Financial modeling for business owners and entrepreneurs

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For your convenience Apress has placed some of the front matter material after the index Please use the Bookmarks and Contents at a Glance links to access them ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info Contents at a Glance About the Author�� xvii About the Technical Reviewer�� xix Acknowledgments�� xxi Introduction�� xxiii ■■Part 1: The Foundations of Financial Modeling�� ■■Chapter 1: Business Thinking and Financial Modeling: Success Starts with the Right Mindset��3 ■■Chapter 2: The Company Business Model: Envisioning and Realizing Your Future�� 25 ■■Chapter 3: Green Devil Control Systems: Our Business Case��47 ■■Part 2: Financial Modeling in Action�� 55 ■■Chapter 4: The Staffing Model: Make the Most of Human Resources��57 ■■Chapter 5: Sales and Revenue Model: Chart Your Financial Future��83 ■■Chapter 6: Cost of Goods Sold and Inventory Model: Plot Your Costs and Margins��105 ■■Chapter 7: Cost of Sales and Marketing Model: Calculate the Cost of Doing Business��127 ■■Chapter 8: Cost of Product Development Model: Ensure a Return on Your Investment�� 157 ■■Chapter 9: Operating and Capital Expenditures Models: Manage Your Budget��185 ■■Chapter 10: Making Business Decisions Using Quantitative Models: Decision Analysis Best Practices��213 v ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info ■ Contents at a Glance ■■Chapter 11: Statements of Profit and Loss and Cash Flow: Plan for Profits and Ready Money��231 ■■Part 3: Valuation and Financial Reporting�� 255 ■■Chapter 12: Modeling Valuation and Investment with the FIN Model: Can You Cash Out?��257 ■■Chapter 13: Financial Reporting and Analysis Using the FIN Model: Do Better and Better��287 Index��317 vi ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info Introduction This book outlines smart business strategies for building startups and growing existing businesses It provides a comprehensive guide to building a financial model of the company I wrote this book to share my entrepreneuring experience and to help entrepreneurs and owners and managers of small and medium-sized businesses 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 startups and smaller companies It demonstrates, practically, 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 ongoing or proposed enterprise Who This Book Is For The ideal reader of this book is an entrepreneur, the owner or manager of an early-stage business, the business or technology student, 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 begins with a high-level discussion of business principles and practical suggestions for the entrepreneur or business owner and concludes with a discussion of concepts for developing financial models Chapter describes, in greater detail, the structure and methodology and best practices for building a financial model Chapter 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 kicks off the planning process with the development of organizational concepts and the forecasting of staffing and related costs Chapter opens our examination of Company target market assumptions with the creation of a sales and revenue forecast xxiii ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info ■ Introduction Chapter 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 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 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 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 examines good decision making and how to use your financial model as an integral part of the decision making process Chapter 11 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 12 explores Company valuation and investment strategy utilizing the forecasts and assumptions developed in previous chapters Chapter 13 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 2013 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 Download the Code The source code for this book is available to readers at www.apress.com in the Downloads section of this book’s web page (www.apress.com/9781484203712) 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 Contact the Author You are very welcome to contact me by e-mail at tom@tomysawyer.com, or feel free to visit my web site, www.tomysawyer.com xxiv ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info Part The Foundations of Financial Modeling ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info Chapter Business Thinking and Financial Modeling: Success Starts with the Right Mindset Your financial model is a key management