It's Not a Plan Until the Numbers Add Up - Colwell, Michael

8/12/2019 It's Not a Plan Until the Numbers Add Up - Colwell, Michael

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This second edition first published 2012 2012 Michael T. Colwell

www.startupmodels.com

Contents

Introduction

Requirements

Overview


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IntroductionIts not a plan until the numbers add up. More than the title of this book, itis 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 willbenefit you in the end. Your business partners, financiers, spouses, andothers need to understand the return on their investment (in time or money)in your business. Often putting together the financial portion of the businessplan is the hardest part of the planning process. More than anything else,putting together a financial plan for your business startup forces you todefine your assumptions.

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

Explain how to use the model to complete a financial plan for yourstartup.Help you understand many of the decisions you need to make in creatinga financial plan.Clearly identify all of the business and financial assumptions you makein your financial plan.Allow you to focus on your business and financial assumptions, not Excelformulas or tools.

You are welcome to use the model and share it with as many other users asyou wish. I request that you not take credit for my work or remove the


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license agreement, my identification, or any links. The work put into thismodel is funded by the sale of this guide. Please read the license agreementincluded within the model and make sure you agree with the terms. If youuse the model, you are agreeing to the terms.

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


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Requirements

A PC or Mac running Microsoft Excel 2003 Service Pack 3 or laterversions 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:

[email protected].


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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 tounderstand finmodel4 and build your financial plan. If you need moreassistance, this overview and the chapters following are for you.

Getting to Cash Flow NeutralWhat causes most businesses to fail is running out of cash. In putting

together a financial plan for your startup, the primary goal is to determinewhen or even if the business will get to cash flow neutral. This is the pointwhen there is the same amount of cash coming into the business as is goingout.

In the diagram above E stands for expenses and R stands for revenue. In thebeginning when first starting up, it is likely you will be spending more cashthan what you receive in revenue. As you approach the point of cash flowneutral, your balance of revenue and expenses is equal. Profit occurs whenyour revenues exceed your expenses. While simplistic, this is true for any

business and a critical point to understand and remember. You mustget tocash flow neutral and stay there to survive in business. To succeed inbusiness, you must get to the point where your revenues exceed yourexpenses.Modeling Your Startup


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Determining if and when your revenue can exceed your expenses is whatfinmodel4 is all about. There is a simple equation that defines thisquestion. It is represented in the diagram below.

Businesses often have multiple sources of revenue. For each source ofrevenue, subtract the direct cost of that revenue. If you have productrevenue, subtract the cost of that product. If you have service revenue,subtract the direct cost of providing that service. Combined, all of yourrevenue 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 thecontribution margin leaves you with an operating profit, or loss.

The rest of this guide will explain how to use finmodel4 to develop a solidfinancial plan for your business startup.


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Quick Start Guide

Do you know Excel? Do you understand financials for business? This quickstart section describing the key points of finmodel4 may be all you need. Ifyou 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-downmenu selections. You can use the menu or type over the field.

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

Three or Five Years:All of the relevant worksheets have five years ofplanning area. When you receive this model, the fourth and fifth yearswill be contracted. To expand the fourth and fifth year, you will needto first unprotect the sheets. Then you can click the plus sign above thegreen shaded cell with the year listed (year divider) to expand thatyear. Alternately, click the minus sign above year divider to contractthat year.G&A worksheet:The G&A worksheet is intended for all non-revenuerelated costs. The revenue related direct costs are entered on therevenue worksheets.You can edit the expense descriptions on the G&A worksheet. Thosedescriptions in yellow can be edited in cell. Most of the expensedescriptions in white can be changed on the Labels worksheet.The G&A worksheet allows you to contract any expense category youwill not be using so that it does not appear on detailed reports. You willneed to unprotect the sheet then click the plus sign to the left of thecategory to contract the section and keep it from printing.


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

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

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

Income Statement and Net Worth Statement:There is no ability toenter data on the Income Statement or Net Worth Statement. Allinformation on these worksheets flows from the other worksheets.

