Presentation on Financial Modelling.pptx

Financial modeling is one of the most highly valued, but thinly understood, skills in financial analysis. The objective of financial modeling is to combine accounting, finance, and business metrics to create a forecast of a company’s future results.

A financial model is simply a spreadsheet which is usually built in Microsoft Excel, that forecasts a business’s financial performance into the future. The forecast is typically based on the company’s historical performance and assumptions about the future, and requires preparing an income statement, balance sheet, cash flow statement, and supporting schedules (known as a three-statement model).

From there, more advanced types of models can be built such as discounted cash flow analysis (DCF model), leveraged buyout (LBO), mergers and acquisitions (M&A), and sensitivity analysis. Below is an example of financial modeling in Excel:

1. Financial Modelling An Holistic Exercise

2. Expectations of the session What will be covered Basic structure of modelling will be covered Theoretical structure/ building blocks of Financial modelling from strategic perspective Will show the use case (in confidence) Will not cover Excel Formulaes Detailed Calculations, Graphs and Ratios Cashflows, Valuation Session focus Best Practice Sharing, Discussion, Prime focus on concepts and less on calculations

3. Contents Purpose What is important for scaling Output Business Models for Startups Top Down – Revenue and Cost Model Marketing Channels TAM for Fintech Company ROAS for Fintech Company CAC Example CAC Example Unit Economics Expenses Breakup Fixed Assets Cost Drivers Direct Costs Drivers for Direct Cost Indirect Costs Drivers Working Capital Sources of Funds Use Case and Regression example

4. Purpose Target Client Mostly Startups SMEs who are scaling up Challenges/ Opportunities Cofounder is mostly non-finance person Passionate but lacks experience and clear vision Will face challenges during scaling Need of the hour – Investor purpose, Valuation, Pitch Deck Only has rough estimates – No proper basis Charge for Financial Modelling as it is not part of Valuation exercise

5. WHAT IS SO IMPORTANT FOR SCALING Clarity of plan and execution for next 5 to 10 years – Program Management – all minute details to be planned and revisited Focus on Governance and Compliance Spend on Technology, Marketing and People (smart and other) Process driven/ Structure / Policies in place Take external and professional help - Spend on professional advise Strong Leadership Principles and Ethics Build capacity and capability for expansion Organization structure and succession planning Over dependence on runway – Wrong allocation of funds – Using Investor funding to run the business

6. Output Income Statement Balance Sheet Cashflow Statement Ratios Cap Table Investment Needed

7. Business Models of Startups Startup Business Models

8. Top Down – Revenue and Cost

9. Various Marketing channels 1. Digital Marketing Channels 1.1. Search Engine Optimization (SEO) 1.2. Pay-Per-Click (PPC) Advertising 1.3. Social Media Marketing 1.4. Content Marketing 1.5. Email Marketing 1.6. Affiliate Marketing 1.7. Influencer Marketing 2. Offline Marketing Channels 2.1. Traditional Advertising 2.2. Direct Mail 2.3. Events and Sponsorships 2.4. Public Relations (PR) 3. Hybrid Marketing Channels 3.1. Content Syndication 3.2. Partnerships and Alliances 3.3. Referral Programs 4. Emerging Marketing Channels 4.1. Chatbots and Messaging Apps 4.2. Voice Search and Smart Speakers 4.3. Virtual and Augmented Reality (VR/AR) Selecting and Optimizing Channels 1. Audience Analysis 2. Goal Alignment 3. Budget Allocation 4. Testing and Optimization 5. Integrated Marketing

10. TAM for a Fintech company Define the Fintech Product or Service Identify the Target Market Segments - For example, segments for a mobile banking app might include: - Individual consumers (e.g., millennials, Gen Z, unbanked populations) - Small and medium-sized enterprises (SMEs) - Large enterprises

11. Determine the Market Size of Each Segment Individual Consumers Population Data: Use census data or demographic reports to find the number of individuals in the target age group and geographic location. Penetration Rates: Estimate the percentage of the target population likely to use your service based on market research, surveys, or adoption rates of similar services. Small and Medium-Sized Enterprises (SMEs) Business Data: Obtain data on the number of SMEs in your target region from business registries, industry reports, or economic surveys. Adoption Rates: Estimate the percentage of SMEs that might adopt your fintech solution, considering factors like technology adoption rates in the industry. Large Enterprises Corporate Data: Find the number of large enterprises through business directories and industry reports. Adoption Rates: Similar to SMEs, estimate the likelihood of large enterprises adopting your solution.

