Financial Modeling
Bill Warner Thursday, July 17, 2008
“Financial models are a black art and don’t really reflect what is going to happen anyway,” says a typical entrepreneur! Well, true and not true. It’s not a black art, and your business is probably going to act differently than you expected. Nevertheless, you can’t run a business without a game plan. When an executive and founder put a business plan together, one of the exhibits is a financial model of the business. This is your financial road map. It is important to show an estimate of how the business is going to perform over the first three to five years. It is shown as balance sheet, cash flow and income and expense statements. These are created from estimates of costs, expenses and revenue that all feed the calculations in the financial statements.
But, where does the executive get the data? There are lots of ways to go about this, but here is an approach that works pretty well, and in this order:
- From your market plan, do an estimate of revenue. Don’t just use a market share percentage and think you are done. Take into account the:
- Lead generation productivity expected
- The length of the sales cycle
- Price assumptions
- Revenue recognition assumptions
- Collection assumptions
- Availability of trained sales people
- Productivity of the supply chain
Calculate the number of customers per month and multiply by your price assumptions. Then calculate the revenue based upon your collection assumptions. Since so much of the cost and expense item are determined by revenue assumptions, this is the first step in creating a financial model. No, you won’t actually attain revenue exactly as you planned. The important aspect of this exercise is that you make reasonable assumptions to convince yourself that the revenue plan can be achieved.
- Based on the revenue estimate, the number of products and services sold is known. The costs of goods sold can then be determined. This is a matter of reflecting all the costs of manufacturing the product. For hardware, it’s the manufacturing cost. For software, it’s the cost of creating the software distribution package. For services businesses, it’s the costs of performing the service. Maintenance is also a cost item. These numbers will be subtracted from revenue in the income and expense statement to determine the gross profit.
As part of this step, the inventory plan should be created. Based on the expected rate of sales, a good estimate of the inventory and parts levels can be made. This will be appropriately reflected in the cash flow and balance sheet statements.
- Also, based on the revenue estimate, department budgets can be established. The task differs by type of department, and the expenses vary based on many factors; for example:
- The development expense of a product or service will have to reflect the workload required to produce it
- The maintenance expense will be driven by the inherent quality of the product
- The marketing program expenses will be determined by the number of leads that have to be generated to create the number of qualified leads that the sales team will need
- The sales expense will be driven by the number of customers that have to be called upon and expected closure rate
- The professional services department costs will vary by the length of each services engagement and the number of people that will be needed to perform them
- The support services will be determined by the expected number of customer calls that will have to be answered
- Administration expenses will be driven by the need for support for the functional departments; like sales administration, controller, legal, information systems, human resources, and many others
These budgets are laid out month by month and checked for reasonableness and completeness. All these numbers will be summarized and subtracted from gross profit, to determine the pre-tax net profit.
- Next, a capital budget is established, reflecting all the items that will be purchased that can be depreciated. These are usually items that cost more than $1,000. Examples are: computers, furniture, appliances, buildings, lease improvements, manufacturing equipment and telecommunications equipment. These too are laid out month by month and a depreciation schedule established. The expense for the capital will be reflected in the balance sheet and cash flow statements and the depreciation will be accounted for in the income and expense statement.
- Now it’s time to reflect all these items in the financial statements, which draw upon all the previous information. You will be able to see the profitability and cash flow performance of the business. But, you are not done.
- Unless you can bootstrap the business to profitability and maintain positive cash flow, chances are you are going to need money to get the business started. This influx of cash has to be enough to maintain a positive cash position at the end of every month. The main choices are:
- Borrowing – this form of funding is reflected in the cash flow statement and in the balance sheet as a liability.
- Strategic partnership – where another company supplies cash for your business and is returned a royalty on revenue once sales have been achieved. The nature of the business relationship will determine the manner in which it is reflected in the financial statements.
- Equity – is selling shares of the business to accredited investors who then own a percentage of the business. They get a return on their investment when the company has enough liquidity to repay their investment plus a generous return.
