This second edition first published 2012

2012 Michael T. Colwell

www.startupmodels.com
Contents
Introduction
Requirements
Overview
Quick Start Guide
Finmodel4 Model Specifics
Building a Financial Model
General & Administrative Expenses
Debt Details
Startup Expenses
Revenue Models
Product Revenue
Reoccurring Revenue
Other Revenue
The Income Statement
The Cash Flow Statement
The Year Summary Statements
Modifying the Model
Integrating the Output
Builder / Authors Background
Introduction

Its not a plan until the numbers add up. More than the title of this book, it
is a truth of business creation. You wouldnt invest in a mutual fund knowing
it would have a negative return. You want to know that your investment will
benefit you in the end. Your business partners, financiers, spouses, and
others need to understand the return on their investment (in time or money)
in your business. Often putting together the financial portion of the business
plan is the hardest part of the planning process. More than anything else,
putting together a financial plan for your business startup forces you to
define your assumptions.

The Microsoft Excel model finmodel4.xls (referred to throughout this guide
as finmodel4) was created for people planning a business startup. It is a
straight-forward, easy-to-use model intended for setting up many types of
startup businesses. This guide provides an explanation of the features of this
model. The guide also provides basic advice for those who have not put
together a financial plan for a business.

This guide will:

Explain how to use the model to complete a financial plan for your
startup.

Help you understand many of the decisions you need to make in creating
a financial plan.

Clearly identify all of the business and financial assumptions you make
in your financial plan.

Allow you to focus on your business and financial assumptions, not Excel
formulas or tools.

You are welcome to use the model and share it with as many other users as
you wish. I request that you not take credit for my work or remove the
license agreement, my identification, or any links. The work put into this
model is funded by the sale of this guide. Please read the license agreement
included within the model and make sure you agree with the terms. If you
use the model, you are agreeing to the terms.

You can download the model from www.startupmodels.com.

Requirements

A PC or Mac running Microsoft Excel 2003 Service Pack 3 or later
versions of Excel.

A reasonable familiarity with navigating worksheets.

A little bit of patience.

If you have any feedback or questions about the model, please contact me:

mike@startupmodels.com.

Overview

Are you in a hurry? If you have been down the business planning road before,
jump right in and go to the Quick Start Guide. It may be all you need to
understand finmodel4 and build your financial plan. If you need more
assistance, this overview and the chapters following are for you.

Getting to Cash Flow Neutral

What causes most businesses to fail is running out of cash. In putting
together a financial plan for your startup, the primary goal is to determine
when or even if the business will get to cash flow neutral. This is the point
when there is the same amount of cash coming into the business as is going
out.



In the diagram above E stands for expenses and R stands for revenue. In the
beginning when first starting up, it is likely you will be spending more cash
than what you receive in revenue. As you approach the point of cash flow
neutral, your balance of revenue and expenses is equal. Profit occurs when
your revenues exceed your expenses. While simplistic, this is true for any
business and a critical point to understand and remember. You must get to
cash flow neutral and stay there to survive in business. To succeed in
business, you must get to the point where your revenues exceed your
expenses.

Modeling Your Startup

Determining if and when your revenue can exceed your expenses is what
finmodel4 is all about. There is a simple equation that defines this
question. It is represented in the diagram below.


Businesses often have multiple sources of revenue. For each source of
revenue, subtract the direct cost of that revenue. If you have product
revenue, subtract the cost of that product. If you have service revenue,
subtract the direct cost of providing that service. Combined, all of your
revenue minus all of the costs of revenue equals the contribution margin.
Contribution margin is the money left to pay the expenses of the business.
Subtracting all of the fixed costs such as rent, utilities, salaries, etc. from the
contribution margin leaves you with an operating profit, or loss.

The rest of this guide will explain how to use finmodel4 to develop a solid
financial plan for your business startup.
Quick Start Guide

Do you know Excel? Do you understand financials for business? This quick
start section describing the key points of finmodel4 may be all you need. If
you are new to creating a financial plan, skip to the next chapter.

Yellow cells: Enter data only in yellow cells.

Pull-Down Menus: Many of the yellow data entry fields have pull-down
menu selections. You can use the menu or type over the field.

Order: Start with the introduction worksheet and work left to right
worksheet by worksheet.

Three or Five Years: All of the relevant worksheets have five years of
planning area. When you receive this model, the fourth and fifth years
will be contracted. To expand the fourth and fifth year, you will need
to first unprotect the sheets. Then you can click the plus sign above the
green shaded cell with the year listed (year divider) to expand that
year. Alternately, click the minus sign above year divider to contract
that year.

G&A worksheet: The G&A worksheet is intended for all non-revenue
related costs. The revenue related direct costs are entered on the
revenue worksheets.

You can edit the expense descriptions on the G&A worksheet. Those
descriptions in yellow can be edited in cell. Most of the expense
descriptions in white can be changed on the Labels worksheet.

The G&A worksheet allows you to contract any expense category you
will not be using so that it does not appear on detailed reports. You will
need to unprotect the sheet then click the plus sign to the left of the
category to contract the section and keep it from printing.

