Startup CPA Roy Sivan on Financial Modeling and Deciding How Much Money You Need to Raise
A sound financial foundation is the basis upon which you’ll build your business. And that foundation isn’t complete without a detailed (and accurate) financial model. Labs mentor and certified public accountant (CPA) Roy Sivan of Brooks-Keret Financial Management, held a Labs session focused on financial modeling and the finance side of fundraising. Here are some key pieces of information and advice he shared.
Setting up your financial model
“It’s important to know how you’re going to use your money if you want to last as a company,” Sivan says, hence the importance of creating an accurate financial model. And that starts with setting it up properly. Sivan recommends using Excel. “My Excel financial model template has eight or nine tabs,” he says. “There are three tabs where you input all the information, three tabs that show you different reports, and two or three tabs with graphs that show you the numbers in the graph form.”
“In the first three tabs, there's a revenue tab, which shows a month to month look three years out,” Sivan says. “It shows how many units you sell, the price you sell them at, and then your total expected revenue based on all of your inputs, and that transfers into the cash flow and P&L report. The next tab is a little more detailed— it's all of the different expenses that a company can expect to incur, including expenses related to cost of sales, costs of research and development, etc. You have rent that you have to consider, you have all the different utilities, all the IT related expenses, web hosting, things like that.”
“The first three tabs also includes one focused mainly on salaries and the different employees you’re going to need to hire and when,” Sivan says. “So maybe in the financial model you show two founders because that’s who’s currently in the company, but maybe six months from now, if you raise money, you’ll want to hire a web developer, and you have to include that in the model. You have to figure out when you’ll need each person and what you’re going to pay them. Do some market research to see what the going rate is for each position.” It’s critical that you get an accurate picture of what you’ll need to pay for salaries. “Personnel is a huge part of the expense of a startup, so you need to get those numbers right,” Sivan says. “If you’re wrong, it could drain your money faster than expected.” (Learn more about hiring as an early-stage startup.)
All of these tabs combined give you “a nice visual picture of when you’re going to need money and how much you’re going to need,” Sivan says. You want to link the information in all tabs so that when you change information in any of the first three tabs, the reports and graphs in the other tabs are automatically updated.
Figuring out how much money you need to raise
“Companies trying to raise a seed round are usually raising money to cover the next year or year and a half,” Sivan says, “because, at least in Israel, it usually takes at least six months to close a round. So if you raise enough money for just one year, you’re going to need to raise again six month after you close this round. So plan on raising enough money to cover a year and a half of operations.”
“You should also put a buffer of 20 percent to cover unknown expenses,” Sivan says. “You can’t plan everything perfectly, and there will be some expenses that you just don’t have the data for. You want to take the worst case scenario when you fundraise because you don’t want to run out of money. So look at all of the expenses in your model, all of the cash flows for the first year and a half, and that’s the amount of money that you need to raise.” (Learn more about fundraising.)
Don’t make the mistake of overestimating your revenue in your model
“The more revenue you factor into your model, the faster you’re going to run out of money if you don’t hit your target,” Sivan says. Plus, depending on your industry, it could be awhile before you actually start selling your product. For example, “a lot of the startups in Israel at high-tech, and they have to do a lot of R&D before they even start selling, so they might raise a seed round two years before they even plan on making their first sale,” Sivan says.
And even if you do have some revenue, it’s still best to be cautious. “you might have a little bit of revenue, but I wouldn't build on it because the more revenue you show in your model, the less money you’ll think you need to raise,, and you might run out of money too early,” Sivan says. “So that's why I try to stress, especially to the tech startups, not to assume any revenue.”
A financial model is a living document, not a one-and-done exercise
“If you're the CEO of a company, I would expect you to, at the end of each month, look at your budget, you see what your actual expenses were, look at the difference, and see if you're far off in any area,” Sivan says. “If you are, you should consider that going forward. It's better to know early than wait until the end of the year and see that, you spent $100,000 on something you expected to spend $20,000 on. So the sooner you catch those types of problems, the sooner you can either correct or adjust your plan. You can make a good business decision if you have a good picture of the finances.”
Don’t DIY your financial model if you don’t have financial modeling experience
“I would recommend at least going to someone who can help you out,” Sivan says. “I'm not saying you have to go to a big accounting firm and ask for a detailed financial analysis that's going to cost you thousands of dollars. Go sit with someone for a few hours, pay them a little bit of money, and at least have them set up the template for you. You can build it together. Sit with them, they'll build it for you, and after that, you can manage it yourself.”
This post is based on content from a WeWork Labs programming session.
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