Financial Model

Social Investment Toolkit | Module 5 | SolaRise Case Study

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Financial Model | Module 5

Content

Overview 3
Introduction 4
Case Study: SolaRise 5
Using our example Financial Model 5

A Quick Tour of the Model 6

How to set up inputs in the Financial Model 9
Financial Statements 18
The Profit and Loss Account 18
The Cash Flow Statement 19
The Balance Sheet 20

Financial Results 21
Financial Return 21
Amount of Investment needed 22
Financial Valuation 22
Investor Tip: Care With Financial Valuation 23
Sources and Uses of Funds 24

Social Impact 25
Number of beneficiaries reached 25
Measuring Social Impact 26
Social Return on Investment (SROI) 27
Social Impact Valuation 27

Refining and testing assumptions 28

Testing different inputs 28
What is an investable business case? 28
Example: How SolaRise uses the Model to refine Pricing 29
Creating Different Scenarios 30

Exercise: Now Your Turn 31

Creating your own Financial Model 32
Investor Recap 33
Financial Model | Module 5

In this module, we will cover:

– What is a Financial Model?

– Model Layout
– Inputs to the Model
– Financial Statements
– Key Financial Results
– Key Social Impact Results
– Refining your Inputs
– Modelling different scenarios

We are keen to
receive your feedback
for the Social
Investment Toolkit.

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Financial Model | Module 5
Introduction
We now want to show you one of the most useful tools for
anyone looking to raise social investment: the Financial Model.
A Financial Model is a spreadsheet which provides a forecast
of your venture’s future cash flow (i.e. incoming revenues and
outgoing expenses during a year) and summarises key finan-
cial and social impact results for social investors.
The Model is an invaluable tool you can use to show investors
the financial potential of your business as well as quantify your
social impact. You can use the Financial Model to answer
questions such as:
–– How many customers/beneficiaries do you plan to reach?
–– What is your projected income and expenditure over the
lifetime of the investment?
–– How much external funding do you need?
–– How much profit do you expect to generate, and by when?
–– What level of financial return can you offer to investors?
–– When can any investment be fully repaid?
–– How much is your business worth?
(i.e. also known as valuation)
–– How much social impact will you create?
We believe that you will find the Financial Model an indispens-
able tool in your own business planning. You can use it to
refine your pricing, for example, or to work out which prod-
ucts are the most profitable or impactful (however measured),
and plan accordingly. The model can also be used to help
both you and your investors agree future budgets, and measure
financial and social impact performance against those plans.
The simplest way for us to explain how a Financial Model
works is to show you one. We have therefore created a
demonstration Model as an example. If you are not familiar
with Financial Models, we highly recommend that you take
the time to work through this workbook for yourself using our
demonstration Model. Once you see how our example Model
works, you will be able to more easily build and run your own.
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Financial Model | Module 5
Case Study: SolaRise
Throughout this Toolkit, we use the fictional example of a
social enterprise called SolaRise to illustrate how to raise social
investment. SolaRise is a social business selling ‘Solar Kits’ in
rural villages that are not connected to an electric power grid.
The Solar Kit comprises a solar panel that can be installed on
the roof of a rural house, connected to a battery as well as
a set of solar lights. The panel and battery store enough
energy during the day to be able to run up to 6 high quality
LED lights, as well as charging devices such as a mobile
phone or a fan.
The Solarise Solar Kit has tremendous social impact in terms
of saving costs for rural households without access to grid
electricity, as well as providing better lighting and useful
­services such as mobile phone charging. Once installed, a rural
household no longer needs to spend money on expensive
and polluting fuels such as kerosene for lighting, nor buying
disposable batteries.
Using our example Financial Model
We have created a Financial Model for SolaRise which can
be downloaded alongside this workbook. Our Model has been
specially designed for teaching purposes and is deliberately
kept as simple as possible. Nevertheless the Model is fully
functional and will illustrate many of the principles of financial
modelling. The Model is written in Microsoft Excel, as this is
the spreadsheet software used by most investors. You should
have this model in front of you on your computer as we go
through this module. This demonstration Model has been sim-
plified, in particular, in two respects:
Annual vs. monthly forecasting
The SolaRise Financial Model provides annual cash flow fore-
casts for the business for the next seven years (since investors
typically expect to exit within seven years or less). A more
advanced model would provide forecasts on a monthly basis,
but this would require a much greater degree of complexity
that isn’t needed for this example. For many ventures, having
a set of annual projections is sufficient. A monthly model is
however very useful to help you prepare and track monthly
budgets.
Equity Finance only
This basic model assumes that any funding need is solely met
through funding from shareholders (i.e. equity). It does not
show how financing could be done via debt. We therefore
don’t show debt related items such as loan interest or repay-
ment. If you are considering raising debt, you would need
to add this into your own financial Model. We discuss financ-
ing options in Module 7.
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Financial Model | Module 5
A Quick Tour of the Model
Let’s start with a quick tour of the SolaRise financial model.
We will then walk you step-by-step through how the team set
up the inputs in this model. We will then show you the key
financial and social impact results they derived and how they
can present these results to investors.
Please begin by downloading and opening the SolaRise
Financial Model. When the model opens you will see a
­completed financial model showing a scenario that has already
been set up by the SolaRise team.
Please note that all figures used in this example are entirely
made up, and simplified for illustration purposes. All monetary
figures are in USD unless otherwise stated.
A quick note about inputs and outputs: any figures that
have a yellow background are inputs and can be changed.
Any figures without a yellow background are outputs and
should not be touched. Please only type text or numbers in
the yellow cells.
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Financial Model | Module 5
The Model is set up with 10 sheets, as follows:
1. Summary:
This is the first sheet you see when you open the Model.
The main purpose of this Summary page is to provide
an ­overview of your model to investors. The Summary sheet
records the key outputs of the model in two boxes –
­‘Financial ­Summary’ and a graph showing ‘Net Cash Flow
Before Finance’ - at the top of the screen. Some of these
numbers are automatically drawn from other sheets while
­others are inputs that you will use for the rest of the model.
Don’t worry about these for now; we’ll explain what’s in each
box shortly.
Below these Summary boxes is the ‘Product Inputs’ Box
(rows 18–27). Here you will see space for entering the prices of
up to 5 ‘products’ (or services). In this Model, we’ll only be
showing one product, the Solar Kit, so the other product boxes
are set to zero. You also see in the Inputs box a ‘sales forecast’
box which shows how many units of each product are sold
in each year, starting in Year 1 and going up to end of Year 7.
E.g. 3,000 units sold in Year 1, 6,000 in Year 2 and so on.
Below the Inputs Box is a ‘Grants and Donations’ box
(rows 29–37) which shows any funds that SolaRise expects
to receive from philanthropic funders. The names of those
funders can be entered on the left, and the amount of
the grant on the right in the relevant annual column. In this
way, the financial model can cater for social enterprises
that receive income in the form of grants and donations as
well as earned income.
Finally, rows 38–42 of the Summary sheet are ‘General
Assumptions’. These are a few other assumptions that
that Model needs to know in order to be able to calculate the
financial statements, including:
–– H39 – The Corporate Tax rate that the company pays
(set as a percentage of annual profits)
–– H40 – Any tax losses that may be carried over from prior
years (SolaRise has none, as it is a start-up).
–– K39 – The annual rate of depreciation for all fixed assets.
The Model assumes that any fixed assets of the business
will decline in value at a fixed annual percentage rate. This
is a simplified assumption as different assets may in practice
have different rates of depreciation - you should check
with your accountants what would be appropriate in your
par­ticular case.
2. Impact:
The ‘Impact’ sheet shows the projected social impact metrics
of the venture. The impact metrics will vary from venture to
venture depending on how you measure your impact (please
see Module 2 for more details). The Impact sheet will typically
record basic metrics such as how many beneficiaries are
reached by your venture (both annually and cumulatively), and
some estimate of your impact on those beneficiaries. In
the case of SolaRise, you can see the sheet here records how
many rural households have a Solar Kit installed, and how
many beneficiaries are reached given that there are 6 people
per household (cell E20). This sheet also works out how
much each household saves in costs by having a Solar Kit,
and shows the cumulative value of these savings over time.
This is how SolaRise measures its main impact in a way that
is easy-to-estimate and visualise for investors.
The next three sheets are the three types of Financial Statement
which accountants use to show the financial strength of an
organisation. These three statements are the ‘Profit and Loss
Account’, the ‘Cash Flow Statement’ and the ‘Balance Sheet’.
3. P&L:
The ‘Profit and Loss Account’, which is also known as the
‘Income Statement’, records the revenue and expenses of
the venture in one year. For a social enterprise, revenue can
be both grants and donations, as well as earned income
from sales. After deducting product costs, salaries, overhead,
tax and depreciation, we can see the net profit of the company
at the end of the year.
4. Cashflow:
The next sheet is the Cash Flow Statement. This statement
shows all movement of cash into and out of the company over
the course of the year. This differs from the Profit and Loss
Account in that some income and expenditure may not result
in an actual cash movement (for example, ‘depreciation’ (the
write-down in the value of assets owned by the company) is
an expense in the P&L but is not an actual outflow of cash, so
does not appear in Cash Flow. On the other hand, changes
in the timing of payments (‘working capital’) can result in tem-
porary cash shortfalls even if these don’t ultimately change
the company’s final profit. The Cash Flow Statement is there-
fore important as it shows if the venture actually has sufficient
cash to meet its obligations, as the Profit and Loss Account
may not pick this up.
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Financial Model | Module 5
5. BS:
The third Financial Statement is the Balance Sheet. This provide
a view of the assets and liabilities of the venture at the end
of the year, and therefore a measure of the overall ‘net worth’
of the company (Net Worth = Assets – Liabilities).
Assets are split into ‘current assets’ (i.e. cash, or assets that
are expected to become cash within one year such as invoices
waiting to be paid by customers), and ‘long term’ assets (such
as buildings and equipment). Similarly liabilities can be split
into ‘current’ (debt that must be paid within the year, such as
payments owed to suppliers) and ‘long-term’ (debt owed after
a year, such as a bank loan).
The difference between assets and liabilities is the ‘shareholder
equity’ or ‘net worth’. Shareholder Equity comprises ‘Paid in
Capital’ (funds actually paid in by shareholders’ and ‘Retained
earnings’ (cumulative profits earned by the company which
haven’t been paid out to shareholders). Shareholder Equity is
a measure of what the company has left if its assets were all
sold and the liabilities all paid off (this is also known as the
‘book value’ of the venture). If this figure is negative, then the
venture is technically insolvent (although in practice, ventures
don’t actually become bankrupt until they fail to meet a debt
payment as it comes due).
6. Funds:
The funding sheet shows where finance comes from and how
it is used. This is known as the ‘sources and uses of funds’.
Funding sources can be either internal (i.e. revenue from sales)
or external (i.e. investment by outside investors, either in
the form of debt, equity or donations). The tables gives a break-
down of the costs these funds are spent on. This is a useful
table to present to investors in your business plan and pitch
deck.
7. Products:
The third sheet is called ‘Products’. This is where you input
all the costs that go into each product (raw materials, costs
of assembly, shipping etc). You can enter costs for as many
­products or services as you have in your venture. These only
include the direct costs associated with making one more
unit of each product; other costs such as central overhead are
­handled on the next “Cost” sheet.
8. Costs:
The next sheet is called ‘Costs’. This Sheet is where all of the
central costs (i.e. all costs that are not direct product costs) are
input. These include staff salaries, as well as other fixed costs
such as rent. The Costs sheet is also where you input ‘capital
expenditure’ such as the purchase of assets such as buildings
or equipment.
9. CALC:
The ‘Calc’ sheet is the engine room of the Financial Model.
This is where several of the key calculations are made. These
include the tax calculations, as well as the calculations for the
Financial Return, Social Return on Investment (SROI), Company
Valuation and Social Impact Valuation (all terms which we
explain later).
10. Disclaimer:
The final sheet is a legal disclaimer. You should include a dis-
claimer in your Financial Model before handing it over to an
investor. The disclaimer is important because Models may con-
tain errors in either inputs or calculation, and you don’t wish
to be liable for any errors. Investors should be able to review
the Model but they should always be encouraged to do their
own due diligence and take responsibility in forming their own
conclusions. We also include a confidentiality clause on this
sheet as Financial Models often contain highly sensitive infor-
mation. You should never hand a Financial Model over to a
third party without a confidentiality commitment from them.
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Financial Model | Module 5