Employee worksheet: The Employee worksheet accommodates hourly
and salary employees who are full time, part time or contract. Note
that you can enter multiple identical hires by putting the number of
employees required into the "Number in position" cell.

Debt Detail worksheet: Debt details allow you to account for loans and
lines of credit. Note there is a cell for entering the interest rate for
your line of credit.

Startup Expenses worksheet: The Startup Expenses worksheet is for
non-reoccurring expenses related to the formation of your business. The
total startup expenses will appear on the first year income statement.

Income Statement and Net Worth Statement: There is no ability to
enter data on the Income Statement or Net Worth Statement. All
information on these worksheets flows from the other worksheets.

Revenue worksheets: You can use one, two, or all three revenue
worksheets simultaneously. The revenues and associated direct costs all
flow to the income and cash flow statements.

All revenue worksheets have a cell in the first year titled "Cash
collected in ___ Months". Setting this cell to the value 0 sets the cash
collection to "at the time of revenue." Setting this cell to 1, 2, or 3 will
delay cash collection by that same number of months.

Product Revenue worksheet: The Product Revenue worksheet is for
products with an associated cost per unit sold. All direct labor
attributed to the product should be included here on a per unit basis
and not duplicated in the employee details worksheet.

Commission amounts entered here are not used in employee tax
calculations. If the commissions you enter here are for employees, you
need to account here for taxes related to these commissions. Any
salaries for commissioned employees are entered on the employee
details worksheet.

Reoccurring Revenue worksheet: The Reoccurring Revenue worksheet
is very powerful. Intended to model a complex Software-as-a-Service
(SaaS) revenue flow, this worksheet accommodates different values for
new license and renewal prices, rates of renewal, and commissions on
both new and renewal licenses. You have the ability to reflect specific
costs related to new license purchase and renewal license purchase.

There is a further capability to reflect costs directly related to the total
number of current licensees. Most often this is related to the purchase
of additional server capacity or other fulfillment related needs. Along
with a cost entry, there is an increment field which allows you to
account for a cost for every increment of renewals. If you set the
increment to 20, for each incremental increase of 20 total licenses, the
cost will be allocated.

On the Reoccurring Revenue worksheet, the term license is used
throughout. While originally designed for selling licenses for software,
this worksheet can also be used for memberships, monthly fees, service
contracts, etc. On this worksheet, you can make the renewal period
every 1, 3, 6, 9 or 12 months. The impact of this can be surprising. A
90% renewal rate on a monthly membership may sound great but that
means you are losing 10% of your renewals every month. Experiment
with this feature to better understand the impact.

Other Revenue worksheet: The other revenue worksheet is an open
model allowing for the entry of dollar-denoted revenue and related
costs and commissions.

Additional Details:

If you need to account for initial inventory for a product, enter it into
the startup expenses.

You can change most of the labels on the reports by changing the text
on the Labels worksheet.


This quick start guide is just a brief overview of finmodel4. The follow
chapters provide a more in-depth description of each of the worksheets.
Finmodel4 Model Specifics

In the finmodel4, there are several conventions you need to understand:

Groups: Excel has a feature that allows a number of columns or rows to
be grouped together. Once grouped, the selected columns or rows can
be expanded and contracted by simply clicking the associated plus
sign above the grouped column or to the left of the grouped rows.


Year Dividers: Most of the worksheets have five years of data. Across
the top of the worksheet you will see a set of green cells with the year
number in black. Above this you will see a plus sign. By clicking the
plus sign you can expand and contract the relevant year.


In order to use this feature, you will need to turn off the protection on
the worksheet. You can do this via the main menu in Excel by clicking
Tools -> Protection -> Unprotect Sheet and clicking OK. Once this is
done, you can freely edit any of the cells. For most users it is not a
good idea to leave the sheet unprotected. Once you have expanded or
contracted the desired groups, make sure you turn protection back on
by clicking Tools -> Protection -> Protect Sheet and clicking OK. There
are no passwords set on protection.

Pull-down selection lists: In many areas of the model, there are pull-
down selection lists. For example, on the instructions worksheet, if you
click on the year cell an arrow will appear to the right of the cell.
Clicking that arrow will present a list of potential values for the year
starting with 2011. You may select from the lists presented or type
values in directly. In most cases, your entries will be limited to the
values on the list.


Color: I use the color light yellow to indicate the cells in which you can
enter data. This color will also indicate to you or others (investors,
advisors, board members) the assumptions you have made about your
business.

Enter Once: In the introduction worksheet, you enter the name of your
business, the starting year of your model, and the beginning amount of
money you have for the business. The rest of the worksheets in the
model pull this information from the introduction worksheet. Change
something once and it is changed throughout the model. This approach
is used throughout finmodel4.

Printing: The worksheets are set up to allow easy printing of part or all
of the worksheets. Select File, Print and below the area titled Print
what select Entire workbook and click the Preview button to get a view
of the complete model.

Lets talk assumptions. It is very common for someone working with you to
ask what assumptions you have made in your model. The truth is that every
number you put into your model is likely an assumption. You assume your
cell phone bill is $75 per month. You assume your rent is $900 per month. By
referring to the yellow color data entry cells, you can easily identify all of
the assumptions made.

