Pro Excel Financial Modeling

Transcription

1 Pro Excel Financial Modeling Building Models for Technology Startups Tom Y. Sawyer

2 Pro Excel Financial Modeling: Building Models for Technology Startups Copyright 2009 by Tom Y. Sawyer All rights reserved. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage or retrieval system, without the prior written permission of the copyright owner and the publisher. ISBN-13 (pbk): ISBN-13 (electronic): Printed and bound in the United States of America Trademarked names may appear in this book. Rather than use a trademark symbol with every occurrence of a trademarked name, we use the names only in an editorial fashion and to the benefit of the trademark owner, with no intention of infringement of the trademark. Lead Editors: Mark Beckner, Matthew Moodie Technical Reviewer: Debra Dalgleish Editorial Board: Clay Andres, Steve Anglin, Mark Beckner, Ewan Buckingham, Tony Campbell, Gary Cornell, Jonathan Gennick, Michelle Lowman, Matthew Moodie, Jeffrey Pepper, Frank Pohlmann, Ben Renow-Clarke, Dominic Shakeshaft, Matt Wade, Tom Welsh Project Manager: Kylie Johnston Copy Editor: Heather Lang Associate Production Director: Kari Brooks-Copony Production Editor: Katie Stence Compositor and Artist: Kinetic Publishing Services, LLC Proofreader: Martha Whitt Indexer: Becky Hornyak Cover Designer: Kurt Krames Manufacturing Director: Tom Debolski Distributed to the book trade worldwide by Springer-Verlag New York, Inc., 233 Spring Street, 6th Floor, New York, NY Phone SPRINGER, fax , , or visit. For information on translations, please contact Apress directly at 2855 Telegraph Avenue, Suite 600, Berkeley, CA Phone , fax , , or visit. Apress and friends of ED books may be purchased in bulk for academic, corporate, or promotional use. ebook versions and licenses are also available for most titles. For more information, reference our Special Bulk Sales ebook Licensing web page at. The information in this book is distributed on an as is basis, without warranty. Although every precaution has been taken in the preparation of this work, neither the author(s) nor Apress shall have any liability to any person or entity with respect to any loss or damage caused or alleged to be caused directly or indirectly by the information contained in this work. The source code for this book is available to readers at.

3 This book is dedicated to my father, Tom Y. Sawyer, the last of the old-time country lawyers.

4 Contents at a Glance About the Author...xv About the Technical Reviewer...xvii Acknowledgments... xix Introduction... xxi CHAPTER 1 Business Thinking and Financial Modeling for Technology Startups...1 CHAPTER 2 Company Business Model...23 CHAPTER 3 The Green Devil Control Systems Business Case...43 CHAPTER 4 The Staffing Model...51 CHAPTER 5 Sales and Revenue Model...77 CHAPTER 6 Cost of Goods Sold and Inventory Model...97 CHAPTER 7 Cost of Sales and Marketing Model CHAPTER 8 Cost of Product Development Model CHAPTER 9 Operating and Capital Expenditures Models CHAPTER 10 Statements of Profit and Loss and Cash Flow CHAPTER 11 Modeling Valuation and Investment with the FIN Model CHAPTER 12 Financial Reporting and Analysis Using the FIN Model INDEX v

5 Contents About the Author...xv About the Technical Reviewer...xvii Acknowledgments... xix Introduction... xxi CHAPTER 1 Business Thinking and Financial Modeling for Technology Startups...1 Analyzing, Demonstrating, and Explaining the Value of the Financial Model...1 Attracting the Resources You Need to Grow Your Business...2 The Big Three Questions...3 Strategies That Build Value and Credibility...4 Common Ways of Getting Stuck...12 Looking at Startups from the Perspective of Value...13 The Value- Based Enterprise Perspective...13 Four Primary Value Events...14 Thinking Critically About the Business and Financial Model...17 Financial Model Design Principles...17 Financial Model Design Dimensions...18 Major Functions Performed by the Model...20 Summary...21 CHAPTER 2 Company Business Model...23 Designing a Company...23 Business Thinking About Financial Modeling...25 Applying the Project Planning View...25 Applying the Software Development View...26 Creating the Company Business Model...28 Taking the 35,000-Foot View...28 Using the Top-Down Approach Deriving the Model Structure...28 Organizing the Sequence of the Models...30 Developing the Models Design and Functionality...33 Summary...41 vii