How to set up inputs in the Financial Model

Now let’s see how the SolaRise team set up their inputs in this
example Financial Model. We will then show you how they
use the Model to generate the key social and financial results
which they can use to present to social investors.

Step 1: Enter the costs for each product

Start in sheet: ‘Products’

In Module 3 (‘Business Model’) of this Social Investment Tool-

kit, we showed how to group the core activities of your organi-
sation into a series of ‘products’ or ‘services’. This is true
even for social sector organisations delivering a social mission.
Grouping your activities in this way helps you both manage
and streamline your operations, as well as being strategic
about which ‘products’ to focus on. A ‘product’ here means
a standardised benefit (which might be a physical good
and/or a service) delivered to a paying customer at a fixed price.

We can now take the set of core ‘products’ which you defined
in Module 3 and input these into the Financial Model. This
will enable you to calculate the economics (i.e. price and cost,
and therefore gross profit) made on each unit that you sell.
This exercise can be done even for a pure charity which raises
money solely from donations. You can consider a grant-maker
to be a ‘customer’ who is buying a service from you. This exer-
cise will help you determine how much funding you need to
raise, irrespective of whether you are looking for philanthropy
or investment.
Let’s see this for SolaRise:
SolaRise begins by entering the costs for each of its products
and services. This is done on the Excel sheet called ‘Products’.
Please select this sheet and you will see a screen that looks
like the table on the right.
In this simplified example, SolaRise just sells one product: the
‘Solar Kit’, which comprises a solar panel, six lights, battery
and charger. Solar Kits are sold in local stores, and the price
includes an engineer coming to your home to help install the
solar panel and set up the lights.
For now, let’s leave aside the question of what price the
Solar Kit will be sold for. First we need to input what it will
cost SolaRise to produce one Solar Kit.
SolaRise work out that each Kit costs them $100 each. Solar
Panels and lights are produced in China, where they cost $40
for each unit. They are then shipped in bulk to the country
where they will be sold, and shipping on average costs $10
per kit (note how all costs are expressed as costs per product).
There is also an import tax of $10 per kit. Finally, an engineer
and other staff (e.g. sales consultants) cost on average
$40 per kit to assemble the Kit and install in a local household.
SolaRise enters these items and figures in the first box on the
left on the ‘Products’ Sheet. These are only the direct product
costs for each Kit (i.e. costs that will only be incurred if that
kit is produced and sold). They do not include general costs
such as management salaries or overhead such as rent;
i.e. ignore for now those central costs which must be paid
no matter how many Solar Kits are sold. In the Profit and
Loss Account, these direct product costs are known as ‘Cost
of Goods Sold’ (COGS).
Please note that if these costs contain any Value Added Tax
(VAT) that SolaRise can reclaim back later, these prices should
be entered excluding VAT. If the VAT cannot be reclaimed,
it should be included (since it is a genuine cost that cannot be
recovered).

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Financial Model | Module 5

The model has a further four boxes so another four products

or services could also be added and costed in the same way.
The categories in any of these boxes, such as ‘Labour’ and
‘Shipping’, can be changed to whichever categories are most
appropriate for those products.
A note on allocating overhead costs to products: Many
social sector organisations adopt a practice of taking their
core costs (e.g. management salaries) and allocating these
pro-rata across their various products. For the purposes of this
financial model, please don’t do this. The aim is to enter here
only the extra cost the company will incur from producing
one more unit. This might be zero in some cases (e.g. software
which costs nothing extra to download one more). We will
deal with management salaries and overhead separately later.
Working Capital Assumptions
The Products box is also the place to enter the assumptions
for the ‘days payable’ and ‘days receivable’ for that product.
‘Days receivable’ refers to how many days SolaRise must
wait before a customer who buys a Solar Kit pays the cash to
­SolaRise. The customer in this case is the shopkeeper who
buys Solar Kits to sell on to rural customers. You can see here
that SolaRise must wait 60 days before it receives the cash
from the shopkeeper. This means that during this time SolaR-
ise will experience a temporary cash shortfall, which will need
to be funded. The longer the ‘days receivable’, the more
­SolaRise will need to fund.
Investor Tip
What Is a ‘product’?
It’s worth spending a moment to think about what ‘prod-
uct’ means in the context of a Financial Model. A product
is any specific package of goods or services that are sold
at a specific price. Here are some guidelines:
1. Products are defined by price/cost, not by customer.
If you sell the same product (same cost, same price) to
different customers (e.g. an education charity selling
workshops to two different schools), please treat this
as one product.
2. If you sell a product with different price points, or
­differentiated in some way, please treat these as
­different products (even if the underlying costs are
the same). For example, if SolaRise sold the Solar Kit
in two different ways - a cheaper option where you
install your own Solar Kit, and a premium version
where an engineer does this for you, this would count
as two different products.