tool If built correctly, it will provide invaluable assistance in understanding, managing, presenting and explaining your business idea or operations It can assist you in the simple budgeting of cash, or it can serve as the primary basis for a valuation of your company In this chapter, I will explain several concepts related to startups and small to medium sized businesses I will refer to the great men and women that create and own these organizations as Entrepreneur/Owners Every business must access financial resources at some point in their life cycle These resources can be investors, lenders, or strategic partners For the purposes of this book I will call these various entities Financial Resources, or Funders We will discuss questions that entrepreneurs and business owners get from investors, lenders, and potential strategic buyers and partners We will explore strategies and principles that create success and credibility, and we will view the business enterprise through the lens of value We will discuss the financial model, a tool that assists the entrepreneur/owner in planning and in articulating his or her success strategies I have combined thoughts and strategies for company success with a step-by-step financial modeling tutorial There is not always a clear correlation between business thinking and the actual financial model but, where possible, I have tried to link business thinking with the mechanics of the model There is an important reason for this link: The story of your company as set forth in your business plan and the quantitative outputs of your financial model must be consistent Analyzing, Demonstrating, and Explaining the Value of the Financial Model This book emphasizes business thinking about your company as you design your financial model Business thinking will enhance the probability that your model will provide a meaningful analysis of your company, helping you explain your success strategies to potential financial resources Your model should be designed to reveal the value proposition of your company, to uncover the profit engine of your enterprise Building a business requires focus, thought, understanding, and a clear business idea Can you articulate and quantify the value proposition for your business or idea? Can you demonstrate how you are going to achieve traction and prove that you have it? Maybe you are wondering just what traction means Your company is demonstrating traction when it is executing your operating plan, essentially as you planned it You also demonstrate traction when your business idea has credibility with employees, investors, partners, and customers Everyone knows traction when they see it ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info Chapter ■ Business Thinking and Financial Modeling: Success Starts with the Right Mindset Implicit in any well-designed model are the answers for most, if not all questions that the entrepreneur/owner must answer when pursuing the resources necessary to business I always say, “If you can model it, you can explain it.” Many subjects are qualitative in nature, and they cannot be directly represented on a spreadsheet—subjects like the vision of the company, staff qualifications, market assessments, or the company brand For each qualitative subject, however, there is usually some form of representation in the model Once you explain your strategy for penetrating a market, your model should show the quantification of your strategy Your company story should be represented by the model and vice versa Assumptions, for example, of the number of units sold and the associated cost of goods sold should make sense based on your qualitative explanation of the market opportunity Make sure that you have a thorough understanding of your business idea, and have done sufficient market research prior to any serious modeling exercise You remember “garbage in, garbage out,” right? ■■Note Financial models are not about absolute values; they are about relationships A good financial model demonstrates the relationships and the business tradeoffs that compose the profitability potential of the business idea If you understand the relationships, the drivers of revenue, drivers of cost, and critical success factors, you understand the core of the business Many believe that sales, profit, and profitability projections shown in financial models are the keys to success in attracting financial resources The truth is that they will come up with their own projections Funders want to understand the assumptions and the structure and the relationships within the model If assumption, structure, and