What about income taxes? This model is completely pre-tax. Since income
taxes vary dramatically and tend not to become burdensome until you turn a
profit, I do not consider them very relevant to the planning portion of
starting a business. My wish for you is that you have so much profit in your
business that you have to pay income taxes!

There are thirteen worksheets in finmodel4. They are:

Instructions
G&A Expenses
Employee Details
Debt Details
Startup Expenses
Balance Sheet Entry
Product Revenue
Reoccurring Revenue
Other Revenue
Income Statement
Cash Flow Statement
Year Summary Statements
Labels

The first worksheet, Instructions, is the beginning point for the model. There
you will also find the license agreement, finmodel4 version number, and
other general information.

The next four worksheets are for your business expenses:

G&A Expenses are General and Administrative expenses. These are the
expenses that you have whether you sell something or not. For
example, you have to pay your cell phone bill whether you sell
something or not. This does not include paying for the product you sell.

The Employee Details worksheet is where you enter any employees you
may hire in the business.

The Debt Details worksheet is where you can define any debt
repayment(s) your business needs to make.

The Startup Expenses worksheet is for one-time expenses you incur to
start up your business. This may be machinery, legal fees, beginning
inventory, or any other expense you incur before beginning your
business.

The Balance Sheet Entry worksheet is a very simplistic method of including a
balance sheet with your financial plan. In general, the balance sheet is not
something that is planned in advance. Rather than trying to calculate the
balance sheet from the planning model, I have provided a simple worksheet
that includes the ending cash balance for each year along with fields for you
to enter the rest of the balance sheet assumptions. These values are
reflected on the reports on the Year Summary Statements worksheet. It is up
to you to decide if you will use the balance sheet. For most startups planning
their business, the balance sheet has little real value pre startup.

There are three revenue worksheets: Product Revenue, Reoccurring Revenue
and Other Revenue. You can use one, two or all three of these worksheets in
describing the revenues of your business. For example, you may sell a
product and a service plan for maintaining the product after the sale. The
product sale would be shown in the Product Revenue worksheet while the
sale of a service contract should most likely be noted in the Reoccurring
Revenue worksheet.

Three of the worksheets do not require any input. They are the Income
Statement, the Cash Flow Statement and the Year Summary Statements.
These are outputs of the revenues and expenses you enter into the finmodel.

The last worksheet is the Labels worksheet. For now, you can ignore it. This
worksheet contains the labels in the reports used in the rest of the model.


Building a Financial Model


Getting Started

When you start using finmodel4, if you scroll to the right on most worksheets,
you will notice there is room for five years of information. The last two years
are groups that are contracted. By default, the model is set up for a three-
year plan. In most cases, three years of financial plan is sufficient data for
investors, advisors, or others. It is truly hard to plan beyond three years. If
needed, unprotect the worksheet and click the "+" sign above the year divider
for years four and five.

In the simplest form, Revenue Expenses = Profit. The income statement
explains this equation in detail. The cash flow statement reflects when cash
moves into and out of your business. Just because you sold something, does
not necessarily mean you have been paid for it. Also, if you are selling
physical products, you most likely need to pay for those products or their
creation before you can sell them. Run out of cash and you may be out of
business, even if you have hundreds of orders for your product.

Lets start with the Instructions worksheet. In the yellow shaded cells, enter
your company name, the beginning year of your business, and the starting
cash balance. The year you enter here will define the three to five years of
your plan. Enter 2013 and you will see worksheets for 2013, 2014, 2015, etc.
The starting cash balance can be any number you like. Many users start with
zero to get a feel for the cash flow needs and determine what level of
investment will be needed to sustain the company through the startup
phase. You can go back at any later time and change any of these values.

Now, lets review each of the various worksheets.
General & Administrative Expenses

General and administrative expenses are the expenses that do not directly
vary with revenue. Usually things like rent, insurance, internet connections,
and postage do not vary with each sale. Granted, as your business grows, you
may need to spend more on these items but normally not in direct proportion
to sales.

You will notice as you scroll down the G&A Expenses worksheet that each
expense type has been grouped and can be expanded and contracted as
needed. As you determine which categories to use in your plan, you may
wish to contract the groups for the ones you do not use. Contracting the
unused groups will also eliminate them from being included as printed output
or included in PDF files created from the worksheet.


The expense categories in the G&A Expense worksheet are:

Marketing
Facilities & Equipment Rental
Maintenance & Repairs
Utilities, Phone & Postage
Insurance
Supplies
Freight
Auto, Travel & Entertainment
Legal & Accounting
Other Outside Services
Misc, Taxes & Fees
Other G&A expenses
Depreciation

This is not an all inclusive list of expense types. There are a number of
possible expense categories. The categories listed above are typical of a
startup. Try to work within these categories at first. If you need to change
the names of these categories, you can do so on the Labels worksheet.

Each of the G&A Expense areas in the worksheet shares some common
functionality. You may enter names for each type of expense in each
category. For example, in the Marketing expense area, there are seven lines
with the names Item 1, Item 2, etc. You can change each of these to any
name you want, i.e. business cards, agency fees, brochures, etc. Use names
that will make sense to you later and will make sense to others who review
your plan.