‘Days payable’ refers to how many days SolaRise can wait Similarly if SolaRise offered different payment options
before it pays one of its suppliers. You can see here that this e.g. one option where the customer pays upfront, or an
will vary depending on the cost item: SolaRise can wait alternative where the customer pays over 1 year in
30 days before paying its Solar Panel manufacturer, but a full monthly instalments that would also be treated as two
90 days before paying import tax. The longer that SolaRise different products.
can delay paying suppliers, the more cash it will retain for
a temporary period. Longer ‘days payable’ therefore helps This is because the Financial Model needs to track prod-
cash flow. ucts sold at different price points separately, so that it can
work out the revenue from each separately.
The total amount of cash that a venture is waiting to receive
from its receivables is recorded in the Balance Sheet under
‘Accounts receivables’. It is part of ‘current assets’. The total
amount of cash that a venture needs to pay under its ‘pay-
ables’ is recorded in the Balance sheet under ‘Accounts pay-
ables’. This is part of ‘current liabilities’.

Changes in accounts payable and receivable are known as

the ‘working capital’ requirement of the company. Working
capital (the net effect of changes in accounts payable and
receivables) can have a big effect on the amount of funding
that a venture needs to raise. Rapidly growing ventures often
have substantial working capital needs as they incur new
costs faster than the revenues they receive from prior sales.

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Financial Model | Module 5
Step 2: Enter the Price of Each Product
Sheet: ‘Summary’
SolaRise now inputs the price for each product. This is done
on the main front sheet (‘Summary’). You will see a box
labelled ‘Inputs’ from row 18-26 on this sheet looking as
­follows:
In this example, SolaRise has only one product – the Solar Kit –
so SolaRise just inputs a price into cell C20. There is room for
a further 4 products if needed.
Using the pricing exercise described in Module 3 (‘Business
Model’), the SolaRise team estimate that a SolaRise Kit could
retail for somewhere between $150 – 240. They know that it
must be priced higher than $100 (the cost of producing one
Kit) but cannot be higher than $240 (the typical annual expen-
diture of a household on competing products such as kero-
sene candles). They therefore select a price of $180 as an ini-
tial guess. We shall see in a moment how the Financial Model
helps them refine this decision.
Note that any price entered here should be excluding Value
Added Tax (‘VAT’). This is because any VAT receipts must
be paid to the government, and so do not stay with SolaRise.
Investor Tip
How to Price Different Payment Methods
In the financial model, price is simply the total amount
that customers pay that year for the product. Since pay-
ments may be spread over time, you need to count all
cash received in one year in the total price. So in the Sola-
Rise example:
–– If the customer buys the Solar Kit in a store
for $200, the price is $200.
–– If the customer pays $100 as down payment,
and $150 on installation, the price is $250
–– If the customer were to make monthly leasing
­payments of $20 per month, the price would
be $240 per year
–– If the customer were to borrow a loan from you
for $200 with a 10% interest rate, and repay the
whole loan after 1 year, the price would be $220
(i.e. $200 + 10% x 200 = $220).
You therefore need to work out how much cash you
receive from the customer in one year, and count this
as the ‘Price’. This enables you to model different pay-
ment methods, such as pay with loan, leasing, pay-in-in-
stalments etc.
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Financial Model | Module 5
Step 3: Enter Salaries
Sheet: ‘Costs’
Having entered the costs per product, the next step is to enter
the key central costs of the business. These are the costs
which do not change even if SolaRise were to sell one more
product.
For most organisations, the largest central costs are staff
­salaries. These are entered on the ‘Costs’ sheet, in rows
7 – 13.
SolaRise enters the estimated salaries for each of the next 7
years for each of its key staff (i.e. CEO, CFO, COO, CTO).
These are of course highly confidential figures, which is why it
is normally only the CEO and CFO who have oversight of the
Financial Model, as well as any senior staff who are authorised
to represent the firm to investors.
Please feel free to aggregate salaries if you prefer not to show
salary per person. For example, in row 11 SolaRise puts all of
the salaries for its ‘Program and Regional managers’ onto one
line, with a total figure of $200,000 for all of its managers.
Similarly, ‘all other staff’ is put together in one line.
The salaries that are included here are those for permanent
staff only. If you employ consultants who are contracted to
deliver a specific product, those consultant costs should be
included in the ‘Product’ costs. For example, SolaRise employs
engineers who install the Solar Kits in people’s homes. These
engineers are paid on a ‘per Solar Kit installed’ basis. These
labour costs are part of the direct Product Costs, because they
are only incurred if and when each Solar Kit is sold. These
costs would not be included in the “Salaries” box, which is
reserved for central staff and management.
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Financial Model | Module 5
Step 4: Enter Central Overhead costs
Sheet: ‘Costs’
The next step is to enter the central overhead costs for the
business. Overhead or ‘fixed costs’ are all the non-salary and
non-program expenses which the business incurs for its
daily operations. These are often referred to as ‘central costs’
and include items such as rent and utility bills, as well as
insurance, payroll, accounting, telephone, website and so on.
You can see this on the ‘Costs’ page in rows 20–38.
Here you can see the cost categories that SolaRise has
selected. These categories can be changed to whatever is
appropriate for your venture. You don’t have to fill in every
row. Blank out rows that you don’t use. These costs are
entered for every year of the model (columns G-M) so that
if any costs change over time, you can input changing costs
from year to year.
You can see that SolaRise’s fixed costs add up to $100,000 per
year (row 38). Note that one of the items that SolaRise lists
is ‘Contingency’, which is quite large: $20,000. In this case,
the SolaRise team felt it was prudent to build in a large buffer
for unexpected costs that might arise during the year. We
­recommend that you do the same in your Model.
Note also that SolaRise has a category called ‘Sundry and
­Miscellaneous expenses’. This is designed to catch all of those
small or ad hoc items (the occasional office expense, team
event etc) which come up during the year, and which can
­collectively add up to a larger sum. This item catches all of
these costs.
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Financial Model | Module 5
Step 5: Enter Capital Expenditure (‘Capex’)
Sheet: ‘Costs’
There is a special category of expenditure which we call ‘capital
expenditure’ (often shortened to ‘capex’), which we treat
­separately from operating costs and overhead. Capital expen-
diture refers to any expenditure which involves purchasing
or upgrading an asset owned by the organisation. This might
include physical assets such as buying equipment or machin-
ery. It also includes investment in non-physical assets such
as intellectual property. For example, investment in software
would count as capital expenditure. Capital expenditure is
also typically expenditure that helps increase your capacity to
produce.
Examples of capital expenditure include:
–– Buying or refurbishing a building
–– Buying machinery such as a car
(note petrol would be an operating expense)
–– Filing a patent
–– Creating or buying software
You can distinguish between whether an item is capex or
operating expense by asking yourself the question: ‘Will this
expense leave me with an asset (physical or non-physical)
which will generate ongoing value for me going forward
after its purchase?’ If the answer is yes, you most likely have
a capex item.
One way that capital expenditure differs from operating costs
is that it is typically non-recurring. In other words, it may be
incurred once or over a short period (e.g. building a ware-
house), but not every year. You buy the asset (car, machinery,
building, software) once, and thereafter it helps you to be
more productive. It has a value paid for upfront, which depre-
ciates over time.
In SolaRise’s case, they want to buy a warehouse to store the
Solar Kits in their first year. This will cost $150,000 in that
year. Thereafter SolaRise might spend $20,000 every 5 years
on refurbishment (row 42). Other capex items for SolaRise are
patenting the Solar Kit design ($20,000 in first year) as well
as buying an IT system capable of managing all of their logis-
tics ($50,000).
This data is entered on the ‘Costs’ page, in rows 41 – 47.
As you can see, capital expenditure can be substantial, and is
often one of the key reasons why external finance needs to
be raised. SolaRise will incur total capital expenditure costs of
$220,000 in its first year – a big portion of its funding need.
However, this capital expenditure is also finite – after the first
year, there is minimal need for further capex. This is a very
common financing profile (large upfront cost, low thereafter)
which investors will be familiar with.
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Financial Model | Module 5
Step 6: Enter the Unit Sales Forecast for Each Product
Sheet: ‘Summary’
We’ve now taken account of all of the costs of the business.
The next step is to work out how many units of each product
do we think are going to be sold in the coming years. This is
the unit sales forecast for each product. The unit sales forecast
is the company’s estimate of how many units of the product
will be sold in each year. This can ever only be an educated
guess because the actual sales results can rarely be known pre-
cisely in advance (unless you have a long-term contract with a
vendor in place).
What is a ‘unit’? A unit is whatever is your basic package
delivered to a customer at a specific price. So in this case
the unit is the delivery and installation of one Solar Kit.
The sales forecast is entered in the box on the right in rows
21–25 (columns H-N):
SolaRise estimate that they might be able to sell 3,000 Solar
Kits in their first year of operation, based on their market
study. Their sales strategy relies on securing distribution
through key retail outlets serving specific villages. If this roll-
out strategy is successful in the first year, they estimate they
could sell 6,000 the following year, and 10,000 the year after.
These are conservative forecasts – they hope to exceed these
figures, but don’t wish to be too aggressive in the model.
They then continue these estimates until year 7, filling in each
box in row H20–N20.
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Financial Model | Module 5
Step 7: Enter Grants and Donations
Sheet: ‘Summary’
Many social enterprises access funding in the form of philan-
thropy (i.e. grants and donations), particularly in the early
stages. SolaRise is no exception. Our SolaRise team succeed
in raising two grants in their first year.
The first grant is for $60,000 from the Solar For All Foundation,
a grant-maker interested in supporting the adoption of solar
technology in emerging markets. This grant is a ‘restricted’
grant whose specific purpose is to sponsor the delivery of
1,000 Solar Kits to rural households in Uganda.
The second grant comes from a wealthy private philanthropist,
Dr Michael Singh, a friend of the founder. Dr Singh gives a
$40,000 grant directly to SolaRise, but does not require a spe-
cific use for the grant other than to support the buildout of
the project. The grant is therefore ‘unrestricted’ in its use and
can be used by the SolaRise team for general purposes, includ-
ing salaries and overhead.
You can see each grant recorded in the box titles ‘Grants and
donations’ in the Summary sheet (rows 29–36). Each grant is
recorded in its separate box, and each one has a projection
going forward so that future donations can also be estimated.
To be conservative, the SolaRise team only record the actual
pledges made for 2018, and do not assume any grant funding
in future years.
Each grant is treated differently for accounting purposes.
A grant which is specifically for the purchase of goods and
services, such as that from the Solar For All Foundation, is
treated as ‘operating revenue’. This is recorded in cell D32 on
the Summary Sheet by entering a ‘0’ in this box. The Model
will treat this grant as if it was purchase of goods, and there-
fore taxable income.
The unrestricted grant from Dr Singh is not a purchase of
goods. It is closer to a capital injection and is therefore treated
as ‘capital’, rather than operating income. It is a direct increase
in the net worth of the company. This will be seen in the
­Balance Sheet as ‘Capitalised donations’ under ‘Shareholder
Funds’. It is akin to equity, although the grant never needs
to be repaid and does not carry any voting or other shareholder
rights, unlike normal equity.
The Model allows you to select whether a grant should be
treated as ‘revenue’ or as ‘capital’ by changing the cells
D32–36 on the Summary Sheet (a ‘0’ = operating revenue and
a ‘1’ signifies capital).
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Financial Model | Module 5