With all this information, you have a financial model of your business. Now you can understand the financial dynamics of the business and perform a “what if” analysis to tune the model. You should also compare your financial ratios with other companies that are similar to yours. This is a good check on the reasonableness of your assumptions.
With this level of financial work reflecting your business, you will have the basis for your financial plan. Not only will the model be used to convince yourself and possible funding partners, it will become your budget and revenue plan. This plan will be further refined as your business matures and learn more about your business’s actual operation.
Filed Under:
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
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CEO Coach - Improving Communications
Bill Warner Monday, July 14, 2008
Getting your ideas across, helping your employees, and achieving your ambitions all come with effective communication. Even though you may already be a good communicator, everyone can improve on their current abilities and approaches to communications.
Network With Other Executives
One way to improve your communications skills is to take advantage of local business organizations. Many business communities have organizations like the Council for Entrepreneurial Development (CED) which is housed here in Research Triangle Park, North Carolina. The CED is a place where entrepreneurs can gather to share ideas and gain training on business related topics. Take advantage of CEO gatherings, industry networking events, business seminars and communications coaching opportunities.
Get Out and Meet People
Other ways to improve company communications include implementing an aggressive program of Managing By Walking Around (MBWA). CEOs can’t communicate if they are stuck in their offices. Get out and walk the halls and visit the cubes of ALL your employees. Ask questions about how the employees are doing, what they are doing and how they are going it. Be interested or at least act interested in your employees and the teams they work within.
Regular Employee Communications
Share information about the company freely. If the CEO does not share the information, the employees will make up their own information. This is the dreaded rumor mill. Share information in person in company meetings on a monthly or quarterly basis. Implement a company newsletter/newspaper/e-letter and encourage every department and team contribute.
Be Consistent
Be consistent in your communications. Many CEOs complain that they have set the company vision and shared it with the employees, but “everyone is going in different directions?” What they don’t realize is that each time they share the vision they state it slightly differently and the employees hear a different vision.
Be brief and only communicate the minimum required to get the message across. To elaborate and elaborate slightly differently each time just breeds confusion and lack of focus.
Focus on Improvement
The most effective way of improving communications is to assess your situation, identify and improve on your areas of weakness, and capitalize on your strengths. Where do you start? Ask your employees.
Make communications a daily drum beat. Communications effectiveness starts in the CEOs office, continues with MBWA, and ends in the CEOs office. You can even get a coach, who can impartially discuss your communications needs and strategies.
Filed Under: Business Operations, Management and Leadership
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
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CEO Coach - What’s Your Value Proposition
Bill Warner Monday, June 30, 2008
I attended a very enlightening meeting last week of an organization called Men of Significance. It is led, along with others, by Fate Thompson, the CEO of iAdvantage Software in Cary, NC.
They bring to life another aspect of business vision and value proposition. When thinking about these two subjects, most of us think of the obvious observations about market size, customer value, revenue growth, profitability, marketing messages and sales traction. But, we don’t often think about our own fulfillment. That is, what of your own needs have been fulfilled by your business vision and value proposition. Often, the need is really not money or fame. Searching deeply into your own purpose in life, you perhaps will find a more fundemental and significant need that drives you. Entrepreneurs and business executives start businesses for many reasons. When you discuss with them why they are taking this risk, you will often find a deeply seeded and thoughtful reason that really represents their view of their purpose in life. Men of Significance is all about helping business people find that deeper need and to guide them to their significance in life.
This organization adds another dimension to the way we should think about our role in a business endeavor. I invite you to go to their website at www.men-of-significance.org and learn about their organization and the many resources they have available.
Filed Under: Management and Leadership, Raleigh Happenings
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
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Sales Fundementals
Bill Warner Thursday, June 26, 2008
You are selling your product from the time you put together your first market study and every day thereafter. Actually, everybody in the company sells in one form or another; it’s not just the sales team’s role. You have to sell to your employees, stakeholders, investors, channel partners, alliance partners and customers. Let’s focus on selling the company’s products and services.