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

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

Product Revenue worksheet: The Product Revenue worksheet is forproducts with an associated cost per unit sold. All direct laborattributed to the product should be included here on a per unit basisand not duplicated in the employee details worksheet.

Commission amounts entered here are not used in employee taxcalculations. If the commissions you enter here are for employees, youneed to account here for taxes related to these commissions. Anysalaries for commissioned employees are entered on the employee


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details worksheet.Reoccurring Revenue worksheet: The Reoccurring Revenue worksheetis 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 onboth new and renewal licenses. You have the ability to reflect specificcosts related to new license purchase and renewal license purchase.

There is a further capability to reflect costs directly related to the totalnumber of current licensees. Most often this is related to the purchaseof additional server capacity or other fulfillment related needs. Alongwith a cost entry, there is an increment field which allows you to

account for a cost for every increment of renewals. If you set theincrement to 20, for each incremental increase of 20 total licenses, thecost will be allocated.On the Reoccurring Revenue worksheet, the term license is usedthroughout. While originally designed for selling licenses for software,this worksheet can also be used for memberships, monthly fees, servicecontracts, 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. A90% renewal rate on a monthly membership may sound great but thatmeans you are losing 10% of your renewals every month. Experimentwith this feature to better understand the impact.Other Revenue worksheet:The other revenue worksheet is an openmodel allowing for the entry of dollar-denoted revenue and relatedcosts and commissions.

Additional Details:If you need to account for initial inventory for a product, enter it intothe startup expenses.

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


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on the Labels worksheet.

This quick start guide is just a brief overview of finmodel4. The followchapters provide a more in-depth description of each of the worksheets.


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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 tobe grouped together. Once grouped, the selected columns or rows canbe expandedand contractedby simply clicking the associated plussign above the grouped column or to the left of the grouped rows.

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


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In order to use this feature, you will need to turn off the protection onthe worksheet. You can do this via the main menu in Excel by clickingTools -> Protection -> Unprotect Sheet and clicking OK. Once this isdone, you can freely edit any of the cells. For most users it is not agood idea to leave the sheet unprotected. Once you have expanded or

contracted the desired groups, make sure you turn protection back onby clicking Tools -> Protection -> Protect Sheet and clicking OK. Thereare 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 youclick 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 typevalues in directly. In most cases, your entries will be limited to thevalues on the list.

Color: I use the color light yellow to indicate the cells in which you canenter data. This color will also indicate to you or others (investors,advisors, board members) the assumptions you have made about yourbusiness.Enter Once:In the introduction worksheet, you enter the name of your

business, the starting year of your model, and the beginning amount ofmoney you have for the business. The rest of the worksheets in themodel pull this information from the introduction worksheet. Changesomething once and it is changed throughout the model. This approachis used throughout finmodel4.Printing: The worksheets are set up to allow easy printing of part or all


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of the worksheets. Select File, Print and below the area titled Printwhat select Entire workbook and click the Preview button to get a viewof 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 everynumber you put into your model is likely an assumption. You assumeyourcell phone bill is $75 per month. You assumeyour rent is $900 per month. Byreferring to the yellow color data entry cells, you can easily identify all ofthe assumptions made.What about income taxes? This model is completely pre-tax. Since incometaxes vary dramatically and tend not to become burdensome until you turn a

profit, I do not consider them very relevant to the planning portion ofstarting a business. My wish for you is that you have so much profit in yourbusiness that you have to pay income taxes!There are thirteen worksheets in finmodel4. They are:

InstructionsG&A Expenses

Employee DetailsDebt DetailsStartup ExpensesBalance Sheet EntryProduct RevenueReoccurring RevenueOther RevenueIncome StatementCash Flow StatementYear Summary StatementsLabels

The first worksheet, Instructions, is the beginning point for the model. Thereyou will also find the license agreement, finmodel4 version number, andother general information.


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The next four worksheets are for your business expenses:

G&A Expenses are General and Administrative expenses. These are theexpenses that you have whether you sell something or not. For

example, you have to pay your cell phone bill whether you sellsomething or not. This does not include paying for the product you sell.The Employee Details worksheet is where you enter any employees youmay hire in the business.