Step 8: Enter Tax & Other General Assumptions

Sheet: ‘Summary’

Almost there! The final step for SolaRise to complete its finan-
cial modelling is to enter a number of general inputs that help
the model complete its calculations. In this simplified financial
model, there are only three additional inputs: the deprecia-
tion rate, corporate tax rate and any tax losses carried
forward.
Depreciation (cell K39): This Model assumes that all fixed
assets owned by SolaRise decline in value at the same annual
percentage rate each year, which in this case is 20% per
annum. This is known as the ‘reducing balance’ method of
accounting for depreciation. This is a simplified assumption,
and you should check with accountants which rate of depreci-
ation and which depreciation policy (‘straight line’ and ‘reduc-
ing balance’ are the two main methods) to apply for each of
the main assets owned by your venture.
For SolaRise, the relevant corporate tax rate is 25%, so they
input 25% in this box here. The model takes care of the rest
and calculates tax accordingly.
Tax Losses Carried Forward (cell H40): In most tax
regimes, companies are permitted to carry tax losses incurred
in earlier years forward to off-set against future taxable prof-
its. SolaRise is a new business so it has no tax losses carried
forward from previous years. Nevertheless, if you are model-
ling a business that does have tax losses carried forward from
prior years, the amount of the accumulated tax losses should
be entered into cell H40 on the ‘Summary’ Page. Forgetting to
do so means that the tax calculation will not give you the ben-
efit of those losses, which for some companies can be signifi-
cant.

Corporation tax rate (cell H39): SolaRise is incorporated as

a for-profit business so it must pay tax on its annual taxable
profits (off-set by any tax losses incurred in its early years). The
corporate tax rate is therefore a key assumption which must
be input. This tax rate will be specific to the country in which
you operate.

Step 9: Review Outputs

SolaRise have now completed their inputs into the financial

model. They are now ready to review the results which have
been automatically calculated in the other sheets thanks to
the formulae of the model. These can be split into financial
results and social impact results. Let’s look at each in turn,
starting with the Financial Statements.

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Financial Model | Module 5
Financial Statements
The Profit and Loss Account
Sheet: ‘P&L’
Let’s start with the ‘Profit and Loss Account’. This Sheet
­summarises the revenues and expenses of the venture in each
year. It starts with the revenue received from sales (row 4),
­followed by that from grants and donations (row 5). Recall
that SolaRise only has one grant, in 2018, that counts as
earned revenue – this was the $60,000 grant from Solar For
All Foundation to support the purchase of Solar Kits for Uganda.
‘Cost of goods sold’ or COGS (row 6) represents the total
direct costs to SolaRise of all the products sold. This is
deducted from the sales revenue to give the Gross Operating
Profit figure. Then salaries and fixed overheads (collectively
known by accountants as ‘Sales, General and Administration’
or ‘SG&A’ costs), are deducted to give the Net Operating
Profit, also commonly known as the ‘Earnings before Interest,
Tax, Depreciation, and Amortization’ or ‘EBITDA’.
After deducting depreciation (which is an accountant’s estimate
of by how much the fixed assets on the company’s balance
sheet have declined in value over one year) and taxes, the final
row of the Profit and Loss Account shows the Net Earnings
retained by the company at the end of the year. Investors will
note several points from reviewing this Profit and Loss forecast:
–– The Gross Operating Profit Margin (row 8) is relatively
healthy at 44%. This means that SolaRise makes a profit of
$44 for every $100 of product that it sells. Lower margins
means that the company would have to sell many more units
to cover its overheads, which would be a much harder task.
–– The Net Operating Profit, or EBITDA, is negative in the first
two years. This is normal for a start-up: in the early years
as sales ramp up from zero, most companies are unlikely to
cover all of their operating costs straightway. The total loss
is just under $500,000 (the sum of total losses in the first
2 years). SolaRise will need to raise at least this much to
­survive its first two years. As we shall in Cash Flow below,
it will actually need to raise more than this due to working
capital and capital expenditure.
–– SolaRise breaks even in its third year (Net earnings, shown
in row 19, turns positive in this year. This is the point where
revenue exceeds all costs). This is important, because inves-
tors cannot wait too long to see some positive profits to
begin repaying their investment or to help them prepare
to sell their shares. Breakeven within 4 years is acceptable;
much longer than that will be harder to finance.
–– There are significant profits from year 3 onwards. Row 19
(Net Earnings) shows strong profit after year 3, climbing to
above $1mn from year 4 onwards. Net Profit Margin reaches
32% by year 7. This means that SolaRise should be more
than able to repay any investment, and to so within a 7 year
time-frame. The exact amount of SolaRise’s profitability is its
Financial Return, also known as its IRR (internal rate of
return), which is shown on the Summary page in cell D6 as
35%. This is a strong financial return, which should give
investors some comfort before they invest their money. A
Financial Return of much less than 12% would be low and
leave little room for error.
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Financial Model | Module 5