There are two ways to enter expenses in the G&A Expense worksheet. These
two examples will show you how.

"I have an expense two times a year every year. What do I do?"

You can enter a unique amount separately in the cells below the appropriate
month. Assume the expense will be in June for $350 and $485 in August. You
can enter these amounts in the appropriate cells directly below the month of
the expense. Make the same entries for each subsequent year that the
expense is incurred.

"My expense is the same every month year after year. Do I have to enter it
36 times?"

No, you can enter a single amount into the cell below Fixed/Month. If you
enter an amount into Fixed/Month, that amount will automatically be filled
into each month for each year across the entire plan. The Fixed/Month cell
exists for each year in the financial plan for each expense line item. If an
expense is $500 per month the first year but increases to $600 per month for
each year thereafter, you can navigate to the Fixed/Month cell in the second
year and change $500 to $600. Once you have done this, you will note that
every month thereafter will change to $600.

I have a repeating expense but it does not start until July, What do I do?

Put the amount in the Fixed/Month cell. Then delete the amount from the
months you do not need.

As you are putting expenses into the model, here are some general questions
or things you should consider in each G&A Expense area:

Can you measure the outcome of your marketing expenditures? How do
you measure it? If you cannot measure the expenditure, you should
seriously consider not spending the money.

Where do your target customers look for information? That is where you
should market. Tewnty-one-year-old consumers tend not to read print
newspapers. Most 50 and older consumers dont spend their day on
Facebook. Point your marketing where you know your consumers are.

The narrower your market focus, the more effective your marketing can
be. If you target men 18 to 34 years old, you are going to need to spend
a vast sum of money to reach them. If you target men 18 to 22 who like
Facebook and soccer, you will have a much easier time reaching that
group.

Beware of reoccurring expenses such as memberships, web services, etc.
They can really add up over time.

Questions you should ask about your Facilities and Equipment Rental
expenses:

Do you absolutely have to buy or rent a facility? If you are
manufacturing a product, can you work with an existing manufacturer
until you prove your market? If you are an internet startup, do you need
an office at all?

Beware of expensive equipment rentals. Some equipment can be
purchased used and be fairly inexpensive. If two rental payments is the
same amount of money as buying the equipment used, then buy it. Can
you buy used on eBay and sell it after you are done?

Questions you should ask about your Utilities, Phone and Postage expenses:

What utilities will you be responsible for? These may include sewer,
trash, water, electricity, gas, etc. Are deposits required?

Do you really need a landline phone? Can you get by without a dedicated
fax line?

Questions you should ask about your Insurance expenses:

Did you get three competitive bids on your insurance?

Does your insurance agent specialize in your type of business? Those
who do specialize usually know what coverage you really need and how
to get that coverage for less.

Are you buying the right types of insurance? Typical business insurance
types include:

Property
Bonding costs
Errors and Omissions
Directors and Officers
Commercial umbrella
Unemployment

Questions you should ask about your Legal and Accounting expenses:

Do you know what ongoing legal expenses you will have? If you have
custom contracts that need to be negotiated for each client, there may
be substantial expense.
Will you be paying a bookkeeper, an accountant, a tax advisor or a CFO
for hire?

Will you need employment agreements with your employees?

If you are licensing a software product, you will most likely need a user
license.

If you are selling a significant product to other businesses, you may want to
consider a purchase agreement stating all of your terms.

Employee Details

The Employee Details section can be used for both salaried and hourly
employees who are full time, part time or contractors. The difference
between full time, part time and contractors comes down to taxes and
benefits. For contractors, no taxes or benefits are calculated. It is assumed
that the contractor is taking full responsibility for these items and is truly an
independent contractor. Make sure you know the IRS rules regarding
contractors. Many large companies have found themselves in trouble over
this distinction. If in doubt, consult your accountant. Part-time employees
have taxes calculated against their earnings, but not benefits. Full time
employees have both taxes and benefits calculated.

Taxes, Unemployment Insurance, and Workers Compensation Insurance:

Please take note that the taxes and insurance calculated in this model are
those that the company pays, not the employee. As every state is different,
you will need to ensure that you have the correct values for your state in the
Taxes table at the top of the Employee Details worksheet as shown in the
example below.


Since I live in Iowa, I have completed this table to be current with Iowa tax
and insurance requirements. In many cases, taxes or insurance are collected
on only a portion of the income. This is the reason for the column titled
Apply tax up to payroll of. For example, the state unemployment
insurance for Iowa is collected only on the first $14,400 of income. By placing
the amount $14,400 in this column, the model will calculate the insurance up
to this amount and no further. In states where there is no upper limit on
collection, I suggest entering $999,999.

Employee Benefits:

Just like the taxes and insurance, the model only calculates the cost of
benefits for the employer. The benefits you plan to provide are detailed in
the benefits table at the top of the Employee Details worksheet. Again, you
will need to ensure that the amounts and percentages listed in the table are
accurate for your business.