relationships pass the test, the entrepreneur/owner has demonstrated complete understanding of the business side of the enterprise Most sophisticated potential investors are more interested in the soundness and logic of your thought process than your absolute projections The further out in time the model projects, the weaker the validity of the forecast However, in the short term, the model can be extremely valuable as a tool to forecast cash needs Attracting the Resources You Need to Grow Your Business To state the obvious, business ventures require resources There is a high probability that you will need to borrow or raise money at some point in the life cycle of your early stage venture One day, you will find yourself making a pitch to a relative, a banker, an angel investor, or a venture capitalist seeking the funding you need to build or grow your business The question may not be asked explicitly, but your target audience will be calculating the value of your business as part of their assessment of your proposition You must be able to explain the logic, rationale, and workings of your venture with sufficient clarity to enable investors, lenders or potential partners to make a determination of value They must be able arrive at an understanding of your company’s value if you are to attract the resources you need Don’t underestimate the value equation in attracting talent and employees High-quality employees make similar calculations of value to determine if they are willing to invest their time and energy, and sometimes reputations, by coming to work for your venture The financial model provides you with a powerful tool for articulating your business idea and assisting funding sources in determining a value profile for your company In the following sections, we will cover two important topics that are directly related to establishing the value of your company: • The big questions: Questions you will be asked by financial resources • Strategies that build value and credibility ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info Chapter ■ Business Thinking and Financial Modeling: Success Starts with the Right Mindset The Big Questions I have attended meeting after meeting in which the entrepreneur/owner failed to convince potential investors or lenders to fund their company In most cases, the presentation failed to prove that the entrepreneur/owner had a firm grasp on the business model needed to either take their idea to market and profitability or to qualify for operating capital loans Technology was rarely the show stopper The problem repeatedly centered on the business model: the business assumptions that failed the sniff test “What we’ve got here is failure to communicate.” —Donn Pearce, author and screenwriter, Cool Hand Luke Financial resources are looking for the entrepreneur/owner that has a clear sense of their opportunity and how to build their business A good entrepreneur/owner understands both technical and business opportunities and how to flesh out the numbers behind them The entrepreneur/owner will inevitably encounter fundamental questions from potential investors and lenders Examples of the big questions follow: • Cool idea; how you make money with it? • How much you need? • What you need it for? • When you need it? • What key events must occur for you to be successful and when? • What can go wrong? • What you think your company is worth? • What will be the return on my investment? These types of questions, represent the starting point from which the Resource proceeds to assess the risk/opportunity profile of your company These questions are actually pretty straightforward They are the same questions anyone asks when they are thinking about purchasing or investing in virtually anything Does it work like you say it does? How much you want for it? What makes you think it’s worth that? To explain how you’ll make money with your idea, your team, market opportunity, and the product/value proposition must be justified and explained Risk is a major factor in any value assessment Where is the risk in the overall business and technology and product production model, and how may it be quantified or mitigated? Risk is the dark side of critical success factors What is the risk that the venture’s critical success factors will not be realized? Technology differentiation or business model differentiation is also important Internal processes for development, tools, code review, and the philosophy around development must support cost estimates to build the product and meet introduction schedules How much cash is needed and when? Investors