Financials that Work Matthew Ennis, PhD Entrepreneur and Investor
Financial Backbone The Jacks or Better to Open Believable Financial Model Reasonable Assumptions Demonstrates Market Understanding Proof that Financial Expertise is Involved Embodies the Importance of Cash Flow This needs to be easily communicated and withstand initial challenges. This allows the investor to believe that they speak the same language an essential starting place. All necessary but not sufficient!
What makes the Financial Model Believable? Detailed enough that it demonstrates an understanding of basic business principles Realistic cost-buildup that acknowledges the variable versus fixed costs Enables the reviewer to see expected sales cycles Enables reviewer to understand expected collection intervals A range of numbers based on expected outcomes Clearly stated financials If you are opening a local pharmacy and you show that you will reach 10 locations and $100 M in revenues in 3 years, you better be teamed with Walter White, and the range better account for jail time. Meaning that you need to demonstrate comparables.
What are Reasonable Assumptions The Assumptions are clearly articulated and are built into the model The Assumptions are validated by external data They incorporate the whole of the company (what are the expected rate limiting parameters) They address risks If at the end of the spread sheet you are providing for a company with faster growth rate than Uber, challenge your assumptions.
Providing Proof that Financial Expertise is Involved The spread sheet is not broken The entrepreneur understands the model and can defend it That someone involved understands how money can run through the company Proof that a common language can be achieved. There needs to be a key person that is translating the activities of the business into a metric that allows the company to run.
The Importance of Cash Flow Everything Raising of money Spending of money Timing of revenues Growth of revenues Timing of expenditures Growth of expenditures 999 out of 1000 times this is what keeps the CEO from sleeping for a start up. All activities are grounded in cash flow.
Now that we have a hand that gets us into the game, how do we turn that into a winning hand?
Ground Truth-Customers Who are the customers? Names and contact information! When do they buy? Why do they buy? (what problem do you address for them) How often do they buy? Why would they buy from you and what performance do you need to achieve? How do you reach them? How many are there? How do you manage the engagement? How many have you interviewed?
Ground Truth-Sales Channel What makes up the Sales Channel? What is your access to the channel? How loyal is the channel? How do you influence the channel? Who have you interviewed?
Ground Truth-Production How soon can you make it? How well can you make it? How much will it cost? What do you need to make it? Who else can make it? What is your backup plan? What can go wrong? How do you get better? How many have you interviewed?
Ground Truth-Supply Chain Who is important for you to deliver what you said you were going to deliver? What happens when one of those suppliers doesn t deliver? What is the supply chain of your customers? If that goes wrong, how does that impact you? What regulations now or in the future can impact your supply chain? Who have you interviewed?
Ground Truth-Influencers How will you use media as your voice? Both Traditional and Social What benchmarks will you be establishing and who are the third parties that you will use? Why them? Who is your tribe of evangelists? How will you use them? Are lobbyists necessary? Who are you going to use? Why? How do you measure their success? What awards will set you apart and for whom? Who have you interviewed?
Ground Truth-Regulators What regulations exist between you and success? How much time and money is it going to cost to mitigate their impact? How will you address regulation management? How can you use regulations to increase your moat? Who have you interviewed?
Ground Truth-Financing What does the funding roadmap look like? Who has funded similar enterprises? What advantages does the funder bring? How do you align interests with the funders? Who have you interviewed?
How do you get the information and the network you need?
Ground Truth-Service Providers Legal, Accounting, HR, IP, Development Partners, etc. What else do they bring? Who do they know? How vested are they in your success? How do they know your market? How can you leverage their help? What success have they had previously? What can you learn from them? Who have you interviewed?
Ground Truth-Competition What is the competition? Names and contact information! Who will be the competition in the future? What is your advantage? How do you increase the size of the moat? How are they going to change to meet your challenge? What have they done right? What can you learn from them? What is their advantage on you? Who have you interviewed?