12. TAM - Computation For each segment, calculate the potential revenue by considering:  - Average Revenue Per User (ARPU): Estimate how much revenue an average user or business in each segment will generate. - Market Penetration: Estimate the maximum potential penetration rate (e.g., what percentage of the total market can you realistically capture). {Revenue Potential} = {Market Size} {Adoption Rate} {ARPU} -Aggregate the Data Combine the revenue potential estimates from all segments to arrive at the Total Addressable Market. {TAM} = {Segment Size} {Adoption Rate} {ARPU})

13. TAM computation - Example 1. Individual Consumers: - Population: 100 million adults - Adoption Rate: 30% - ARPU: $50/year - Revenue Potential: 100 million × 0.30 × $50 = $1.5 billion 2. SMEs: - Number of SMEs: 5 million - Adoption Rate: 40% - ARPU: $500/year - Revenue Potential: 5 million × 0.40 × $500 = $1 billion  3. Large Enterprises: - Number of Enterprises: 1,000 - Adoption Rate: 70% - ARPU: $10,000/year - Revenue Potential: 1,000 × 0.70 × $10,000 = $7 million [ {Total TAM} = $1.5 { billion} + $1 { billion} + $7 { million} = $2.507 { billion} ]

14. ROAS – Return on Ad Spends ROAS Formula: {ROAS} = Revenue from Ads/Advertising Spend ROAS indicates how much revenue is generated for every dollar spent on advertising. A ROAS of 5 means that for every $1 spent on ads, $5 in revenue is generated. 1. Advertising Spend: Collect data on how much you have spent on advertising in previous periods. 2. Revenue from Ads: Gather data on the revenue generated directly from those advertising efforts. 3. Other Relevant Metrics: Include data on impressions, clicks, conversion rates, and customer acquisition costs if available.

15. Sales Computation using ROAS - Example - Last Quarter Advertising Spend: $50,000 - Last Quarter Revenue from Ads: $200,000 - Historical ROAS:200,000/50,000 = 4 Based on trend analysis and expected improvements, you estimate a future ROAS of 4.5. You plan to spend $100,000 on advertising next month.  1. Estimated Revenue from Ads: {Expected Revenue} = 4.5 times 100,000 = $450,000 ] 2. Other Revenue Streams: Assume an additional $50,000 from non-advertising sources (e.g., organic growth, referrals). 3. Total Forecasted Revenue for Next Month: {Total Forecasted Revenue} = 450,000 + 50,000 = $500,000 ]

16. CAC – Customer Acquisition cost - example - Digital Ads: $10,000 - Content Marketing: $2,000 - SEO: $1,000 - Social Media: $1,500 - Sales Salaries and Commissions: $15,000 - CRM Software: $500 - Customer Support Salaries: $5,000 - Onboarding Costs: $2,000 - Referral Bonuses: $3,000 - Promotional Discounts: $2,500   Total Acquisition Cost for the month = $42,500   If the company acquired 500 new customers in that month: {CAC} = {42,500}/{500} = $85

17. Unit Economics Note: Unit Economics is difficult as it involves extensive Costing Exercise and usually possible if Costing System is installed to arrive at COGS and other Costs

18. Expenses Breakup Direct Costs Cost of Good Sold (COGS) Distribution Cost Employee Cost (Direct) Indirect Costs Employee Cost Technology Cost Marketing Cost Administrative Cost Legal Cost Depreciation

19. Fixed Assets Computers / Laptops – Based on # of employees Printers Furniture and Fixtures – Based on the size of the office Other Plant and Machinery – Based on the kind of operations/ business

20. Cost Drivers Direct Costs Cost of Good Sold (COGS) - # of units sold * per unit cost Distribution Cost - # of units sold * per unit cost Employee Cost (Direct) - # Employees involved in Direct Contribution per unit of sales * Salary cost Indirect Costs Employee Cost - # Employees * Salary for the period Technology Cost – Estimated based on technology involved (like cloud, etc.,) Marketing Cost – Estimated based on the marketing strategy (Ad spends, SEO, others) Administrative Cost – Estimated based on the rent paid for office space and other admin costs Legal Cost - Estimated Depreciation – Based on the investment in Fixed Assets

21. Direct Costs Cost of Good Sold (COGS)= # of units sold * per unit cost Cost of Good Sold (COGS) = Beginning Inventory + Purchases current period – Ending inventory Cost of Raw Materials Cost of Direct Labor - # Employees involved in Direct Contribution per unit of sales * Salary cost (Cost of Labor calculated based on the productivity) Distribution Cost - # of units sold * per unit cost

22. Drivers for Direct Cost Direct Material – Based on Bill of Materials Direct Labor – Based on Productivity for each assembly line or Production Line Distribution Costs – Based on the business and supply chain management Cost Sheet – Excel Sheet Review

23. Indirect - Employee cost Drivers Based on Span of Control, Productivity Technology Team Marketing Team Operations Administrative & Facilities Finance Leadership Team

24. Indirect Cost Drivers Technology Cost – Estimated based on technology roadmap, other recurring (cloud space, API, etc.,) Marketing Cost – Estimated based on the marketing strategy (Ad spends, SEO, others) Administrative Cost – Estimated based on the rent paid for office space and other admin costs HR – Based on total employee strength and growth Finance – Based on Sales growth Depreciation – Based on the investment in Fixed Assets

25. Working Capital Inventory holding - # of months of Sales Volumes Bills Receivable - # of months of Sales Bills Payable - # of months of Purchases Rent and other Deposits Advance received from Customers Advance paid to Vendors Bank Overdraft Other Expenses Payable Duties and Taxes Payable

26. Source of Funds Long Term Equity CCPS SAFE CCD Long Term Debt Working Capital Bank Overdraft / Cash Credit Own Funds

27. Use Case Will go through high level as it might need separate session to go through in detail Regression - Example

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