prefer to fund growth in sales and build out of capability rather than early stage research and development Lenders want to see cash flow and cash flow projections From the earliest idea scratched on a napkin through the various stages of growth, a fundamental question is repeatedly asked about companies looking for resources, “How much is it worth?” The entrepreneur/owner will attempt to answer this question, but the Resource will determine the answer And the answer, over the life cycle of the endeavor, will greatly influence the prospects for success To survive due diligence by a sophisticated investor, all of these questions must be answered A complete, well-designed financial model will not only facilitate the answers, but will also provide the entrepreneur/owner with a tool to examine “what ifs” with various assumptions and scenarios ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info This book is dedicated to my father, Tom Y Sawyer, the last of the old-time country lawyers ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info Contents About the Author�� xvii About the Technical Reviewer�� xix Acknowledgments�� xxi Introduction�� xxiii ■■Part 1: The Foundations of Financial Modeling�� ■■Chapter 1: Business Thinking and Financial Modeling: Success Starts with the Right Mindset��3 Analyzing, Demonstrating, and Explaining the Value of the Financial Model��3 Attracting the Resources You Need to Grow Your Business�� The Big Questions�� Strategies That Build Value and Credibility��6 Performance and Execution Strategies�� People and Process Strategies�� 11 Ownership and Control Strategies�� 12 Common Ways of Getting Stuck��14 Looking at Your Company from the Perspective of Value��15 The Value-Based Enterprise Perspective�� 15 Four Primary Value Events�� 16 Critical Thinking about the Business and Financial Model��19 Financial Model Design Principles�� 19 Financial Model Design Dimensions�� 20 Major Functions Performed by the Model�� 22 Summary��23 vii ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info ■ Contents ■■Chapter 2: The Company Business Model: Envisioning and Realizing Your Future�� 25 Designing a Company��25 Business Thinking About Financial Modeling��27 Applying the Project Planning View�� 27 Applying the Software Development View�� 29 Creating the Company Business Model�� 30 Using the Top-Down Approach��30 Deriving the Model Structure�� 31 Organizing the Sequence of the Models�� 32 Developing the Models’ Design and Functionality�� 36 Summary��46 ■■Chapter 3: Green Devil Control Systems: Our Business Case��47 Founding Green Devil Control Systems��48 Giving Birth to the Idea��48 Getting the Company Started��48 Testing Market Feasibility�� 48 Assessing Technical Feasibility�� 49 Validating Resource Feasibility�� 49 Designing the Company��49 Stating the Company Purpose�� 49 Defining the Product�� 49 Establishing the Value Proposition�� 50 Identifying the Target Market�� 50 Assessing the Market�� 50 Developing a Marketing Strategy�� 50 Creating the Sales Strategy�� 50 Defining the Scope�� 50 Establishing Naming Conventions�� 51 Identifying Assumptions and Risk�� 51 Developing the Production Approach�� 51 viii ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info ■ Contents Assigning Roles and Responsibilities�� 51 Company Deliverables�� 51 Master Schedule, Critical Milestones, and Earned Value Criteria�� 52 Summary��53 ■■Part 2: Financial Modeling in Action�� 55 ■■Chapter 4: The Staffing Model: Make the Most of Human Resources��57 Business Thinking About Staffing: Evolution or Intelligent Design?��57 Staffing the Startup Phase�� 58 Staffing the IOC Phase�� 59 Staffing the FOC Phase�� 59 Moving Through the Phases�� 59 Reviewing the Staffing Business Case��60 Exploring the Market�� 60 Exploring the Product�� 60 Understanding the Critical Components of the Staffing Model��61 Planning the Staffing Model��62 Planning the Organizational Structure�� 62 Creating the Staffing Plan�� 63 Defining Cost Assumptions and Key Planning Variables�� 64 Using the Building Blocks of the STAFF Model��64 Understanding the Staffing Plan Worksheet�� 65 Understanding the Staff Calculation Worksheet�� 66 Understanding the Executive Dashboard�� 70 Understanding the Executive Chart Data�� 71 Summary��81 ■■Chapter 5: Sales and Revenue Model: Chart Your Financial Future��83 Business Thinking About Sales and Revenue��83 Validating the Value Proposition�� 84 Analyzing the Market�� 84 ix ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info ■ Contents Positioning the Product�� 84 Planning for Product Availability�� 84 Crafting the Sales