In the example below, you will see two methods for entering the cost of
different types of benefits. For health care and dental, you will note that
these costs are shown as a fixed cost per month per employee, regardless of
the employee income. For the short-term and long-term disability and life
insurance, the cost is calculated as a percentage of the salary. If you have
other benefits you plan to provide, you can enter these either as a cost per
month or a percentage of pay.

The model provides two alternative methods of detailing the cost of these
other benefits, either the cost in actual $ per month or the cost as a
percentage of pay. If both numbers are present, the model uses the cost in
actual $ per month. If no cost in actual $ per month is present, the model
will use the cost as a percentage of pay to calculate the benefits.


Notice the column Expected increase / yr %. This has become a significant
issue in recent years as health care insurance continues to rise at a rate
much greater than the rate of inflation. You can enter your assumption for
how much you anticipate each benefit increasing over time. These increases
will be calculated for each incremental year starting in the month of January
regardless of what month an employee began employment.

Entering Employees, Contractors and Positions:

Each employee, contractor, or position is entered in the first column of the
Employee Details worksheet. You can enter the name of the employee or
contractor, or the name of the position you will be filling such as
programmer. In the second column, you can click and pull down a menu to
select F for full time, P for part time, or C for contractor. In the
example below, I have entered four employee names and set one full time,
two part time, and one contractor. I have set the start month and year plus
a stop month and year. This allows you to enter employees and contractors
that will not be with the company on a permanent basis. For those positions
that are long term, simply set the stop month and year to the last possible
month in the model.


Compensation is entered either as a salary rate per month or an hourly rate.
If a salary is entered, any hourly information is ignored. For hourly
employees, you must enter the number of hours per month you plan to have
the person work.

The model allows you to set a planned raise and if desired, a bonus. Any
raise entered will not take effect until the year after the start year. The
bonus amount will be added for each year the employee is on staff. In the
example below, raises have been set for two of the employees along with
bonuses.


Finally, notice the last column Number in position. This is defaulted to the
number 1. If you have a position where you plan to bring on several people
to do the same job, you can set this number to correspond to the number of
employees hired and the calculation will include all applicable pay, taxes,
and benefits for that number of employees.
Debt Details

To complete the debt details, you will need an amortization table for each of
your loans. You cannot just enter the payment. You must enter the principal
and interest for each month in separate locations. This requirement is based
on the need to track interest paid separately for tax purposes. The
difference between short-term and long-term debt is handled different by
industry. If you do not know which to use, talk to an accountant familiar
with your industry.

If you have a line of credit, you will need to enter the interest rate for the
line and the average monthly balance. Typically a line of credit is used to
deal with cash flow issues from operations. A common use for a line of credit
is to pay for the goods needed to fulfill customer orders. When the customer
pays for the order, you pay back the line of credit. Do not fall into the trap
of using your line of credit to finance your company. Use it only to bridge
short-term gaps in cash flow.
Startup Expenses

The worksheet for startup expenses is where you enter the expenses related
to beginning your business. You do not have to use this worksheet. I offer it
as a planning tool to list in detail all of the one-time expenses you face when
starting a business. A few examples are: developing a logo, having a
partnership agreement created, forming a legal entity, buying initial
inventory, having your bookkeeping set up, etc. These expenses will appear
on the first year income statement.
Revenue Models

For many, the most difficult issue is building a viable revenue model for their
business startup. This is where most questions will come from investors,
partners, and other interested parties. They will ask how you came up with
your revenue assumptions. Simply saying there are 1 million customers in the
target market and you will capture 5% is not going to convince anyone. Base
your revenue model on that logic and you will likely fail.

On the other hand, being able to demonstrate you performed a market
acceptance test that shows 10% of those who experience your product or
service will buy it is a much better start. Identifying a marketing strategy
and plan that delivers your product experience to potential customers is a
good next step. Proving you can do both of these things while making money
is the basis for a solid revenue plan.

There are three revenue worksheets in finmodel4. These models are not
exclusive of each other. You can use one, two, or all three models at once.
In many businesses, there are multiple ways of earning revenue. These are
commonly referred to as revenue streams. As you look at the model, start by
asking yourself:

What revenue streams will your business create?

Will the revenue come from each customer only once, multiple times
but at random intervals, or on a regular reoccurring basis?

Are there direct expenses related to each sale such as commissions,
product costs, installation costs, or other directly related costs? Note
that you can count labor in your product costs, but you will have to
estimate the labor cost per unit or license. Alternately, you can
estimate the labor in the Employee Details worksheet and leave it out
of the direct cost of your revenue. From an accounting standpoint, it is
better to estimate the labor in your product costs.

Are there expenses for third parties such as channel partners or resellers
of your product or services?

Remember, those expenses such as rent, utilities, or any other expense that
does not change in direct relationship to revenue, should be considered a
G&A expense and entered into the financial plan accordingly.

In creating your revenue model, you will probably only need to plan three
years of revenue into the future. Finmodel4 will support up to five years, but
it is extremely difficult to plan that far in advance.

Once you understand your revenue streams and direct costs, you can build
the revenue plan. The next three sections discuss in detail the three revenue
worksheets in finmodel4.