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

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

The Balance Sheet Entry worksheet is a very simplistic method of including abalance sheet with your financial plan. In general, the balance sheet is not

something that is planned in advance. Rather than trying to calculate thebalance sheet from the planning model, I have provided a simple worksheetthat includes the ending cash balance for each year along with fields for youto enter the rest of the balance sheet assumptions. These values arereflected on the reports on the Year Summary Statements worksheet. It is upto you to decide if you will use the balance sheet. For most startups planningtheir business, the balance sheet has little real value pre startup.There are three revenue worksheets: Product Revenue, Reoccurring Revenueand Other Revenue. You can use one, two or all three of these worksheets indescribing the revenues of your business. For example, you may sell aproduct and a service plan for maintaining the product after the sale. Theproduct sale would be shown in the Product Revenue worksheet while thesale of a service contract should most likely be noted in the ReoccurringRevenue worksheet.


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Three of the worksheets do not require any input. They are the IncomeStatement, 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. Thisworksheet contains the labels in the reports used in the rest of the model.


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Building a Financial Model

Getting StartedWhen 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 yearsare 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 forinvestors, advisors, or others. It is truly hard to plan beyond three years. If

needed, unprotect the worksheet and click the "+" sign above the year dividerfor years four and five.In the simplest form, Revenue Expenses = Profit. The income statementexplains this equation in detail. The cash flow statement reflects when cashmoves into and out of your business. Just because you sold something, doesnot necessarily mean you have been paid for it. Also, if you are sellingphysical products, you most likely need to pay for those products or theircreation before you can sell them. Run out of cash and you may be out ofbusiness, even if you have hundreds of orders for your product.

Lets start with the Instructions worksheet. In the yellow shaded cells, enteryour company name, the beginning year of your business, and the startingcash balance. The year you enter here will define the three to five years ofyour 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 withzero to get a feel for the cash flow needs and determine what level ofinvestment will be needed to sustain the company through the startupphase. You can go back at any later time and change any of these values.Now, lets review each of the various worksheets.


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General & Administrative Expenses

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

You will notice as you scroll down the G&A Expenses worksheet that eachexpense type has been grouped and can be expanded and contracted as

needed. As you determine which categories to use in your plan, you maywish to contract the groups for the ones you do not use. Contracting theunused groups will also eliminate them from being included as printed outputor included in PDF files created from the worksheet.

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

MarketingFacilities & Equipment RentalMaintenance & RepairsUtilities, Phone & PostageInsuranceSupplies


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FreightAuto, Travel & EntertainmentLegal & AccountingOther Outside ServicesMisc, Taxes & Fees

Other G&A expensesDepreciation

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

Each of the G&A Expense areas in the worksheet shares some commonfunctionality. You may enter names for each type of expense in eachcategory. For example, in the Marketing expense area, there are seven lineswith the names Item 1, Item 2, etc. You can change each of these to anyname you want, i.e. business cards, agency fees, brochures, etc. Use namesthat will make sense to you later and will make sense to others who reviewyour plan.

There are two ways to enter expenses in the G&A Expense worksheet. Thesetwo 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 appropriatemonth. Assume the expense will be in June for $350 and $485 in August. Youcan enter these amounts in the appropriate cells directly below the month ofthe expense. Make the same entries for each subsequent year that theexpense is incurred."My expense is the same every month year after year. Do I have to enter it36 times?"No, you can enter a single amount into the cell below Fixed/Month. If you


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enter an amount into Fixed/Month, that amount will automatically be filledinto each month for each year across the entire plan. The Fixed/Month cellexists for each year in the financial plan for each expense line item. If anexpense is $500 per month the first year but increases to $600 per month foreach 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 thatevery 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 themonths you do not need.

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

Can you measure the outcome of your marketing expenditures? How doyou measure it? If you cannot measure the expenditure, you shouldseriously 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 printnewspapers. Most 50 and older consumers dont spend their day onFacebook. Point your marketing where you know your consumers are.