Strategy�� 84 Making Sales Assumptions�� 85 The Products, Services, and Sales Strategy Business Case��85 The ECS Value Proposition�� 85 The ECS Market�� 85 The ECS Product�� 85 ECS Product Availability�� 86 ECS Sales Strategy�� 86 ECS Sales Forecast Assumptions�� 86 Planning the Sales and Revenue Model��88 Defining the Product Configuration and Component Revenue and Cost Assumptions�� 88 Developing Sales Forecast Assumptions�� 88 Developing Methods for Forecasting Revenue�� 88 Developing Cash Collection Assumptions Based on Revenue�� 89 Exploring the Building Blocks of the REV Model��89 Understanding the Sales Forecasting Worksheet�� 90 Understanding the Product Pricing and Margin Worksheet�� 92 Exploring the Revenue Calculation Worksheet�� 94 Exploring the Recurring Service Rev and Maintenance Rev Worksheet�� 95 Understanding the Accounts Receivable Worksheet�� 97 Exploring the Revenue Summary Dashboard�� 98 Exploring the Revenue and COGS Chart Data�� 98 Summary��104 ■■Chapter 6: Cost of Goods Sold and Inventory Model: Plot Your Costs and Margins��105 Using Business Thinking About COGS��105 Defining “Cost of Goods Sold”�� 105 Defining “Inventory”�� 106 Assessing Profitability and Contribution to Margin�� 106 x ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info ■ Contents Considering the Green Devil Control Systems Product Offering and Sales Strategy��107 Product�� 107 Product Development�� 107 Making Product Availability Fulfillment and Inventory Assumptions�� 108 Product Pricing and Variable Cost�� 108 Planning the COGS Model��109 Defining Product Configuration Assumptions Related to Component Revenue and Costs�� 109 Developing Cost of Goods Sold and Profitability Assumptions for Each Year�� 110 Developing Inventory Assumptions�� 110 Developing an Inventory AP Model and Assumptions�� 110 Examining the COGS Model’s Building Blocks��111 Understanding the Product Pricing and Margin Worksheet�� 112 Understanding the Revenue Calculation Worksheet�� 113 Understanding the Contribution to Margin Analysis Worksheet�� 114 Understanding the Inventory and Inventory AP Worksheet�� 116 Understanding Revenue and COGS Chart Data�� 119 Summary��126 ■■Chapter 7: Cost of Sales and Marketing Model: Calculate the Cost of Doing Business��127 Business Thinking about the Cost of Sales and Marketing��127 Completing the Market Assessment�� 128 Developing the Value Proposition�� 129 Understanding Sales and Marketing Strategy�� 133 Exploring the Sales and Marketing Strategy Business Case��133 Exploring the Product�� 134 Assessing the Market�� 134 Creating a Resonating Offer to the Customer�� 135 Capturing the Market�� 135 Planning the COSM Model��138 xi ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info ■ Contents Using the Building Blocks of the COSM Model��138 Understanding the Staff Calculation Worksheet�� 139 Understanding the Bonus and Sales Commission Worksheet�� 140 Understanding the Trip Type Calculation Worksheet�� 141 Understanding the Trip Plan Calculation Worksheet�� 143 Understanding the Cost of Sales and Marketing Calculation Worksheet�� 143 Understanding the Capital Plan Calculation Worksheet�� 144 Understanding the Cost of Sales and Marketing Dashboard�� 145 Understanding the Cost of Sales and Marketing Chart Data Worksheet�� 147 Summary��155 ■■Chapter 8: Cost of Product Development Model: Ensure a Return on Your Investment�� 157 Business Thinking About Product Development��157 Product Development Objectives, Strategies, and Tactics��158 Creating Product Concept and Design�� 159 Planning�� 159 Optimizing the Time to Market�� 159 Adopting Agile Product Development and Production�� 160 Forming the Team�� 160 Managing the Product Life Cycle�� 161 Building in Quality�� 161 Sustaining Development Capacity�� 161 Taking Care of Your Customers�� 162 Know Your Suppliers�� 162 Capture Intellectual Property�� 162 Developing the Green Devil Control Systems Product Development Strategy��163 Product�� 163 Scheduling Product Development�� 164 Targeting Operational Dates for Product Availability and Inventory�� 166 Strategizing Product Development�� 166 Considering Other Product Development Strategies�� 168 xii ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info ■ Contents Planning the DEV Model��169 Exploring the Building Blocks of the DEV Model��169 Using the Staff Calculation Worksheet�� 170 Using the Bonus and Sales Commission Worksheet�� 171 Using the Trip Type Calculation Worksheet�� 172 Using the Trip Plan Calculation Worksheet�� 173 Using the Cost of Product Development Calculation Worksheet�� 174 Using the Capital Plan Calculation Worksheet�� 175 