The Cash Flow Statement

Sheet: ‘Cashflow’

Next, let’s look at the Cash Flow Statement which is produced
on the ‘Cash Flow’ Sheet. The Cash Flow Statement records
the inflows and outflows of cash in the venture during each
year. It is actually the sum of three different sets of cash flows,
which are those arising from:
1. ‘Operations’
(i.e. sales less product costs, salaries, overheads and tax),
2. ‘Investing’
(i.e. acquisition and sale of fixed assets such as
buildings and equipment) and
3. ‘Financing’
(i.e. receipt of cash from investors and payments
back to investors).
Row 21 is the most significant line. This shows the net cash
flow available before raising any finance. If this number is
­negative, it means that SolaRise needs to raise cash to cover a
shortfall. A positive number means that SolaRise generated
positive net cash flow in that year, which can be used to repay
investment or build reserves. This line is shown graphically on
the Summary Sheet.
You can see that SolaRise is negative for the first 3 years: this
is the period for which it needs to raise external funding.
The sum of these losses in its first 3 years is the ‘Funding Gap’
which is shown by the Model on the Summary sheet in cell
D8. This is how the Model works out how much money Sola­
Rise needs to ask for.

You can see these broken out in their respective sections of

the cash flow. The operating cash flows start with the Net
Operating Profit (also known as ‘EBITDA’) from the Profit and
Loss Account, and then adds in the adjustments from the
working capital cash flows (changes arising from the timing of
cash receipts and payments).

