083)||$ (16,583)|
A simple cash flow forecast. Note that the total difference between cash inflow (sales and the difference between last month’s accounts receivable and the current month’s) and outflow here is the amount of money we need to raise to operate on the plan. Combine this with our fundraising strategy and you will quickly see which plans are reasonable and which ones are not.
Visualize key pieces of SaaS data
It’s not enough to create income statements and statement of cash flows. You need to be able to turn them into actionable insights, things you can use every month to track your business health. Therefore, taking your key metrics (Monthly Recurring Revenue (MRR) and its MoM growth) and putting them into a visual format will give you a good indicator of early-stage business health. Focusing on MRR can help you identify seasonality your market, or help you identify growth among your customer segments. A healthy double-digit MRR growth rate is key for your business from 0-1Million in annual recurring revenue.
After MRR growth, one key indicator of your business is your customer acquisition cost (CAC). This number will generally change over time as the tactics you use to generate revenue adapt. Mapping CAC over time can give you insight on if the unit economics for your business is changing. This becomes even more relevant as you open up more sales channels. Imagine taking a marketing-heavy sales process and injecting inside sales. With costs changing ignoring CAC puts your business at risk of acquiring customers for more than their total value to your business.
Now that you’ve made it through how to finalize a financial model, you’ll have the resources to track your business. With these pieces in place, you’ll be able to see which assumptions impact the success of your business the most. You will also be in a good spot to have conversations with investors on your business model and growth trajectory. Happy forecasting!