As a business evolves, it will encounter the need to build credibility with outside parties, such as investors and lenders, and to make well-informed strategic decisions. In short, financial...Read more »
“Investor-ready” Financial Models
“Investor-ready” Financial Models – Doug Jones, Director Fahrenheit Finance
Recently I read an excellent article by Mike Periu about getting your financial model “investor-ready”. Mike explains some key “do’s and don’ts” for preparing models for potential investors. In addition to his fine advice, let me add a few more suggestions about model preparation:
- It is all about cash flow. Non cash items like depreciation and amortization are important when preparing complete financial statements, but they are not very meaningful to potential investors. Also, don’t agonize over whether you should record that trade show registration as a prepaid expense. It is cash out the door today and that is what is important.
- Allow for changes to key assumptions over time, and make them visible to the reader. I admit that I have made the mistake of allowing one input cell for a key variable for all periods, not allowing for changes in future periods. That can result in the need to “hard code” a change in the model in later periods which eliminates transparency to the reader. Your production cost today may be high due to low volume, but it may drop in the future as your volume increases and you can produce more efficiently. Allow for that possibility.
- Watch the use of percentages. It is easy and often appropriate to define items as a percentage of sales. Commissions are a great example…if your average commission rate is 5% of sales, you should project it as 5% of sales. If your cost of sales for a certain item is 40%, be careful about using that % in your model. What if you change your sell price without a change in cost? What if the cost of the item is projected to rise but the market will not accept an increase in price? Wherever possible use actual per item sales and cost assumptions rather than percentages. That will allow you to adjust for changes to one of the factors and not the other.