Product Revenue

The Product Revenue worksheet is intended for traditional product sales. In
my company casesimple, Inc, we sell cases for iPads, Kindles, Nooks and
MacBook Air laptops. These are traditional product sales. The information
you need to create your plan is your product names, monthly sales volume,
average selling price, average cost, and any commission paid. You will need
to know this for each year. Keep in mind that prices and costs can change.
In my business, as sales volume goes up, I can see a small decrease in product
cost. At the same time, I provide free shipping and that tends to go up in
cost over time.

As you enter your sales volume for each month, do not fall into the trap of
the perfectly sloping sales forecast where each month you sell more than the
month before. Keep in mind seasonality, the fact that February has fewer
days, and any other factors that influence your sales. If you sell in Europe, it
is common to see a sales decrease in the summer for business-to-business
selling as many people there take extended holidays. For my business, we
expect to see a sharp sales increase heading into the Christmas holiday
season and then a drop-off in sales starting in mid January.

In the top left corner of the Product Revenue worksheet is the label Cash
Collected in and then a yellow shaded cell followed by the word Months.
This yellow shaded cell is a pull-down menu that you use to set how quickly
you receive payment from your customers. If your customers pay at the time
of the order, (as we do in casesimple, Inc.) you should set this to 0. If your
customers pay you in an average of 30 days, you set this cell to 1. Some
industries have average payment occurring 60 days (set cell to 2) or even 90
days (set cell to 3). It is critical to note that even if your cash collection is
delayed, your direct costs of revenue are not delayed. You still have to pay
for the product. Make sure you know what the common practice is in your
industry. It is hard enough to be a new player in the industry. Do not make it
worse by acting differently than the established players. That is unless what
you do differently is a positive to the customer!

The average price of your product is the price your customer pays. If your
product goes into distribution, this will be what your distributor is paying you
even though your product sells at retail for a higher price.

The average cost of your product is the full cost of your product delivered to
the customer. For casesimple Inc., we include shipping costs, a free pen,
display cleaning kit, and several promotional cards in each case. We also
package the case in a clear plastic bag and then seal it in a shipping
envelope. Each of the items I just mentioned is part of the full cost of the
product. The following is a list of common costs associated with a product:

Material cost
Labor cost
Packaging cost for items
Packaging costs for bulk packaging
User guides, warranty cards, and other printed materials
External licenses paid for included content

Commissions tend to be a percentage of the selling price. Again, this is
intended to be an average. Check to see what comparable commission rates
are with others in your industry or similar industries. The commission
percentage you enter is the total commission cost. This includes any benefit
costs related to the commissions as well as taxes if these are salaried
employees. Most often these are third party relationships, such as affiliate
models or manufacturing representatives, in which case taxes and benefits
are the responsibility of the third party.

At the bottom of the Product Revenue worksheet is the gross profit and gross
profit margin. This is the amount of contribution to your business from the
revenue stream described in this worksheet. Most industries will call this
contribution the gross margin. If possible, try to find out what the gross
margin tends to be in your industry. Investors and others will want to know
this information. If the average margin in your industry is 35% and your
model shows 50%, you must be able to show how your margins can be so much
higher. For most investors, this would be a red flag.

Reoccurring Revenue

The Reoccurring Revenue worksheet is the most powerful part of finmodel4.
With this worksheet, you can plan out a complex SaaS product offering. This
worksheet can also be used to plan a membership-based business such as a
health club. I use the term license throughout this guide and in the
Reoccurring Revenue worksheet. However this word could be membership,
service contract, dues or any other form of reoccurring revenue. There are
several key items to note:

The retail price for new license sales can be set to a different amount
than the renewal price.

The reoccurrence period refers to the frequency with which a license
renews. This value can be set to 1, 3, 6, 9 or 12 months. A setting of 1
denotes monthly reoccurrence and a setting of 12 denotes yearly
reoccurrence.

The renewal rate/period indicates the percentage of customers that
renew their license. The impact of this is seen most dramatically on
licenses that reoccur monthly.

The worksheet allows for reoccurring costs related to both new licenses
payments and renewal license payments. These costs are entered in the
cells Cost of New License Sales and Costs of Renewal License Sales
accordingly. This allows you to account for any costs tied directly to a
license payment. The concept of license payment is important. For
example, if a license holder renews six periods in a row, the amount
entered in the cost of renewal license will be incurred six times.

You can set up costs related to the total net number of license holders
separately. Total Net License Cost is designed to allow you to reflect
one-time costs that occur for every given incremental number of
licenses in your system (or members in you gym). For example, in a
SaaS offering where the owners must acquire an additional server for
every 50 additional licenses in use on the system, a value of 50 would be
entered in the Increment cell and the Total Net License Costs would be
set to the cost of the server.

What makes this very different from the Cost of New License Sales or
Cost of Renewal License Sales is that the total net license cost will
not be affected by the same user renewing many times. In other words,
in the example above, there is no reason to add server capacity based
on a license renewal. Server capacity would only increase when the
total number of users increased by the defined increment. Remember
these reflect one-time costs, not reoccurring costs.