Your first sales call
Once you have a well formed business plan, your first sales call will be to companies that you will want to buy your product some day. During your market validation you should call on prospective customers to determine if your value proposition is valid and whether or not the buyer will be interested enough to actually buy the product. You are finding out:
- Do you really understand the buyer
- Do you have the problem defined correctly
- Does the product really solve the problem
- Is the value really there
- Will the buyer really buy
In this process, you will have created a relationship that could turn out to be your first revenue producing sale. You would be wise to establish a relationship that will last through the entire time before the product is ready to go to market. Foster the customer relationship as if they are your first paying customer, because they may turn out to be just that. Become partners with them.
Who’s next?
Before the product is ready to go to market, you should establish relationships with early adopter customers. These customers will be your first users of your product and will require special handling. You sell your product to them. Make them a good deal. Give them special support. Get them to agree to take the first version of the product and actually use it. They are your “lighthouse accounts,” showing the way for the upcoming product introduction. This “Beta” customer engagement will give you a chance to validate not only your product’s capabilities, but also your entire service and support infrastructure. You are testing out your product in a real customer environment. These buyers should ultimately become some of your first paying customers.
Sell to your channel partners
With your understanding of your sales and distribution channel, your next set of sales calls is to the channel partners through which your product will reach the ultimate buyer. The value proposition has to be specifically tailored for this audience to show them how they are going to make money in a relationship with your company. The partnerships could be with wholesalers, distributors, integrators, value added resellers and dealers. All of these partnerships have to be set up before you go to market, and will require:
- Training
- Product information
- Sales support
- Problem support
- Warranty management
- Inventory
- Discounts that make them profitable
Your sales efforts are to close a channel partner agreement that will result in financial success for them and an increase in revenue for your company. These will be long term relationships and should be nurtured as you would any valued customer.
What about alliance partners?
If your product requires that you have to go to market jointly with another company, you have to make sales calls to them too. For example, if your product is integrated with another company’s product, then you may have to have an agreement where you are jointly marketing and selling. You may be integrating some other company’s product into your solution, so an agreement is needed for you to market and sell their product along with yours. The value proposition here has to bring a share of the overall revenue to the partner to recover the expense that they incurred plus a reasonable profit. As with channel partners, keep working hard to support these relationships because they are key to your company’s success.
Now we are ready to sell the product
Whether you have a direct sales force or your selling is done by other companies, you now have to make sure that the buyer is handled in the best way possible to insure a sale. The key success factors are:
- A solid value proposition
- Seasoned sales people who know how to sell
- A well trained sales team who know about the product or service
- Well thought out compensation and commission plans
- Appropriate incentives
- Effective supportive material for the sales teams
- Well linked and responsive lead generation programs
- Responsive sales support for pre-sales engagements, proposals, contracts, questions and implementation services
- A strong follow-up process supporting the sales effort as well as cultivating repeat business
All of these success factors are guided by one simple principle. Provide the buyer:
- With a truly memorable experience
- In offering a valuable product that solves a significant problem
- Knowing they are working with the most responsive and caring company they have every worked with
The preparation for the sales work has to be achieved before the product goes to market and should be thoroughly checked out. Get the best people who are really well founded in the principles of selling and who have relevant experience in the market that your are pursuing. Some of the most critical hiring decisions will be in selecting the right sales team.
So, selling is something that starts from the very inception of the product idea and never stops thereafter. Selling involves approaching the whole distribution channel as well as other stakeholders in the market landscape. A well oiled sales operation is essential to the success of any business.
Filed Under:
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
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CEO Coach - Effective Communications
Bill Warner Wednesday, June 25, 2008
Over 80 percent of our waking life is spent either sending or receiving information. The ability to communicate effectively at work and in our personal lives is perhaps the most critical skill for everyone, especially the CEO. Poor communication leads to poor performance, yet it is common in the workplace. Luckily, communication skills can be improved and the more effective the communication, the better the overall performance and therefore the greater the level of business success.