6 viii CONTENTS CHAPTER 3 The Green Devil Control Systems Business Case...43 Founding Green Devil Control Systems...43 Giving Birth to the Idea...44 Getting the Company Started...44 Testing Market Feasibility...44 Assessing Technical Feasibility...45 Validating Resource Feasibility...45 Designing the Company...45 Stating the Company Purpose...45 Defining the Product...45 Establishing the Value Proposition...46 Identifying the Target Market...46 Assessing the Market...46 Developing a Marketing Strategy...46 Creating the Sales Strategy...47 Defining the Scope...47 Establishing Naming Conventions...47 Identifying Assumptions and Risk...47 Developing the Production Approach...47 Assigning Roles and Responsibilities...47 Company Deliverables...48 Master Schedule, Critical Milestones, and Earned Value Criteria...48 Summary...50 CHAPTER 4 The Staffing Model...51 Business Thinking About Staffing: Evolution or Intelligent Design?...51 Staffing the Startup Phase...53 Staffing the IOC Phase...53 Staffing the FOC Phase...53 Moving Through the Phases...53 Reviewing the Staffing Business Case...54 Exploring the Market...54 Exploring the Product...54 Understanding the Critical Components of the Staffing Model...55 Planning the Staffing Model...56 Planning the Organizational Structure...56 Creating the Staffing Plan...58 Defining Cost Assumptions and Key Planning Variables...59 Using the Building Blocks of the STAFF Model...59 Understanding the Staffing Plan Worksheet...60 Understanding the Staff Calculation Worksheet...61 Understanding the Executive Dashboard...65 Understanding the Executive Chart Data....66

7 CONTENTS ix Exercise 4-1. Using Microsoft Excel s Sumif Function to Count Requirements for Phones, Computers, and Work Spaces...67 Exercise 4-2. Using Microsoft Excel s Find and Replace Command to Link Large Spreadsheets Quickly...69 Exercise 4-3. Using Microsoft Excel to Create a Double- Axis Management Chart...71 Summary...75 CHAPTER 5 Sales and Revenue Model...77 Business Thinking About Sales and Revenue...77 Validating the Value Proposition...77 Analyzing the Market...77 Positioning the Product...78 Planning for Product Availability...78 Crafting the Sales Strategy...78 Making Sales Assumptions...78 The Products, Services, and Sales Strategy Business Case...79 The ECS Value Proposition...79 The ECS Market...79 The ECS Product...79 ECS Product Availability...80 ECS Sales Strategy...80 ECS Sales Forecast Assumptions Planning the Sales and Revenue Model...81 Defining the Product Configuration and Component Revenue and Cost Assumptions...81 Developing Sales Forecast Assumptions...82 Developing Methods for Forecasting Revenue...82 Developing Cash Collection Assumptions Based on Revenue...82 Exploring the Building Blocks of the REV Model...82 Understanding the Sales Forecasting Worksheet...83 Understanding the Product Pricing and Margin Worksheet...86 Exploring the Revenue Calculation Worksheet...87 Exploring the Recurring Service Rev and Maintenance Rev Worksheet...88 Understanding the Accounts Receivable Worksheet...90 Exploring the Revenue Summary Dashboard...90 Exploring the Revenue and COGS Chart Data...91 Exercise 5-1. Using Microsoft Excel to Forecast Recurring Subscription Revenue...92 Exercise 5-2. Using Microsoft Excel to Model Accounts Receivable (AR)...94 Summary...96