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Financial Model | Module 5
The Balance Sheet
Sheet: ‘BS’
The Balance Sheet provides a record of the assets and liabili-
ties of the venture. The difference between assets and liabili-
ties are the ‘shareholders funds’ or ‘net worth’, and these are
an indication of the net financial strength of the company.
The more net worth a company has, the stronger it is in theory.
Reading the Balance sheet: You can see in the first year
that SolaRise has total assets of $667,589 (cell G13) but total
liabilities of only $29,589 (cell G21). It therefore has net worth
of $638,000 (cell G27) (net worth = total assets - total liabili-
ties). This is because SolaRise raised $870,000 of equity in its
first year, which sits on the balance sheet as ‘Paid in Capital’
(row 24). Some of this is kept as ‘cash in bank’ (row 6), the
rest is spent on buildings (row 11) and to fund operating costs
and working capital. Since SolaRise needs to cover losses over
its next 3 years, the cash in the bank (row 6) is gradually
eroded over the next 3 years, but never reaches zero (which
would be a bankruptcy).
Shareholder Funds: SolaRise has three forms of capital:
capitalised donations (row 26), which in this case is just the
$40,000 grant from Dr Michael Singh entered earlier in
the ‘Summary’ sheet. It also had ‘Paid in Capital’ (row 24),
which is the new money from shareholders which it raises.
Finally it has retained earnings (row 25), which is the cumulative
sum of its net earnings over time. While negative in the early
years, the net earnings become positive by year 4 and build up
a strong surplus thereafter. Investors will look closely at this
build-up of reserves in order to be reassured that the venture
is building a ‘strong balance sheet’ – i.e. has adequate reserves
to withstand a strong downturn. If shareholders ever wished
to sell a company, having strong reserves on its balance
sheet will be one of the factors helping ensure a successful sale.
Starting Values: Since SolaRise is a brand new company,
the starting values on its balance sheet are zero (e.g. it has no
cash carried forward, no existing paid in capital or retained
earnings). For a company which has a prior history, the values
of the relevant balance sheet items should be entered in the
yellow cells in column F under ‘Starting Value’. If you do this,
all numbers must balance – any assets must be matched by a
corresponding liability or equity item (e.g. a starting balance
of $5,000 of cash could be matched by $5,000 in retained
earnings, so that the balance sheet always balances and your
accountant stays happy).
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Financial Model | Module 5
Financial Results
Sheet: ‘Summary’
We can now use the Cash Flow statement to derive some key
financial results for SolaRise, based on the inputs that they’ve
just made. Let’s look at the ‘Financial Summary’:
There are four items that investors will be keen to understand.
These are:
1. the Financial Return of your business
(this measures its overall profitability),
2. the Amount of investment you’re looking for,
3. the Financial Valuation of your company
(if you’re selling shares) and
4. the sources and uses of funds
(i.e. how will their money be spent?)
Let’s look at each of these in turn.
Financial Return
Sheet: ‘Summary’
Investors need a way to measure how much profit you will
generate relative to the cash investment that you are seeking.
One way would simply be to show how much net profit is
­generated each year. However, profits might be volatile from
year to year. To compare different profit profiles over time,
investors use a metric called the ‘Financial Return’ or ‘Internal
Rate of Return’ (IRR), which expresses profitability as an
annual % interest rate on a theoretical investment into the
company.
The IRR imagines an investment that covers all the cash needs
of a business in its growth phase (these are the negative Free
Cash Flow numbers in the first 3 years of the SolaRise exam-
ple). The investor then receives back a percentage of the posi-
tive Free Cash Flow once the business becomes profitable.
What kind of financial return would the investor have received
by end of year 7?
–– If the investor gets less than their money back, the financial
return is negative.
–– If the investor just receives their money back, the financial
return or IRR would be zero (i.e. this is equivalent to giving
a loan with a zero per cent interest with just the capital
invested reimbursed).
–– Above zero, the investor receives a positive financial return.
If the investor received double their money after one year,
this would be a 100% return.
The financial return calculation makes adjustment for the fact
that cash received in later years is not as valuable as cash
received earlier, due both to the greater risk attached with later
cash flows, as well as the opportunity cost of not having cash
to re-invest earlier. This treatment of future cash profits as less
valuable than current profits is known as ‘discounting’.
Cell D6 on the Summary Page shows the Financial Return of
this business up to year 8 (financial return is always expressed
as an interest rate over a particular time frame, because it
will change as more years are included). This SolaRise case
shows a financial return of 35% per annum, which is a strong
rate of return.
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Financial Model | Module 5
Amount of Investment needed
Next, investors will wish to know how much external invest-
ment SolaRise needs to raise. The answer can be found on the
‘Net Cash Flow before Finance’ line in row 27 of the Cash
Flow sheet. You can see that it is negative for the first 3 years.
In other words, SolaRise spends more money than it earns
in the first 3 years of its operations, and needs investment to
cover this shortfall.
The size of this investment is known as the ‘Funding Gap’ and
is simply the sum of the losses. In this case SolaRise makes a
loss of $529,178 in year 1 and a loss of $229,178 in year 2, and
$28,904 in year 3. This implies a total funding gap of nearly
$790,000 (the sum of the 3 losses, rounded up to the nearest
$10,000).
This is the result which is shown in cell D8 of the ‘Summary’
sheet.
Should SolaRise therefore just ask for $790,000? This is the
amount of funding that would just cover the projected short-
fall. It leaves no margin for error. We therefore recommend
that any enterprise ask for more than just the pure funding
gap. An extra ‘margin of safety’ of say 10-15% would be pru-
dent just to allow for any contingencies, and investors would
expect this.
The Model builds in a margin of safety in cell F9 on the
­‘Summary’ sheet. It is currently set to 10%. With a 10% extra
­margin, SolaRise should be asking for an extra $79,000 on
top of the funding gap. This would bring its total ‘Investment
­Target’ to $870,000.
This is the amount of investment that SolaRise seeks to raise.
Financial Valuation
Sheet: ‘Summary’
Our last financial metric is the Financial Valuation of the com-
pany. If you’re selling shares in your business to raise funds,
you will need to come up with an overall value for the com-
pany as a whole (since each share represents proportional
ownership in the company). If you are not selling shares
(for equity), this calculation does not need to be done (except
perhaps for your own interest).
There are several different methods for valuing a company,
and none is an exact science. Especially for early stage compa-
nies, for whom future profits are unknown, trying to produce
a valuation is somewhat arbitrary, and you should expect vig-
orous negotiation with investors. Nevertheless, if you’re selling
shares you need to find some way to put a value on your com-
pany, so we include one common estimation method called
‘Discounted Cash Flow’ (DCF). If you use this, you should con-
sult with a corporate finance advisor to ensure that it is appro-
priate in your particular case.
You can see this valuation result in cell D12 of the ‘Summary’
sheet. You can see that based on the inputs SolaRise has
made, the valuation estimate is $1.45 million (again rounded
up). This is calculated by discounting all future profits using
an annual discount rate of 25%. This is a conservative discount
rate which reflects the high risk inherent in the estimate of
future profits.
If SolaRise wishes to raise $870,000 and the company is valued
at $1.45 million in total, then SolaRise would need to sell a
60% stake in the Company (£870,000 is 60% of $1.45 million)
in order to raise its target amount (cell D15). This makes the
team pause. To give up this much ownership so early on is
a problem for the founders, who don’t wish to give up more
than 30% ownership in this first round. We shall see in a
moment how they solve this.
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Financial Model | Module 5
Investor Tip: Care With Financial Valuation
Please treat the valuation method used in the Model
with great caution and do not place too much reliance
on it. It is only intended to provide one indication.
In this example model, we use a method called ‘Discounted
Cash Flow’ (or DCF). A DCF valuation essentially treats the
value of a company as being the sum of all of its future cash
profits, discounted back to present day. This method is
highly problematic because the answer will vary considerably
depending on assumptions. Especially for early stage ven-
tures (i.e. ventures with less than 5 years of operating his-
tory) and ventures that have not yet broken even, a company
valuation based on discounted cash flow is almost meaning-
less: the figure will vary wildly depending on your growth
assumptions, as well as the discount rate that you choose.
Expect any investor to treat a DCF based valuation of an
early stage company with scepticism.
A commonly preferred alternative approach to DCF valua-
tion is the ‘Comparable Company’ method. Here you point
to companies similar to yours that have been bought out
by others, and look at the multiple of sales or net profits at
which that similar company was bought (e.g. if the other
company was bought for $10mn and had annual sales of
$1mn, its Price/Sales Multiple would be 10x). You then apply
that same multiple to your own business to come up with
a Valuation. If your corporate finance advisor can help you
find this data, please do use it as additional reference point.
However this data is often hard to find for privately held
companies, leaving discounted cash flow as the only other,
highly imperfect, basis for discussion with investors.
We only provide a DCF calculation in our model as an exam-
ple (and perhaps for your own interest). We recommend
that you delete this and don’t use it if you are raising debt,
or if valuation is not an important part of your discussion
with investors. Many experienced investors discard the DCF
methodology altogether and use their own ‘rule of thumb’
guidelines in assessing ventures. They do this by estimating
roughly how large and profitable they think the business
will be in 5 years and then applying their own valuation
­estimate based on their experience. While very subjective,
this is probably as good as the DCF method depending
on the experience and skill of the investor. The point is that
­Valuation is not a science. It is in fact highly subjective, and
while the Model can help you support an estimate, any final
outcome will really depend on your negotiation strength
with investors.
When pitching your venture to an investor, you should
negotiate on the basis not only of future profits but also
the projected social impact that you plan to deliver. This
may give you greater leverage with some investors who are
willing to give you a more favourable valuation because
they see the benefit in your impact story. Your ability to do
this will depend on the investor you are speaking to.
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Financial Model | Module 5
Sources and Uses of Funds
Sheet: ‘Funds’
A table showing how your venture is funded and what the
funds are used for can be found on the ‘Funds’ sheet. This
table shows where the venture raises money from (either
internally through sales or externally from third party inves-
tors), and how these funds are spent. All this information
will be drawn from other sheets’ inputs.
Here you can see that SolaRise needs to fund $4,350,000 in
total costs. $3,420,000 is generated internally from sales
(cell D3), leaving $930,000 which it must raise from third party
investors (cell D10). This is done through equity ($870,000)
and a grant of $60,000. There is no debt funding in this case.
You will recall that the figure of £870,000 is the amount
which the Model worked out as being the ‘Investment Target’
calculated earlier.
On the right hand side, you can see the different uses to which
the funds are put. These include cost items such as salaries
and overhead. Note that working capital is also in here (drawn
directly from the Cash Flow Statement) – you can see that at
$197,260 the working capital requirement is actually quite
­significant. This is normal for a rapidly growing business with
a modest gross profit margin (44%) and long lead times
between when costs are incurred and revenue received.
Investors will be keen to see this breakdown of costs so that
they know to what use their funds will be put. This can be
provided easily from this table in the Model.
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Financial Model | Module 5
Social Impact
Sheet: ‘Impact’
The ‘Impact’ Sheet records all of the metrics for social and
environmental impact that SolaRise expects to achieve over
the next 7 years, if it hits all of its growth targets. For your
own venture you will need to create your own Impact Sheet,
setting out the metrics and calculations that you have chosen
for yourself. They may look quite different from those used
by SolaRise here.
Number of beneficiaries reached
Row 18 of the ‘Impact’ sheet shows the total number of
households that have a Solar Kit installed. This is calculated
easily using the sales projections for Solar Kits provided in
the Sales Forecast on the Summary Sheet. This figure is cumu-
lative because households continue to use a Solar Kit for
at least ten years after they buy one, so the total number of
users increases every year.
Whichever metrics you choose, investors will typically wish to
see at least two kinds of impact metric: firstly how many bene-
ficiaries the venture reaches, and secondly some method of
measuring the total social impact delivered. This might be a
monetary metric, as in the case of SolaRise below, or may be
some other non-monetary metric such ‘Number of students
graduating from college’, for example in the case of an educa-
tion venture.
SolaRise uses this figure to calculate the total number of
­beneficiaries it will reach as follows: the team estimates that
there are on average 6 family members for every household
that buys a Kit (input in Cell E20 on the ‘Impact Sheet’).
This means the total number of beneficiaries can be calculated
as the total number of households x 6 members per house-
hold (row 19). You can see that under the current sales fore-
casts, SolaRise expects to be serving 708,000 people by year
8 (shown in cell F9). Investors will wish to know this number.
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Financial Model | Module 5

Measuring Social Impact

In Module 2 (‘Measuring Impact’) we showed how SolaRise
measures its social impact. The team considered various ways
to quantify their impact, and decided that a simple metric
would be to measure how much each household with a Solar
Kit saves annually in energy costs.
From market studies, the team knows that the average house-
hold spends $20 a month on kerosene candles and other
energy products (e.g. batteries). The annual saving per house-
hold is therefore $240 per year ($20 per month x 12 months),
less the one-time upfront cost of buying a Solar Kit. One Kit
can last for ten years if well maintained, so these savings per-
sist for many years after the initial purchase.
The Financial Model calculates how much rural households
saves as a whole in energy costs (kerosene & batteries) if SolaR-
ise’s projections were realised. Row 20 shows the total cost sav-
ings made each year by all households, and row 21 shows the
total cumulative savings made by all households since year 1.
In this SolaRise example, the Model shows
3 key metrics:
1. How many beneficiaries have been reached by year 8?
2. How much net cost savings has been made by year 8?
3. What is the ratio of the total costs savings to the amount of
investment needed today?
The Model shows that by year 8, there would be 118,000
households installed with a Solar Kit if SolaRise meets its
­targets. This would imply 708,000 beneficiaries (i.e. house-
hold members) and the collective savings in energy costs
made by these households would be $55,800,000. This is a
64-fold increase in the requested investment amount of
$870,000.
These are the statistics that should be told to investors to
tell your impact story. You will wish to consider how you might
use a similar set of statistics in your own particular case.

You can see that by end of year 7, SolaRise expects to have

saved rural households a total of $55,800,000 (after deduct-
ing the upfront costs of the Kits). That is a huge social impact,
and can be used in a compelling pitch to social investors.

Another impressive metric is the ratio of the total cost savings

to rural households by year 8 to the requested investment
amount of $870,000. This would be a 64.1x return on the
original investment. Again, this is a figure that should be
shared with social investors to demonstrate the impact and
effectiveness of this venture.