Some CEOs don’t realize that communication is a two-way process. In addition to getting your own message across, it is also important to listen to and understand what others have to say, a technique known as “active listening.”
But an even more important communication skill that is often overlooked by CEOs was expressed best by Peter Drucker, “The most important thing in communications is to hear what isn’t being said.” Effective communication allows CEOs to use all the other skills they have to their fullest. The ability to motivate, delegate, organize, solve problems, and obtain information all rely on the ability to communicate effectively with others.
Effective Communications Brings Business Results
Evidence suggests that bad communication is probably the cause of most of the problems people encounter at work. It starts with an unclear company vision, gets worse because of ambiguous personal objectives, and is exacerbated by a company culture that evolves rather than being set by the clear communications of the chief executive. Jack Welch, the past CEO of GE said it best, “Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.”
Effective communication can transform how well people work. Imagine an organization in which everyone is kept informed, knows exactly what to do, and has all the information necessary to do their job. The effective CEO fosters teamwork, empowers key employees with responsibility and authority, and communicates key information to the organization. These CEOs not only use effective communication, but they also gain employee buy-in to the vision and objectives, build employee confidence in the company and create respect for the management team.
Setting a culture of sharing knowledge is critical to business success. If, rather than keeping quiet, people shared their knowledge with others, and problems were solved using everyone’s knowledge, skill development of less experienced people would dramatically increase. It would also allow more delegation and facilitate problem solving. The CEO who operates this way creates cohesive teams and builds uniqueness of purpose
Think of the effect it would have on the performance of your organization if culture drove everyone to feel motivated and empowered.
Filed Under: Business Operations, Management and Leadership
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
[0] Comments | Permalink
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
[0] Comments | Permalink
Sales Fundementals
Bill Warner Thursday, June 26, 2008
You are selling your product from the time you put together your first market study and every day thereafter. Actually, everybody in the company sells in one form or another; it’s not just the sales team’s role. You have to sell to your employees, stakeholders, investors, channel partners, alliance partners and customers. Let’s focus on selling the company’s products and services.
Your first sales call
Once you have a well formed business plan, your first sales call will be to companies that you will want to buy your product some day. During your market validation you should call on prospective customers to determine if your value proposition is valid and whether or not the buyer will be interested enough to actually buy the product. You are finding out:
- Do you really understand the buyer
- Do you have the problem defined correctly
- Does the product really solve the problem
- Is the value really there
- Will the buyer really buy
In this process, you will have created a relationship that could turn out to be your first revenue producing sale. You would be wise to establish a relationship that will last through the entire time before the product is ready to go to market. Foster the customer relationship as if they are your first paying customer, because they may turn out to be just that. Become partners with them.
Who’s next?
Before the product is ready to go to market, you should establish relationships with early adopter customers. These customers will be your first users of your product and will require special handling. You sell your product to them. Make them a good deal. Give them special support. Get them to agree to take the first version of the product and actually use it. They are your “lighthouse accounts,” showing the way for the upcoming product introduction. This “Beta” customer engagement will give you a chance to validate not only your product’s capabilities, but also your entire service and support infrastructure. You are testing out your product in a real customer environment. These buyers should ultimately become some of your first paying customers.
Sell to your channel partners
With your understanding of your sales and distribution channel, your next set of sales calls is to the channel partners through which your product will reach the ultimate buyer. The value proposition has to be specifically tailored for this audience to show them how they are going to make money in a relationship with your company. The partnerships could be with wholesalers, distributors, integrators, value added resellers and dealers. All of these partnerships have to be set up before you go to market, and will require:
- Training
- Product information
- Sales support
- Problem support
- Warranty management
- Inventory
- Discounts that make them profitable
Your sales efforts are to close a channel partner agreement that will result in financial success for them and an increase in revenue for your company. These will be long term relationships and should be nurtured as you would any valued customer.