Using the Cost of Product Development Dashboard�� 176 Using the Cost of Product Development Chart Data Worksheet�� 177 Summary��182 ■■Chapter 9: Operating and Capital Expenditures Models: Manage Your Budget��185 Business Thinking About Cash Flow�� 185 Criteria for Capital Expenditures�� 188 Calculating Depreciation�� 188 Defining Expensed Items�� 188 Considering Categories of Expense�� 188 Planning the Operating Expenditure (OPEX) Model��189 Planning the Capital Expenditure (CAPEX) Model��189 Building and Using the OPEX and CAPEX Models��190 Exploring the Building Blocks of the OPEX Model��192 Developing the Operational Expenditure Calculation Worksheet�� 192 Using the Operational Expenditure (Monthly) Worksheet�� 193 Reviewing the Operational Expenditure (Yearly) Dashboard�� 193 Utilizing the OPEX and CAPEX Chart Data Worksheet�� 194 The Building Blocks of the CAPEX Model��196 Understanding the Capital Plan Calculation Worksheet�� 196 Understanding the Depreciation Calculation Worksheet�� 197 Understanding the Fixed Assets Calculation Worksheet�� 198 Reviewing the Capital Plan and Fixed Assets Dashboard�� 199 Summary��211 xiii ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info ■ Contents ■■Chapter 10: Making Business Decisions Using Quantitative Models: Decision Analysis Best Practices��213 Business Thinking About Decision Making��213 Financial Models and Decision Making��214 Variables��214 Variables Conducive to Financial Modeling�� 214 Variables Not Conducive to Financial Modeling�� 215 Financial Modeling Tools Used in Decision Making��215 Decision Support Tools�� 217 Uncertainty and Risk��218 Risk Mitigation�� 219 Pitfalls��221 The Anchoring Trap�� 221 The Sunk Cost Trap�� 222 The Confirming Evidence Trap�� 222 The Framing Trap�� 222 The Overconfidence/Prudence Trap�� 223 The Decision Process: From Uncertainty to Action��223 State the Decision�� 224 Develop Decision Objectives�� 225 Generate Alternatives�� 225 Classify Objectives Into MUSTs and WANTs�� 226 Screen Alternatives Through the MUSTs�� 226 Compare Alternatives Against the WANTs�� 227 Identify Adverse Consequences�� 227 Make the Best Balanced Choice�� 227 Summary��230 xiv ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info ■ Contents ■■Chapter 11: Statements of Profit and Loss and Cash Flow: Plan for Profits and Ready Money��231 Business Thinking about Profit, Loss, and Cash Flow��231 Understanding the Profit and Loss Statement�� 232 Understanding the Statement of Cash Flows�� 236 Exploring Cash Flow Impacts of the Product Development Strategy Business Case��240 Defining the Product�� 240 Planning Operating Activities�� 240 Charting Investment Activities�� 241 Ref lecting Financing Activities�� 242 Planning the FIN Model��243 Understanding the Building Blocks of the FIN Model��245 Understanding the Profit & Loss Statement Worksheet�� 245 Understanding the Statement of Cash Flows Worksheet�� 247 Understanding the Value and Investment Worksheet�� 249 Understanding the Value and Investment Dashboard�� 249 Understanding the Company Balance Sheet Worksheet�� 249 Understanding Financial Reporting Model Chart Data�� 250 Summary��254 ■■Part 3: Valuation and Financial Reporting�� 255 ■■Chapter 12: Modeling Valuation and Investment with the FIN Model: Can You Cash Out?��257 Business Thinking about Valuation and Investment��257 Understanding Valuation and Investment�� 258 Assessing the Value of Events and Risk�� 265 Exploring the Valuation and Investment Strategy Business Case��266 Defining the Product�� 266 Creating a Strategy to Build Value and Credibility�� 266 Devising the Investment and Valuation Strategy�� 267 Planning the FIN Model��271 xv ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info ■ Contents Understanding the Building Blocks of the FIN Model��272 Understanding the Profit & Loss Statement Worksheet�� 272 Understanding the Balance Sheet Worksheet�� 273 Understanding the Financial Reporting Model Chart Data Worksheet�� 273 Understanding the Company Master Schedule�� 273 Understanding the Statement of Cash Flow Worksheet�� 273 Understanding the Value and Investment Worksheet�� 274 Understanding the Value and Investment Dashboard�� 275 Summary��285 ■■Chapter 13: Financial Reporting and Analysis Using the FIN Model: Do Better and Better��287 Business Thinking About Financial Reporting and Analysis��287 Understanding the Balance Sheet�� 288 Creating the Balance Sheet�� 289 Using Financial Ratios to Analyze Financial Statements�� 293 Understanding the Business Case Impact on Financial Results��294 Impact of Operating Activities�� 295 Planned Investment Activities�� 