The narrower your market focus, the more effective your marketing canbe. If you target men 18 to 34 years old, you are going to need to spenda vast sum of money to reach them. If you target men 18 to 22 who likeFacebook and soccer, you will have a much easier time reaching thatgroup.

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 Rentalexpenses:


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

Beware of expensive equipment rentals. Some equipment can bepurchased used and be fairly inexpensive. If two rental payments is thesame amount of money as buying the equipment used, then buy it. Canyou 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 dedicatedfax 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? Thosewho do specialize usually know what coverage you really need and howto get that coverage for less.Are you buying the right types of insurance? Typical business insurancetypes include:

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


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Questions you should ask about your Legal and Accounting expenses:

Do you know what ongoing legal expenses you will have? If you havecustom 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 CFOfor 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 toconsider a purchase agreement stating all of your terms.


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Employee Details

The Employee Details section can be used for both salaried and hourlyemployees who are full time, part time or contractors. The differencebetween full time, part time and contractors comes down to taxes andbenefits. For contractors, no taxes or benefits are calculated. It is assumedthat the contractor is taking full responsibility for these items and is truly anindependent contractor. Make sure you know the IRS rules regardingcontractors. Many large companies have found themselves in trouble overthis distinction. If in doubt, consult your accountant. Part-time employees

have taxes calculated against their earnings, but not benefits. Full timeemployees 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 arethose 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 theTaxes table at the top of the Employee Details worksheet as shown in theexample below.

Since I live in Iowa, I have completed this table to be current with Iowa taxand insurance requirements. In many cases, taxes or insurance are collectedon only a portion of the income. This is the reason for the column titledApply tax up to payroll of. For example, the state unemploymentinsurance for Iowa is collected only on the first $14,400 of income. By placing


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the amount $14,400 in this column, the model will calculate the insurance upto this amount and no further. In states where there is no upper limit oncollection, I suggest entering $999,999.

Employee Benefits:

Just like the taxes and insurance, the model only calculates the cost ofbenefits for the employer. The benefits you plan to provide are detailed inthe benefits table at the top of the Employee Details worksheet. Again, youwill need to ensure that the amounts and percentages listed in the table areaccurate 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 thatthese costs are shown as a fixed cost per month per employee, regardless ofthe employee income. For the short-term and long-term disability and lifeinsurance, the cost is calculated as a percentage of the salary. If you haveother benefits you plan to provide, you can enter these either as a cost permonth 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 apercentage of pay. If both numbers are present, the model uses the cost inactual $ per month. If no cost in actual $ per month is present, the modelwill use the cost as a percentage of pay to calculate the benefits.

Notice the column Expected increase / yr %. This has become a significantissue in recent years as health care insurance continues to rise at a rate


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


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Debt Details

To complete the debt details, you will need an amortization table for each ofyour loans. You cannot just enter the payment. You must enter the principaland interest for each month in separate locations. This requirement is basedon the need to track interest paid separately for tax purposes. Thedifference between short-term and long-term debt is handled different byindustry. If you do not know which to use, talk to an accountant familiarwith your industry.

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


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Startup Expenses

The worksheet for startup expenses is where you enter the expenses relatedto beginning your business. You do not have to use this worksheet. I offer itas a planning tool to list in detail all of the one-time expenses you face whenstarting a business. A few examples are: developing a logo, having apartnership agreement created, forming a legal entity, buying initialinventory, having your bookkeeping set up, etc. These expenses will appearon the first year income statement.


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Revenue Models

For many, the most difficult issue is building a viable revenue model for theirbusiness startup. This is where most questions will come from investors,partners, and other interested parties. They will ask how you came up withyour revenue assumptions. Simply saying there are 1 million customers in thetarget market and you will capture 5% is not going to convince anyone. Baseyour 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 orservice will buy it is a much better start. Identifying a marketing strategyand plan that delivers your product experience to potential customers is agood next step. Proving you can do both of these things while making moneyis the basis for a solid revenue plan.