8 x CONTENTS CHAPTER 6 Cost of Goods Sold and Inventory Model...97 Using Business Thinking About COGS...97 Defining Cost of Goods Sold Defining Inventory...98 Assessing Profitability and Contribution to Margin...98 Considering the Green Devil Control Systems Product Offering and Sales Strategy...99 Product...99 Product Development...99 Making Product Availability Fulfillment and Inventory Assumptions Product Pricing and Variable Cost Planning the COGS Model Defining Product Configuration Assumptions Related to Component Revenue and Costs Developing Cost of Goods Sold and Profitability Assumptions for Each Year Developing Inventory Assumptions Developing an Inventory AP Model and Assumptions Examining the COGS Model s Building Blocks Understanding the Product Pricing and Margin Worksheet Understanding the Revenue Calculation Worksheet Understanding the Contribution to Margin Analysis Worksheet Understanding the Inventory and Inventory AP Worksheet Understanding Revenue and COGS Chart Data Exercise 6-1. Using Microsoft Excel to Forecast Inventory Usage Exercise 6-2. Using Microsoft Excel to Model Inventory AP Summary CHAPTER 7 Cost of Sales and Marketing Model Business Thinking about the Cost of Sales and Marketing Completing the Market Assessment Developing the Value Proposition Understanding Sales and Marketing Strategy Exploring the Sales and Marketing Strategy Business Case Exploring the Product Assessing the Market Creating a Resonating Offer to the Customer Capturing the Market Planning the COSM Model...127

9 CONTENTS xi Using the Building Blocks of the COSM Model Understanding the Staff Calculation Worksheet Understanding the Bonus and Sales Commission Worksheet Understanding the Trip Type Calculation Worksheet Understanding the Trip Plan Calculation Worksheet Understanding the Cost of Sales and Marketing Calculation Worksheet.132 Understanding the Capital Plan Calculation Worksheet Understanding the Cost of Sales and Marketing Dashboard Understanding the Cost of Sales and Marketing Chart Data Worksheet..135 Exercise 7-1. Using Microsoft Excel to Develop a Bonus and Commission Plan Model Exercise 7-2. Using Microsoft Excel to Model Trip Expenses Summary CHAPTER 8 Cost of Product Development Model Business Thinking About Product Development Product Development Objectives, Strategies, and Tactics Creating Product Concept and Design Planning Optimizing the Time to Market Adopting Agile Product Development and Production Forming the Team Managing the Product Life Cycle Building in Quality Sustaining Development Capacity Taking Care of Your Customers Know Your Suppliers Capture Intellectual Property Developing the Green Devil Control Systems Product Development Strategy..149 Product Scheduling Product Development Targeting Operational Dates for Product Availability and Inventory Strategizing Product Development Considering Other Product Development Strategies Planning the DEV Model Exploring the Building Blocks of the DEV Model Using the Staff Calculation Worksheet Using the Bonus and Sales Commission Worksheet Using the Trip Type Calculation Worksheet Using the Trip Plan Calculation Worksheet Using the Cost of Product Development Calculation Worksheet Using the Capital Plan Calculation Worksheet Using the Cost of Product Development Dashboard...161

10 xii CONTENTS Using the Cost of Product Development Chart Data Worksheet Exercise 8-1. Using Microsoft Excel to Develop a Bonus and Commission Plan Model Exercise 8-2. Using Microsoft Excel to Model Trip Expenses Exercise 8-3. Using Microsoft Excel to Develop the Cost of Product Development Calculation Worksheet Summary CHAPTER 9 Operating and Capital Expenditures Models Business Thinking About Cash Flow Criteria for Capital Expenditures Calculating Depreciation Defining Expensed Items Considering Categories of Expense Planning the Operating Expenditure (OPEX) Model Planning the Capital Expenditure (CAPEX) Model Building and Using the OPEX and CAPEX Models Exploring the Building Blocks of the OPEX Model Developing the Operational Expenditure Calculation Worksheet Using the Operational Expenditure (Monthly) Worksheet Reviewing the Operational Expenditure (Yearly) Dashboard Utilizing the OPEX and CAPEX Chart Data Worksheet The Building Blocks of the CAPEX Model Understanding the Capital Plan Calculation Worksheet Understanding the Depreciation Calculation Worksheet Understanding the Fixed Assets Calculation Worksheet Reviewing the Capital Plan and Fixed Assets Dashboard Exercise 9-1. Using Microsoft Excel to Compute Straight Line Depreciation Exercise 9-2. Creating a Combination Bar and Line Chart to Display Capital Expenditures and Depreciation Summary CHAPTER 10 Statements of Profit and Loss and Cash Flow Business Thinking about Profit, Loss, and Cash Flow Understanding the Profit and Loss Statement Understanding the Statement of Cash Flows Exploring Cash Flow Impacts of the Product Development Strategy Business Case Defining the Product Planning Operating Activities...202