All of these key social impact metrics are shown in the ‘Social
Impact Summary’ at the top left of the Impact sheet.

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Financial Model | Module 5
Social Return on Investment (SROI)
The SolaRise Financial Model also calculates an item called
the ‘Social Return on Investment’ (SROI). Please see Module 2
(‘Measuring Impact’) for a more detailed discussion of this
concept.
The SROI is the social impact equivalent of the Financial Return
(IRR). Just as the Financial Return is a metric (expressed as an
annual percentage rate) comparing the future flow of profits
relative to the original investment, the SROI provides a similar
metric comparing the future flow of ‘cost savings to rural
households’ relative to the original investment.
The Model shows that this particular case would generate a
SROI of 145%. Since a Solar Kit pays for itself in less than a
year, and then generates cost savings every year thereafter,
this should not be a surprise. This is a very powerful metric to
share with social investors. Investors find SROI helpful because
they can use it compare the social impact of different invest-
ments they might make.
Social Impact Valuation
We can also go one step further and provide a ‘Social Impact
Valuation’ for SolaRise, in a similar way to how a traditional
Financial Valuation might work. This is calculated by taking all
of the future cost savings that SolaRise would bring to society,
and discounting these back into present day terms using
the same discount rate that we use for the Financial Valuation.
This can be seen in cell F11 of the Impact Sheet.
Using this methodology, SolaRise estimates its Social
Impact Valuation to be over $36 million.
The ‘Social Impact Valuation’ is a useful way to communicate
the value of your social impact to investors. Note the Social
Impact Valuation is considerably higher in this case than the
Financial Valuation. The Social Impact Valuation calculates the
total net benefit to society (in monetary terms) whereas the
Financial Valuation calculates only the net present value of
SolaRise’s future profits. The societal benefits are far greater,
showing why SolaRise is such an effective social investment.
A Social Impact Valuation is a powerful way to communicate
to social investors your social impact over and beyond your
financial valuation. It can help you make a strong case to
­support a financial investment, and with some social investors
achieve better terms that you might otherwise be able to
solely on the basis of the financial valuation alone.
SolaRise can make an Impact Valuation because their main
social benefit is one that can be expressed in monetary terms
(i.e. savings to society on fuel costs). Not every venture can
do this. If your impact is not measured in monetary terms, an
Impact Valuation may not be possible.
Please see Module 2 (‘Measuring Impact’) for more discussion
on this and other ways you may be able to express the value
of your social or environmental impact.
A final note is that these metrics do not aim to capture all of
the benefits that your venture brings. It only captures a hand-
ful of simple easy-to-estimate metrics that convey to investors
some of the most important social impact of your venture.
You should consider which metrics are easy to estimate and
yet convey a powerful story in the same way.
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Financial Model | Module 5
Refining and testing assumptions
Testing different inputs
Once SolaRise have included all their inputs, they are in a
­position to review the outputs and make any adjustments
accordingly. They can refine the inputs until they have a strong
business case which they can present to investors.
A Financial Model enables you to easily test different combina-
tions of price, costs and growth forecasts until you have a case
that is both financially viable as well as socially impactful. You
can also change particular inputs to see the impact that they
have on the financial results, and work out which ones are the
most significant drivers of financial performance.
Please try this for yourself by typing into different prices in
Cell D21 of the ‘Summary’ sheet and seeing how the results
change. Note how sensitive these outputs are to these
changes: a small change in price can have a large effect on
results. You can also see how the metrics change based on
different sales forecasts. By playing around with the Model
inputs, you can get a feel for which inputs are the most signif-
icant drivers of the business.
Different businesses will be sensitive to different variables.
For some it will be the product costs and whether these can
be reduced. For others, everything will depend on the sales
forecasts. For many, price is the most important factor. You
can use the Financial Model to work out where you can best
focus your efforts (change price, reduce costs or overhead,
sell more) in order to achieve better results.
What is an investable business case?
Investors will wish to see the following in a financially
viable case:
–– A strong positive financial return (ideally 12% or higher)
–– A strong positive net profit margin within 7 years
–– Achieving break-even (i.e. positive net operating profit)
within 4 years or less
–– Full repayment with interest within 7 years (if loan)
A Socially Impactful case would have the following features:
–– A high SROI (if applicable – depends if your impact can be
measured in monetary terms)
–– A high Impact Multiple (ratio of social impact / investment)
–– A high Impact Valuation (if applicable – again depends if
your impact can be expressed in monetary terms)
The definition of ‘Impact Multiple’ will vary from venture to
venture. For some, it is a cost savings measure, as in the case
of SolaRise. For others, you can pick different metrics depend-
ing on what is appropriate for you. Not all impact ratios need
to be in monetary terms. For example, an Education Venture
might pick “Number of students getting college degrees over
7 years relative to each $100k invested”.
If you enter a case and don’t see a robust set of financial and
social impact results as per above, you may need to adjust
your price, cost and/or growth assumptions accordingly
(within reason) until you have a viable case. We recommend
always being realistic and ready to justify any assumptions that
you make. Investors are wary of outlandish growth forecasts
(so called ‘hockey stick projections’) and will treat these with
scepticism.
If you cannot achieve a viable case under any reasonable set
of assumptions, then you know that your business will depend
at least in part on subsidy (i.e. philanthropy) to be viable.
We discuss in Module 6 how you might set up a legal structure
that enables you to access both philanthropy and investment
should this be the case.
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Financial Model | Module 5
Example: How SolaRise uses the Model to refine Pricing
Consider the question of what price SolaRise should charge
for one Solar Kit. All our team know is that the right price
needs to be above $100 (the marginal price of one Kit) but
less than $240 (the price at which customers were already
spending on alternatives).
You can see for yourself the impact that different prices
make by changing the Price Input box in cell D20 on the
Summary sheet. Try different prices ranging from $100 up
to $240 and see the dramatic shift in the Financial Return
and the Financial Valuation, as well as on the Social Impact
metrics.
Here’s how the SolaRise team used the Model to refine their
pricing:
The original price that SolaRise were going to charge was
$150, believing that a $50 mark-up on a $100 cost would
be sufficient. But when they put this into the Model, they
realised that this would not give a positive financial return
(it would be -2%, meaning any investor would lose money).
And the overall financial valuation would be negative
(the company is net loss-making).
Please see this for yourself by changing cell D21 to $150.
So they try a price of $180. At this price point, the metrics
look much healthier. SolaRise would need to raise $870,000
in investment to cover its losses during the first 3 years,
but would breakeven in year 3 and be profitable thereafter.
With a financial return on 35%, the investment would be
affordable with a good margin of error. Moreover, the
Social Impact metrics are outstanding: the company would
save rural households more than $55mn over 7 years, a
64.1x multiple of the original investment.
The only thing that makes the SolaRise pause is the financial
valuation. It is quite low at only $1.45mn. This is normal
given the very early stage of the company, and therefore the
need to discount future profits at a very high rate (25% per
annum). If SolaRise were to sell shares to raise £870,000
at this valuation, it would have to sell 60% of the company.
This is too high for the founders at this stage, who are
only willing to give up a maximum of 30% of ownership in
this first round of investment.
SolaRise try a further price rise to $200 (please see for your-
self). This looks much better! At $200 per kit, the Financial
Valuation increases to $2.5mn, and the investment need
falls to £660,000, which is only 26% of the Valuation. This
falls into their acceptable range. At the same time, the
IRR is much higher at 59%, and the SROI increases to an
impressive 152%. This the price that SolaRise therefore
decides to price at. At $200, they achieve excellent financial
and social return metrics, while increasing the valuation
of the venture to a level where they can credibly raise their
target amount without having to give up too much
­ownership.
This is a simplification, because a higher price might depress
demand, meaning the sales forecasts need to be revised
downwards. SolaRise would need to adjust those figures
too, and create a new case at the higher price. Nevertheless
you can see how the Financial Model enables SolaRise to
rapidly optimise its price.
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Financial Model | Module 5
Creating Different Scenarios
The Financial Model makes it easy to run multiple different
combinations of price, cost and growth assumptions. We call
these ‘scenarios or ‘cases’. Investors will certainly want to
use the Model in this way and see several different potential
­outcomes.
The scenario which represents your basic set of assumptions is