There are three revenue worksheets in finmodel4. These models are notexclusive 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 arecommonly referred to as revenue streams. As you look at the model, start byasking yourself:

What revenue streams will your business create?Will the revenue come from each customer only once, multiple timesbut 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? Notethat you can count labor in your product costs, but you will have toestimate the labor cost per unit or license. Alternately, you canestimate the labor in the Employee Details worksheet and leave it outof the direct cost of your revenue. From an accounting standpoint, it isbetter to estimate the labor in your product costs.


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Are there expenses for third parties such as channel partners or resellersof 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 aG&A expense and entered into the financial plan accordingly.In creating your revenue model, you will probably only need to plan threeyears of revenue into the future. Finmodel4 will support up to five years, butit 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 revenueworksheets in finmodel4.


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Product Revenue

The Product Revenue worksheet is intended for traditional product sales. Inmy company casesimple, Inc, we sell cases for iPads, Kindles, Nooks andMacBook Air laptops. These are traditional product sales. The informationyou need to create your plan is your product names, monthly sales volume,average selling price, average cost, and any commission paid. You will needto 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 productcost. 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 ofthe perfectly sloping sales forecast where each month you sell more than themonth before. Keep in mind seasonality, the fact that February has fewerdays, and any other factors that influence your sales. If you sell in Europe, itis common to see a sales decrease in the summer for business-to-businessselling as many people there take extended holidays. For my business, weexpect to see a sharp sales increase heading into the Christmas holidayseason and then a drop-off in sales starting in mid January.

In the top left corner of the Product Revenue worksheet is the label CashCollected 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 quicklyyou receive payment from your customers. If your customers pay at the timeof the order, (as we do in casesimple, Inc.) you should set this to 0. If yourcustomers pay you in an average of 30 days, you set this cell to 1. Someindustries have average payment occurring 60 days (set cell to 2) or even 90days (set cell to 3). It is critical to note that even if your cash collection isdelayed, your direct costs of revenue are not delayed. You still have to payfor the product. Make sure you know what the common practice is in yourindustry. It is hard enough to be a new player in the industry. Do not make itworse by acting differently than the established players. That is unless whatyou do differently is a positive to the customer!


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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. Thisworksheet can also be used to plan a membership-based business such as ahealth club. I use the term license throughout this guide and in theReoccurring Revenue worksheet. However this word could be membership,service contract, dues or any other form of reoccurring revenue. There areseveral key items to note:

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

The reoccurrence period refers to the frequency with which a licenserenews. This value can be set to 1, 3, 6, 9 or 12 months. A setting of 1denotes monthly reoccurrence and a setting of 12 denotes yearlyreoccurrence.The renewal rate/period indicates the percentage of customers thatrenew their license. The impact of this is seen most dramatically onlicenses that reoccur monthly.The worksheet allows for reoccurring costs related to both new licensespayments and renewal license payments. These costs are entered in thecells Cost of New License Sales and Costs of Renewal License Salesaccordingly. This allows you to account for any costs tied directly to alicense payment. The concept of license payment is important. Forexample, if a license holder renews six periods in a row, the amountentered in the cost of renewal license will be incurred six times.You can set up costs related to the total net number of license holdersseparately. Total Net License Cost is designed to allow you to reflectone-time costs that occur for every given incremental number oflicenses in your system (or members in you gym). For example, in a


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SaaS offering where the owners must acquire an additional server forevery 50 additional licenses in use on the system, a value of 50 would beentered in the Increment cell and the Total Net License Costs would beset to the cost of the server.

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

The Commissions on New Licenses percentage is used to account for acommission fee on each new license. It does not calculate on renewallicenses.

Cash Collection In ___ Months is in the upper left hand corner of theworksheet. A value of 0 indicates customers pay at purchase, a value of1, 2 or 3 indicate payment in 1 month, 2 months, or 3 months after thesale respectively.

On the following pages are several examples of uses for the ReoccurringRevenue worksheet. They are intended to help you better understand how toset 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. Ihave named the licenses accordingly. I have set a price of $35 for themonthly member and $350 for the yearly member. Note that I have set theReoccurrence period to 1 for the monthly member indicating that thereoccurrence rate is monthly and set the yearly member to a 12 monthreoccurrence rate.