11 CONTENTS xiii Charting Investment Activities Reflecting Financing Activities Planning the FIN Model Understanding the Building Blocks of the FIN Model Understanding the Profit & Loss Statement Worksheet Understanding the Statement of Cash Flows Worksheet Understanding the Value and Investment Worksheet Understanding the Value and Investment Dashboard Understanding the Company Balance Sheet Worksheet Understanding Financial Reporting Model Chart Data Exercise Using Microsoft Excel to Develop the Company Statement of Cash Flows Summary CHAPTER 11 Modeling Valuation and Investment with the FIN Model Business Thinking about Valuation and Investment Understanding Valuation and Investment Assessing the Value of Events and Risk Exploring the Valuation and Investment Strategy Business Case Defining the Product Creating a Strategy to Build Value and Credibility Devising the Investment and Valuation Strategy Planning the FIN Model Understanding the Building Blocks of the FIN Model Understanding the Profit & Loss Statement Worksheet Understanding the Balance Sheet Worksheet Understanding the Financial Reporting Model Chart Data Worksheet Understanding the Company Master Schedule Understanding the Statement of Cash Flow Worksheet Understanding the Value and Investment Worksheet Understanding the Value and Investment Dashboard Exercise Using Microsoft Excel to Develop the Company Valuation and Investment Model Summary CHAPTER 12 Financial Reporting and Analysis Using the FIN Model Business Thinking About Financial Reporting and Analysis Understanding the Balance Sheet Creating the Balance Sheet Using Financial Ratios to Analyze Financial Statements...249

12 xiv CONTENTS Understanding the Business Case Impact on Financial Results Impact of Operating Activities Planned Investment Activities Targeted Financing Activities Planning the FIN Model Understanding the Building Blocks of the FIN Model Understanding the Profit & Loss Statement Worksheet Understanding the Statement of Cash Flow Worksheet Understanding the Balance Sheet Worksheet Understanding the Value and Investment Worksheet Understanding the Value and Investment Dashboard Understanding the Financial Statements and Analysis Dashboard Understanding the Financial Reporting Model Chart Data Worksheet Exercise Using Microsoft Excel to Develop the Company Balance Sheet Exercise Using Microsoft Excel to Create Financial Ratios Summary INDEX...269

13 About the Author TOM Y. SAWYER has a proven track record as a principal architect, leader, and strategist for successful business and technology ventures. Tom provides management and technology consulting services to technology-focused enterprises, specializing in early-stage organizational strategies, product development, and financial projections. A serial entrepreneur, he founded and sold an Internet data storage dot com, served as president of a regional Internet Service Provider where he negotiated the strategic sale of the company, and served as the first president of a software company that, today, is the largest enterprise software and consulting company in the moving industry. He served as chief technology officer of a GPS/GIS centric engineering technology services company serving the utility industry. Tom gained Fortune 100 senior management experience as the director of information technology for the Martin Marietta Space Launch Systems Titan IV missile program, where he received the Outstanding Achievement Award for Information Technology Management. Prior to his Fortune 100 career, he served in progressively more responsible financial management and financial planning positions in banking, technology services, and computer manufacturing. He holds a BSBA degree in finance from the University of Florida. xv

14 About the Technical Reviewer DEBRA DALGLEISH is owner and lead consultant at Contextures Inc., which specializes in Microsoft Office programming and development. Located in Mississauga, Ontario, Canada, Contextures serves local and international clients in financial, pharmaceutical, service, and manufacturing industries. Self-employed since 1985, Debra has extensive experience in designing complex Excel and Access applications, as well as sophisticated Word forms and documents. She has written three books, published by Apress, to help users master and troubleshoot Excel pivot tables: Beginning Pivot Tables in Excel 2007, Excel 2007 Pivot Tables Recipes, and Excel Pivot Tables Recipe Book. In recognition of her exceptional technical contributions to the Excel community, Debra has been honored to receive Microsoft s Excel MVP award each year since You can find a wide variety of Excel tutorials and sample files on her Contextures web site:. For daily computer tips, please visit the Contextures Blog:. xvii