The Commissions on New Licenses percentage is used to account for a
commission fee on each new license. It does not calculate on renewal
licenses.

Cash Collection In ___ Months is in the upper left hand corner of the
worksheet. A value of 0 indicates customers pay at purchase, a value of
1, 2 or 3 indicate payment in 1 month, 2 months, or 3 months after the
sale respectively.

On the following pages are several examples of uses for the Reoccurring
Revenue worksheet. They are intended to help you better understand how to
set this worksheet up for your business.
Example #1:

In the following example, I have set up a revenue model for a
membership-based business with both monthly and yearly memberships. I
have named the licenses accordingly. I have set a price of $35 for the
monthly member and $350 for the yearly member. Note that I have set the
Reoccurrence period to 1 for the monthly member indicating that the
reoccurrence rate is monthly and set the yearly member to a 12 month
reoccurrence rate.


Look below the reoccurrence period at the Renewal Rate/Period. The
Monthly Member is set for a 98% renewal rate. This means that every month,
only 98% of the previous month memberships will renew. It does not sound
like much but the impact is significant over time. This example shows a total
of 60 Monthly Members sold from January to June. Looking in June below in
the Total Current Net Licensees shows 56 Monthly Members. That means
that at a 98% monthly renewal rate, 4 members have already been lost in 6
months.

This example also assumes we are paying an outside contractor to sell
memberships. We pay this person 30% of the first month price for each
Monthly Member and 25% of the first month price for each Yearly Member.
Finmodel4 only calculates commission on new memberships, not renewals.


There is no direct cost for the memberships in this model so nothing was
entered in the cost area. The Gross Profit section shows the revenue each
month minus the commission paid. This is the amount of contribution to the
business from this revenue stream.

Example #2:

In the following model, I have changed the example from above so there is a
different price for a new member than for a renewal. I have set a price of
$70 for a new monthly member and $450 for a new yearly member. The
renewal price stays as it was at $35 for a monthly member and $350 for a
yearly member.


In this example, I have planned for two separate costs. First, I decided to
pay a fixed finders fee amount for each new member. I will pay a finders
fee of $35 for each new monthly member and pay a finders fee of $100 for
each new yearly member. Second, I have implemented a cost of $5 for each
monthly member and $60 for each yearly member. For discussion sake, lets
assume this $5 fee is for buying additional towels.

Below you will see that I have placed a cost of $35 for each new monthly
member and $100 for each new yearly member in the cost of new license
sales.


The towel cost of $5 per Monthly Member and Yearly Member is entered in
the Total Net Licenses Cost area. The corresponding Increment cell is
set to 1 as we need to charge this amount for each licensee.

Example #3:

This example is a SaaS company with five product offerings each having a
different renewal rate/period and reoccurrence periods, along with
commissions paid on each new license. Look closely at the single user license
information circled.


By June we have sold 46 single user licenses and we have already had 3
license holders not renew. By the end of June, we have 43 current license
holders for single user licenses, but we have had a peak of 44 license holders.




In this example, the commission paid varies by the license. It is not unusual
to spend the first license fee to gain a licensee. The key is to retain the
clients on an ongoing renewal basis.

Example #4:

In this example, I have added several costs to the previous example. I have
included a cost for every new license sold to reflect set-up costs. I have also
added a cost to the renewal licenses of 3% of the price of the license. This is
a common amount paid for credit card fees. Finally, I have added an
incremental cost tied to the total number of licensees. This is to account for
the servers required to deliver the software to the licensees.


You will want to experiment with various values across this worksheet to gain
an understanding of the capabilities. Reoccurring revenue models are unique
and challenging. They are also very desirable.
Other Revenue

The Other Revenue worksheet is intended for sales that do not fit any
reoccurring pattern. Typically this worksheet is used for entering services
revenue, consulting revenue, and other non-product revenue.

You enter revenue in this worksheet directly. If you plan to perform $5,000 in
consulting in June, you would enter that number directly in the appropriate
June cell. Any costs directly associated would be entered directly in the Cost
of Revenue section.

The cash collection In ___ months is in the upper left hand corner of the
worksheet. A value of 0 indicates customers pay at purchase, and a value of
1, 2 or 3 indicate payment in 1 month, 2 months or 3 months after the sale
respectively.

Commissions are entered in the same manner as in the previous revenue
worksheets. At the bottom of the Other Revenue worksheet you will find the
gross profit and gross profit margin figures.


The Income Statement

The Income Statement is the reflection of how your business is performing
from a profitability standpoint. All of the information on this worksheet
comes directly from the entries you have made in the model. Once you have
put your financial plan together, it will be beneficial to you to review your
assumptions and this statement with an accountant and any other business
advisor you have.

The Cash Flow Statement

Cash flow is the lifeblood of your business. The cash flow statement allows
you to see what your cash balance will look like month to month through the
duration of your plan. When looking at this statement, keep in mind you
need to keep a substantial amount of cash on hand at all times as a safety
buffer. It is not unusual to keep at least six months of operating expenses on
hand in the form of cash. Most businesses fail because they run out of cash
before they achieve positive cash flow. Make sure your model reflects a
reasonable safety buffer of cash.

