Financial Modeling for Entrepreneurs
By Anthony Suidan, Stratsolver Corporation
Topics
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Relevant Accounting Basics
Financial Modeling
Key Performance Indicators
Perfecting Your Request for Financing
Your Own Financial Model
Little Andy’s Lemonade Stand
1. Relevant Accounting Basics
Conventional Financial Statements
Income Statement
Balance Sheet
Statement of Cash Flows
Revenue
Assets
Operating Activities
Current Assets
Cash
Accounts Receivable
Inventory
Long-term Assets
Net Property, Plant & Equipment
Revenue A
Revenue B
Revenue N
Cost of Goods Sold
Expense A
Expense B
Expense N
Total Assets
Gross Profit
Liabilities
Sales, General and Administrative
Overhead A
Overhead B
Overhead N
EBITDA
Current Liabilities
Accounts Payable
Short-term Credit
Long-term Liabilities
Taxes Payable
Long-term Credit
Depreciation
EBIT
Interest Expense
EBT
Income Tax
Net Income
Ownership Equity
Stock
Retained Earnings
Total Liabilities & Ownership Equity
Net Income
Accounts Receivable
Inventory
Accounts Payable
Income Tax Payable
Cash P (U) Operating Activities
Investing Activities
Property, Plant & Equipment
Cash P (U) Investing Activities
Financing Activities
Short-term Credit
Long-term Credit
Issuance of Shares
Dividends
Cash P (U) Financing Activities
Net Change in Cash
Cash, Beginning of Period
Cash, End of Period
Internally Consistent | Stress the Importance of Cash and Cash Flow
Cash is King
Financial Accounting
 In a company which is a going concern
 Financial accounting is based on an accounting system
 The general ledger (G/L) is a database with codes
(e.g. companies, departments and accounts)
 Money in and out now and later = debits and credits
 Scenarios are in terms of budget, actual and forecast
 Book recommendation
 How to Read a Financial Report by John A. Tracy (now on 8th edition)
 Financial accounting results in the three conventional financial statements
 Why are financial statements described as “conventional”?
 Financial Modeling
 The entrepreneur wishes to simulate the financial accounting of his/her business
without a financial accounting system
Managerial/Cost Accounting
 Financial Accounting versus Managerial/Cost Accounting
 Activity Based Costing (“ABC”); Operations Finance
 Management accounting system
 If you can’t measure it you can’t manage it
 No conventions; Outside accounting system; Data integrity of non-G/L data;
“People respect what you inspect”; Inherent disconnect with G/L; Drives G/L
 Business-specific operating reports
 Key Performance Indicators (KPI)
 Financial Modeling
 The entrepreneur wishes to simulate and the managerial accounting of
his/her business without a management accounting system
2. Financial Modeling
Financial/Operational Business Simulation
 Features
 Dynamic, spreadsheet-based
 Custom operating reports and conventional financial statements
 Benefits
 What-if scenarios
 Business performance sensitivities
 Align performance with strategy
 Investor and stakeholder conversations
 Business valuations
A Business Scenario Simulator
3. Key Performance Indicators
Key Performance Indicators (KPI)
 Business performance dashboard
 Many ways to measure the same general metric
 Return on investment: ROI, ROCE, ROTA, RONA, ROOA, ROE, IRR,
MIRR, NPV, EPS, P/E, Payback, Discounted Payback and more (define R)
 Find the metrics which work for your business model
4. Perfecting Your Request for Financing
Available Financing Options
 Many different financing options are available to help
entrepreneurs get their business up and running
 Bank Financing
 Agreement with bank to borrow funds and repay loan over time
 Venture Capital (Angel Investor)
 Agreement with wealthy individual(s) to give up ownership in
exchange for money
 Think Dragon’s Den
 % of the company for $$$
Perfecting Your Request for Financing
 Show that you have “skin in the game”
 Financiers want to know that you’ve put some of your own money into
the business
 Provide significant detail on what your business needs the
money for
 Also discuss how/when you expect to be able to pay back the lender
 Ask for enough funds to cover your capital expenditures
under your worst scenario
 Include a working capital requirement
 Working capital is money that is “tied up”
 Working Capital = Current Assets – Current Liabilities
5. Your Own Financial Model
Financial Model Checklist
 Internal cross-checks (retained earnings, checksums)
 Dynamic yet robust
 Full set of financial statements
 Income Statement
 Balance Sheet
 Statement of Cash Flows
 Customized to your business
6. Little Andy’s Lemonade Stand
Financial Model Template
 Little Andy
 Your little brother: Astute seven-year-old entrepreneur
 Business proposition: Lemonade stand open 90 days per year (summers)
 Rented space on Mr. Wilson’s corner lot, expected to be a good location
 Small loan and LOC from Mrs. Sachs, neighbor, local credit union manager
 Dad provides loan collateral and startup investment
 Guaranteed revenue base on three-year contract to local baseball league
 Will hire Joey and Igor, school friends to staff the stand; other kids later
 Will manage the business
 Has done financial modeling and a full set of interrelated financials
 Offering to sell you the business for $2,000, which he says is a great deal
 Little Andy’s Lemonade Stand
Conclusions
 How can the Lemonade Stand model be improved?
 What have you learned?
What We Covered
1.
2.
3.
4.
5.
6.
Relevant Accounting Basics
Financial Modeling
Key Performance Indicators
Perfecting Your Request for Financing
Your Own Financial Model
Little Andy’s Lemonade Stand