15 Acknowledgments I would like to thank my wife, Melanie Sawyer, for hours of proofreading, brutal honesty, and sack lunches; Ken Palmer for great accounting advice; Mark Beckner for getting me started; Scott Jones and Larry Hower for the book s technical case concepts; Lee Whitney for sage advice; and the gang at Ryan and Whitney for ongoing harassment and other annoyances. xix

16 Introduction This book outlines smart business strategies for building a technology startup and provides a comprehensive guide to building a financial model of the company. I wrote this book to share my entrepreneuring experience and to help the entrepreneur avoid many of the obstacles and hazards that I encountered while leading and participating in early-stage companies. This book is important because it combines logical business thinking and strategies with a step-by-step methodology for planning and modeling a technology company. It practically demonstrates the creation of operational and financial models that describe the workings of the company in quantitative terms. This book shows you how to take a business idea for a company and break it down into basic functional and operational components that can be modeled. The resulting model describes the business in quantitative terms and generates operational scenarios and financial projections that are needed to assess the value of the proposed enterprise. Who This Book Is For The ideal reader of this book is the technology entrepreneur, the business or technology student, the owner of an early-stage business, or anyone with an interest in the mechanics of planning, organizing, and developing financial projections for business enterprises. This book is also for anyone interested in using Microsoft Excel to develop operational and financial models of business enterprises. How This Book Is Structured This book presents a structured and logical exploration and development of a business strategy combined with the development of operational and financial models. The book takes you through the progressive creation of operational models that reflect primary functions of the business leading to the creation of financial models that develop standard financial statements. The first three chapters of the book form an introduction to the remaining chapters, each of which takes you through a step-by-step process of building the next logical model in a sequence required to complete the entire company business model. Chapter 1 begins with a high-level discussion of business principles and practical suggestions for the entrepreneur and concludes with a discussion of concepts for developing financial models. Chapter 2 describes, in greater detail, the structure and methodology and best practices for building a financial model for a technology company. Chapter 3 outlines the business case for Green Devil Control Systems (the Company), our business case company and new-breed, green technology company. We will analyze and model the Company throughout the remainder of this book. Chapter 4 kicks off the planning process with the development of organizational concepts and the forecasting of staffing and related costs. Chapter 5 opens our examination of Company target market assumptions with the creation of a sales and revenue forecast. xxi

17 xxii INTRODUCTION Chapter 6 develops the cost of goods sold for various product and service options of the Company and, combined with the sales and revenue forecast developed in Chapter 5, provides for a forecast of margin contribution from the sale of products and services. Chapter 7 assesses the life cycle cost of the sales and marketing function, modeling the fixed and variable costs associated with selling the Company s products and services. Chapter 8 plans for the application of the resources and schedule needed to develop, test, manufacture, and distribute the Company s products and services to market. Chapter 9 budgets for capital expenditures and other operating expenditures that are associated with the core operations of the Company, product development, and sales and marketing. Chapter 10 is the first of our financial modeling chapters covering the concepts of profit and loss and cash flow in detail and developing profit and loss financial reports. Chapter 11 explores Company valuation and investment strategy utilizing the forecasts and assumptions developed in previous chapters. Chapter 12 rounds out and completes our financial discussion with the creation of a Company Balance Sheet and the application of financial ratio analysis to our modeling results. Prerequisites The financial models and examples used in the book were developed using Microsoft Excel This book is written for readers who are familiar with Microsoft Excel at an intermediate or advanced level. The use of Microsoft Excel for financial modeling is emphasized rather than how to use Microsoft Excel in a generic sense. Downloading the Code The source code for this book is available to readers at in the Downloads section of this book s web page. Please feel free to visit the Apress web site and download all the code there. You can also check for errata and find related titles from Apress. Contacting the Author You are very welcome to contact me by at, or feel free to visit my web sites: and.