What about alliance partners?
If your product requires that you have to go to market jointly with another company, you have to make sales calls to them too. For example, if your product is integrated with another company’s product, then you may have to have an agreement where you are jointly marketing and selling. You may be integrating some other company’s product into your solution, so an agreement is needed for you to market and sell their product along with yours. The value proposition here has to bring a share of the overall revenue to the partner to recover the expense that they incurred plus a reasonable profit. As with channel partners, keep working hard to support these relationships because they are key to your company’s success.
Now we are ready to sell the product
Whether you have a direct sales force or your selling is done by other companies, you now have to make sure that the buyer is handled in the best way possible to insure a sale. The key success factors are:
- A solid value proposition
- Seasoned sales people who know how to sell
- A well trained sales team who know about the product or service
- Well thought out compensation and commission plans
- Appropriate incentives
- Effective supportive material for the sales teams
- Well linked and responsive lead generation programs
- Responsive sales support for pre-sales engagements, proposals, contracts, questions and implementation services
- A strong follow-up process supporting the sales effort as well as cultivating repeat business
All of these success factors are guided by one simple principle. Provide the buyer:
- With a truly memorable experience
- In offering a valuable product that solves a significant problem
- Knowing they are working with the most responsive and caring company they have every worked with
The preparation for the sales work has to be achieved before the product goes to market and should be thoroughly checked out. Get the best people who are really well founded in the principles of selling and who have relevant experience in the market that your are pursuing. Some of the most critical hiring decisions will be in selecting the right sales team.
So, selling is something that starts from the very inception of the product idea and never stops thereafter. Selling involves approaching the whole distribution channel as well as other stakeholders in the market landscape. A well oiled sales operation is essential to the success of any business.
Filed Under:
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
[0] Comments | Permalink
CEO Coach - Effective Communications
Bill Warner Wednesday, June 25, 2008
Over 80 percent of our waking life is spent either sending or receiving information. The ability to communicate effectively at work and in our personal lives is perhaps the most critical skill for everyone, especially the CEO. Poor communication leads to poor performance, yet it is common in the workplace. Luckily, communication skills can be improved and the more effective the communication, the better the overall performance and therefore the greater the level of business success.
Some CEOs don’t realize that communication is a two-way process. In addition to getting your own message across, it is also important to listen to and understand what others have to say, a technique known as “active listening.”
But an even more important communication skill that is often overlooked by CEOs was expressed best by Peter Drucker, “The most important thing in communications is to hear what isn’t being said.” Effective communication allows CEOs to use all the other skills they have to their fullest. The ability to motivate, delegate, organize, solve problems, and obtain information all rely on the ability to communicate effectively with others.
Effective Communications Brings Business Results
Evidence suggests that bad communication is probably the cause of most of the problems people encounter at work. It starts with an unclear company vision, gets worse because of ambiguous personal objectives, and is exacerbated by a company culture that evolves rather than being set by the clear communications of the chief executive. Jack Welch, the past CEO of GE said it best, “Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.”
Effective communication can transform how well people work. Imagine an organization in which everyone is kept informed, knows exactly what to do, and has all the information necessary to do their job. The effective CEO fosters teamwork, empowers key employees with responsibility and authority, and communicates key information to the organization. These CEOs not only use effective communication, but they also gain employee buy-in to the vision and objectives, build employee confidence in the company and create respect for the management team.
Setting a culture of sharing knowledge is critical to business success. If, rather than keeping quiet, people shared their knowledge with others, and problems were solved using everyone’s knowledge, skill development of less experienced people would dramatically increase. It would also allow more delegation and facilitate problem solving. The CEO who operates this way creates cohesive teams and builds uniqueness of purpose
Think of the effect it would have on the performance of your organization if culture drove everyone to feel motivated and empowered.
Filed Under: Business Operations, Management and Leadership
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
[0] Comments | Permalink
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
