Building Your Financial ModelFront Row I/O

March 2014Kiyan Foroughi – CEO & Co-Founder

Agenda

• Background• Introduction: The Importance of your Financial Model• The Basics• Building the Top-Line• Building the Bottom-Line• Bringing it All Together• Dos and Don’ts• Conclusion

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Background

• Boticca is the world’s online destination for jewellery, bags and fashion accessories made by carefully sourced independent designers and small & medium brands from across the world

• We currently work with 370 brands from 40+ different countries and offer over 11,000 different pieces for sale on the website on a curated marketplace business model to customers in 60 different countries on any given month

• A little bit on myself

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Introduction: The Importance of Your Financial Model

• The Financial Model is one of the key documents any entrepreneur should look at as it allows you– To set objectives and gives overall direction– To pilot the business and run different case/scenarios– To predict your cash runway and when you should be out raising

cash

• The Financial Model is a living document whose future assumptions should constantly be updated as you collect data

• Your ability to create a clear, understandable model with realistic assumptions has huge sway on whether an investor or VC decides to invest in your business

• If you’re hitting (or beating) your own projections, it gives you a lot of confidence in your own predictability of your business

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The Basics

• A good model is generally simple and should have the following:

– A sheet that drives the top-line (sales/revenue/traffic etc.)– A sheet that drives the bottom line (salaries/expenses/margins

etc.)– A sheet that brings both together to form an income statement

with a basic cash-flow statement to show your cash position at the end of each month

– A one-page, simple yearly summary

• I’d recommend building the model monthly looking forward 3 years at a minimum and 5 years at most

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Building the Top-Line

• The Top-Line drives the assumptions to get to your revenue figures

• It should include:– Growth by traffic channel and the

assumptions to derive it if your business is driven by traffic and conversions like in ecommerce

– Sales by number of stockists if your business sells its own stock/product

– Sales by number of clients/businesses signed if your business sells to B2B or enterprise

• The Top-Line assumptions will be different from business to business

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Building the Bottom-Line

• The Bottom-Line drives everything below the revenue line and is primarily composed of costs

• These include:– Cost of goods sold– Payment processing fees (if

ecommerce)– Variable costs: marketing, PR,

advertising etc.– Fixed costs: salaries/staff,

office/rent, travel etc.

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Bringing It All Together

• Put a simplified version of the Top-Line at the top

• Put a simplified version of the Bottom-Line underneath it

• Get to an EBITDA figure and basic cash-flow statement at the bottom

• Add a summary page

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Dos and Don’ts

• Keep it simple

• Don’t over-engineer or complicate– Too many assumptions– Trying to much to model the “real world”

• Make sure that you can back your assumptions

• Always budget your costs higher than you think– That’s the way it’s going to be!

• Avoid the hockey-stick: go for the ramp– Investors are always weary of hockey stick type growth– It’s better to ramp things up gradually

• Use colours– Blue for anything that is hard-coded in or inputs– Green for assumptions or numbers driven by assumptions– Black for numbers driven by calculations

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Conclusion

• A well-built, strong financial model is an essential tool to raising money from investors and piloting your business

• Your model is a living creature that needs to constantly be updated with real data to constantly improve predictability which in turns gives you confidence

• When raising from investors, don’t live and die by your model either– An incredible product and/or experience for your customers will

take you very, very far…

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Any questions?kiyan@boticca.com

Thank you!