The Year Summary Statements

This section of the model allows you to show a single page view of yearly
versions of the Income Statement, Cash Flow Statement, and the Balance
Sheet. As with the other reports, all of the information on this worksheet
comes directly from the entries you have made in the model.
Modifying the Model

For most people, it may not be wise to attempt to modify the model. For
those who are experienced Excel users, feel free to modify as you see fit.
Please reference the license on the introduction page for further details.
Please do not steal my work.

Protection: The worksheets have protection turned on without a password.
Clicking Tools -> Protection -> Unprotect Sheet will remove the protection.

Labels: Most labels in the worksheets derive their names from the Labels
worksheet. You can easily change the description of many of the labels
here. For the rest, the labels in year one are hard coded and then are copied
to subsequent year statements.

Gray Bars: It is best not to delete any of the gray bars in the worksheets. In
many of the worksheets the gray bars above certain data contain numbers
that are used in equations. For example, in the Employee Details worksheet
the month number (1 through 60) is hidden in these gray bars. The number
text is simply set to the same color as the fill. If you want to see if there is
data in these areas, simply click on one or more of the gray cells and look in
the command line to see if data is present.

Data Validation settings: Many of the pull-down menus access a hidden
worksheet called Data. This sheet contains the lists of menu items and many
offset calculations. You can access the Data worksheet by clicking Tools ->
Macro -> Visual Basic Editor (or Alt/Option-F11). In the Project Explorer,
expand the hierarchy and highlight the sheet named Data. Below you will
find a properties window (View -> Properties Window) and look for the Visible
property selection. Change the Visible property to -1 - xlSheetVisible. To
hide this sheet, change the Visible property to 2 xlSheetVeryHidden.

Inserting rows: If you wish to add rows to one of the expense categories in
the G&A Expenses worksheet, it is best to do so in the following way. Select
the second or third row in the category by clicking the row number. Copy
that row, then select the row number below and click Insert -> Copied Cells.
This should keep the totals correct. The same process will work for the Debt
Details and Startup Expense worksheets.

The same does not hold true for the Employee Details worksheet. There is
currently no easy way to expand the number of employees.

On the Product Revenue worksheet, you can add products by adding rows to
each of the following areas: Units Sold, Revenue, Cost of Goods,
Commissions, and Gross Product. You will need to make sure you add the
same relative row in each of these sections. The Other Revenue worksheet
can be modified in the same way.

I do not recommend adding products to the Reoccurring Revenue worksheet.

Inserting columns:

In all of the worksheets that reflect the model years, you will note that each
January starts on the same relative column. For example, January of year
one is in column M of the G&A Details worksheet. January of year two is in
column AM, January of year three is in column BM etc. This means that each
page ends on the Z column. This was done to make entering formulas easier
for the author. This same standard is followed on all worksheets. Also note
there are a series of columns that are very narrow on these same sheets. If
you need to add a row of information, I highly recommend you use one or
more of these rows rather than inserting additional rows.

In the Reoccurring Revenue worksheet, I used the offset command to
reference data in previous months. When these preceding months are in the
previous year, the offset formulas utilize a series of variable offsets in the
Data tab. If you have to add columns, these should automatically adjust the
required variable offsets.
Integrating the Output

In many cases, you may want to integrate your final financial plans into your
business plan. There are many ways to do this. Two that I prefer are as
follows:

Install and use a PDF printer such as PrimoPDF (www.primopdf.com). This
installs and looks like a printer option. Selecting it allows you to print to a
PDF file. For those that want to send their financials without sending the
actual Excel spreadsheet, this is a good option. Using this method, you can
print one page, an individual worksheet, or the entire workbook.

If you would like to insert sections of a worksheet directly into a word
document, I find that the following works well. In the Excel model, highlight
and copy the desired section. Go to Word and use Edit -> Paste Special and
select Picture (Enhanced Metafile) from the list of options. This type of
picture retains all of the formatting and allows you to easily resize the
images.
Builder / Authors Background

I developed this model over a five-year period while running the Business
Innovation Zone (the BIZ, www.bizci.org). The BIZ is a business accelerator
focused on high-growth-potential startups. The majority of my clients at the
BIZ have been in the technology market segment. However, my clients have
included manufacturers, service providers, and many other business types. I
use this model regularly with the majority of my clients and also use it in my
personal startup businesses.

I have close to 30 years of experience bringing new products to market,
developing new market niches, and building vertical market solutions
(primarily in the mobile computing industry). I have an extensive background
in mobile computing, wireless communications, and Auto ID technologies. I
led the team that created the first multi-mode wireless mobile computer that
was the forerunner to devices such as the Palm Treo, Motorola Q, and
iPhone.

I began my career as a programmer in the early 80s with Norand Corp.
Norand Corp was sold to Intermec Technologies Inc. in the late 90s. I held
various positions within engineering, field sales, and marketing ending as Vice
President of Marketing. At its peak, overall company revenue was in excess
of $950 million per year.

Currently, I am an owner in three startup businesses along with my work at
the BIZ.