295 Targeted Financing Activities�� 296 Planning the FIN Model��297 Understanding the Building Blocks of the FIN Model��298 Understanding the Profit & Loss Statement Worksheet�� 299 Understanding the Statement of Cash Flow Worksheet�� 300 Understanding the Balance Sheet Worksheet�� 303 Understanding the Value and Investment Worksheet�� 304 Understanding the Value and Investment Dashboard�� 305 Understanding the Financial Statements and Analysis Dashboard�� 306 Understanding the Financial Reporting Model Chart Data Worksheet�� 306 Summary��315 Index��317 xvi ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info About the Author Tom Y Sawyer is a serial entrepreneur, business and marketing strategist, author, inventor, and career coach He has a proven track record as a principal architect, leader, and strategist for successful business and technology ventures Tom provides consulting services to business owners and entrepreneurs specializing in early-stage organizational strategies, product development, marketing strategies, and financial modeling 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 highly successful moving industry startup software company Tom also served as chief technology officer of a GPS/GIS–centric utility industry technology services company and is a named inventor on six of their technology patents Tom gained Fortune 100 senior management experience directing information technology support 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 He studies philosophy, guitar, and martial arts to balance out his mania for old-fashioned capitalist enterprise He travels the world, teaches awareness meditation, and loves the Wild West outdoors of his Western Colorado home xvii ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info 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 2001 You can find a wide variety of Excel tutorials and sample files on her Contextures web site: www.contextures.com For daily computer tips, please visit the Contextures Blog: blog.contextures.com xix ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info Acknowledgments I would like to thank 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/Sawyer Marketing for ongoing harassment and other annoyances xxi ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info Other Apress Business Titles You Will Find Useful Improving Profit Cleland 978-1-4302-6307-4 Metrics Klubeck 978-1-4302-3726-6 Eliminating Waste in Business Orr/Orr 978-1-4302-6088-2 Better Business Decisions from Data Kenny 978-1-4842-0185-5 From Techie to Boss Cromar 978-1-4302-5932-9 Being Agile Moreira 978-1-4302-5839-1 Build a Profitable Online Business Olsson 978-1-4302-6379-1 How to Speak Tech Trivedi 978-1-4302-6610-5 Why Startups Fail Feinleib 978-1-4302-4140-9 Available at www.apress.com ||||||||||||||||||||||||||||||||||||||||||||||||| www.it-ebooks.info ... entrepreneuring experience and to help entrepreneurs and owners and managers of small and medium-sized businesses avoid many of the obstacles and hazards that I encountered while leading and participating... logical business thinking and strategies with a step-by-step methodology for planning and modeling startups and smaller companies It demonstrates, practically, the creation of operational and financial. .. concepts for developing financial models Chapter describes, in greater detail, the structure and methodology and best practices for building a financial model Chapter outlines the business case for

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Financial modeling for business owners and entrepreneurs

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Contents at a Glance

Contents

About the Author

About the Technical Reviewer

Acknowledgments

Introduction

Part 1: The Foundations of Financial Modeling

Chapter 1: Business Thinking and Financial Modeling: Success Starts with the Right Mindset

Analyzing, Demonstrating, and Explaining the Value of the Financial Model

Attracting the Resources You Need to Grow Your Business

The Big Questions

Strategies That Build Value and Credibility

Performance and Execution Strategies

Getting There Fast

Taking Early Action

Using a Feedback Loop and Responding Rapidly

Using Prototypes for Simultaneous Research and Selling

Being Agile with Technology and Product Development

Remembering that Cash Is King

Keeping Good Books

People and Process Strategies

Securing the Team

Putting Skin in the Game

Sealing the Deal Early

Planning for Growth

Ownership and Control Strategies

Knowing What You Own

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