known as your ‘Base Case’. This scenario should be optimistic
but also realistic about your growth prospects. The SolaRise
model currently shows their Base Case. Note that growth is
fast but doesn’t exhibit wild assumptions or rapid accelerations
(so called ‘hockey stick’ assumptions, which investors are
always wary of).
Alongside the Base Case, you can also create an ‘upside
case’ which shows a more optimistic growth scenario.
This helps investors assess what is the potential upside if
events turn out better than expected (although still within
the bounds of r­ eason).
You can also model different scenarios such as winning a par-
ticular contract, or the outcome of a particular decision such
as hiring more staff to grow faster, or launching in a new
region. In this way, you can use the Financial Model to review
many different potential outcomes and scenarios.
We also suggest that you model a ‘downside case’. This
shows what might happen if sales are less than you expect.
Investors will wish to see that even if sales are not as strong as
expected, they will still be able to recover their investment.
You could also model the ‘breakeven case’, which tests how
low sales can be before the Financial Return (IRR) hits zero.
This would be the point at which investors only just get their
money back. You could do this for example by showing what
level of sales from year 3 (assuming no growth after year 3)
would result in an IRR of zero. In the case of SolaRise, the
answer is just above 9,500 units per year. Please try this for
yourself and see. This breakeven figure gives investors a
sense of just how much room there is for decline from the
Base Case. A breakeven case which is far below the Base
Case will give them considerable comfort about your financial
robustness.
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Financial Model | Module 5
Exercise: Now Your Turn
Now that you’ve seen how SolaRise set up their Model, we
suggest as an exercise that you take our SolaRise Model
and try it with inputs for your own venture. Since the Model
has been simplified for teaching purposes, this exercise is
only to give you a sense of how a Model of your own could
work, and run some preliminary results. When creating a
case for investors, we recommend that you work with a
­corporate finance advisor to build a Financial Model of your
own specifically adapted to your specific venture needs.
You can follow the steps outlined for SolaRise above:
1. Begin by entering direct costs for each of your Products
on the ‘Products’ Sheet together with working capital
assumptions (i.e. days payable and receivable).
2. Then enter Salaries, Overheads, and Capital Expenditure
on the ‘Costs’ sheet.
3. Then enter the Price of each product in the Inputs Box
on the ‘Summary’ Sheet.
4. Then enter a Unit Sales Forecast for each product in the
Inputs Box.
5. Then enter any grants and donations that you expect to
receive on the ‘Summary’ sheet. Categorise them as
‘1’ or ‘0’ depending on whether you see them as revenue
or capital.
6. Then enter your general assumptions – depreciation rate,
tax rate and any tax losses carried forward – on the
­Summary sheet.
7. Finally, decide what impact metrics make sense for
your venture. Adapt the ‘Social Impact’ assumptions and
­measurement in the Impact sheet accordingly.
Congratulations – you’ve now set up your first
Base Case! How does it look?
–– When / If do you achieve breakeven?
–– What is your breakeven volume of sales?
–– How is your Financial Return?
–– Do you have positive gross and net profit margins?
(see rows 7 and 12 of ‘P&L’).
–– How much external investment does the Model suggest
you need to raise?
–– What is your Financial Valuation? (cell D12, Summary)
–– What is your target investment as a percentage of the
Valuation? (cell D15, Summary)
–– Which product lines are your most important drivers
of profit?
Please do use the Model to play around with the price,
cost and growth assumptions to help you optimise your
case. How sensitive are your results to price? What kind of
growth forecasts do you need to have an investable case?
Are these realistic? Do you need subsidy to make this work?
For the Social metrics, you will need to decide which are
the right ones and adapt the model accordingly. For example,
can you estimate a ratio of customers to beneficiaries?
If not, what is a better way to estimate how many people
that you reach?
If you have a venture whose social impact can be expressed
in monetary terms (e.g. cost savings to society), then
you may be able to use a similar SROI and Impact Valuation
methodology to that used by SolaRise. If not, you will have
to be creative about how you wish to quantify the impact of
your work, based on these model outputs.
Please feel free to adapt / rewrite the Impact metrics in any
way that better illustrates your impact. Module 2 (‘Measuring
Impact’) can give you more guidance on this.
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Financial Model | Module 5
Creating your own Financial Model
The SolaRise Financial Model is a demonstration Model
designed for teaching purposes only. We hope that this work-
book has given you greater insight into how a Social Financial
Model works. You should now be ready to design and build
a Financial Model suited to your own needs.
Please feel free to use the SolaRise Model as an example,
although please note that we cannot be held responsible for
any use of the SolaRise Model outside of its use as a demon-
stration tool for this workbook. We strongly recommend that
you work with a professional corporate finance advisor in the
preparation of your own Financial Model.
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Financial Model | Module 5
Investor Recap
The Financial Model is an incredibly useful tool which
enables you to provide a financial forecast of your business.
The Financial Model will inform many of the key numbers
that you will present to Investors in your business plan and
investment pitch. Investors will also want a copy of the
Model themselves so that they can review all your assump-
tions as well as run their own scenarios.
Investors will want to use the Model to see different scenarios
or ‘cases’. Your standard case is known as the ‘Base Case’.
Your Base Case should set out a set of assumptions on price,
costs and growth that are optimistic but credible. You
should be able to back up each of your numbers with
­evidence. Resist the temptation to enter wildly optimistic
assumptions: you gain far more credibility with investors
by being candid and realistic rather than trying to sell sky
high growth figures. Investors prefer teams that can discuss
openly the risks of achieving their assumptions, and differ-
ent strategies for mitigating risk.
You can also provide an ‘upside case’, ‘downside case’,
‘break-even case’ or indeed any other scenario that you see
fit. In our experience, the ‘break-even’ case is one of the
most useful scenarios to show as it tells investors how much
lower sales can be before they start to lose money on their
investment.
The key results that a Financial Model will generate include:
how much funding you need, what the financial return of
your business is over the lifetime of an investment, and the
financial valuation of your business.
The Model will also help you show your social impact
­metrics such as number of beneficiaries reached, your
Social Return on Investment (SROI), Impact Valuation and
any other key ‘Impact Metrics’ for your venture.
Many social ventures have excellent social impact metrics
but more modest financial metrics. Strong social metrics
can be the most useful way to attract social investors who
are willing to accept a lower financial return than normal in
exchange for high social return.
Each investor will have their own minimum Financial Return
IRR or ‘hurdle rate’, below which they will not invest in an
enterprise. A typical hurdle rate would be 15% or higher for
an early stage company, even for a social venture. Low
returns leave very little margin for error. We have seen target
returns of 25% or higher for many of the projects that we
work with. While this may sound high, consider that inves-
tors need to price in the very high risk of failure: more than
50% of all start-ups will fail within their first 5 years. Some
individual social investors may be more able to accept lower
returns, but investment funds may be more constrained
as they have internal investment criteria which they cannot
change.
For the same reason, investors will apply a high discount
rate to any valuation of an early stage business. It is rare to
see discount rates of below 20% for a start up with less
than 5 years of operating history. Industry norms are closer
to 25% or higher depending on the company and sector.
Be careful when using the Financial Model to come up with
a valuation for your business. The Model’s results will vary
wildly depending on your inputs and investors will rightly
treat any figure with scepticism. Instead use this as just one
data point and be prepared to back up any valuation figure
with other arguments, including comparisons with similar
ventures, and also by referring to the social impact that you
plan to make.
In Module 7 (‘Financing Terms’) we discuss how to approach
the valuation negotiation with investors if you are an early
stage business. This will be one of the toughest and most
contentious items of discussion. Strong social impact metrics
can sometimes help you to get a more favourable outcome
in your negotiations. The Financial Model should help you
be well prepared for those discussions.
Page 33
The information and explanations in this document are for your information only and are not intended as an offer, or a solicitation of an offer, to buy or
sell any product or service. Although all information and opinions expressed in this document were obtained from sources believed to be reliable and in
good faith, neither representation nor warranty, express or implied, is made as to the document’s accuracy or completeness, nor it’s appropriateness to
your organisation’s specific objectives, financial situation and financial needs. UBS and Ashoka will not be held liable for any decisions you make based on
these materials. UBS and Ashoka strongly recommend that anyone using the information and explanations described in this document obtain appropriate
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