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Look below the reoccurrence period at the Renewal Rate/Period. TheMonthly 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 soundlike much but the impact is significant over time. This example shows a totalof 60 Monthly Members sold from January to June. Looking in June below inthe Total Current Net Licensees shows 56 Monthly Members. That meansthat at a 98% monthly renewal rate, 4 members have already been lost in 6months.

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


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There is no direct cost for the memberships in this model so nothing wasentered in the cost area. The Gross Profit section shows the revenue eachmonth minus the commission paid. This is the amount of contribution to thebusiness from this revenue stream.

Example #2:In the following model, I have changed the example from above so there is adifferent 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. Therenewal price stays as it was at $35 for a monthly member and $350 for ayearly member.

In this example, I have planned for two separate costs. First, I decided topay 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 foreach new yearly member. Second, I have implemented a cost of $5 for eachmonthly member and $60 for each yearly member. For discussion sake, letsassume this $5 fee is for buying additional towels.Below you will see that I have placed a cost of $35 for each new monthlymember and $100 for each new yearly member in the cost of new license


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sales.

The towel cost of $5 per Monthly Member and Yearly Member is entered inthe Total Net Licenses Cost area. The corresponding Increment cell isset 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 adifferent renewal rate/period and reoccurrence periods, along withcommissions paid on each new license. Look closely at the single user licenseinformation circled.


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


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to spend the first license fee to gain a licensee. The key is to retain theclients on an ongoing renewal basis.

Example #4:

In this example, I have added several costs to the previous example. I haveincluded a cost for every new license sold to reflect set-up costs. I have alsoadded a cost to the renewal licenses of 3% of the price of the license. This isa common amount paid for credit card fees. Finally, I have added anincremental cost tied to the total number of licensees. This is to account forthe 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 uniqueand challenging. They are also very desirable.


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Other Revenue

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

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

The cash collection In ___ months is in the upper left hand corner of theworksheet. A value of 0 indicates customers pay at purchase, and a value of1, 2 or 3 indicate payment in 1 month, 2 months or 3 months after the salerespectively.

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

The Income Statement

The Income Statement is the reflection of how your business is performingfrom a profitability standpoint. All of the information on this worksheet

comes directly from the entries you have made in the model. Once you haveput your financial plan together, it will be beneficial to you to review yourassumptions and this statement with an accountant and any other businessadvisor you have.


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The Cash Flow Statement

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


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The Year Summary StatementsThis section of the model allows you to show a single page view of yearlyversions of the Income Statement, Cash Flow Statement, and the Balance

Sheet. As with the other reports, all of the information on this worksheetcomes directly from the entries you have made in the model.


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Modifying the Model

For most people, it may not be wise to attempt to modify the model. Forthose 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 Labelsworksheet. You can easily change the description of many of the labelshere. For the rest, the labels in year one are hard coded and then are copiedto subsequent year statements.

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

Data Validation settings: Many of the pull-down menus access a hiddenworksheet called Data. This sheet contains the lists of menu items and manyoffset 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 willfind a properties window (View -> Properties Window) and look for the Visibleproperty selection. Change the Visible property to -1 - xlSheetVisible. Tohide this sheet, change the Visible property to 2 xlSheetVeryHidden.

Inserting rows: If you wish to add rows to one of the expense categories inthe G&A Expenses worksheet, it is best to do so in the following way. Select


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the second or third row in the category by clicking the row number. Copythat 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 DebtDetails and Startup Expense worksheets.

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

On the Product Revenue worksheet, you can add products by adding rows toeach of the following areas: Units Sold, Revenue, Cost of Goods,Commissions, and Gross Product. You will need to make sure you add thesame relative row in each of these sections. The Other Revenue worksheetcan 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 eachJanuary starts on the same relative column. For example, January of yearone 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 eachpage ends on the Z column. This was done to make entering formulas easierfor the author. This same standard is followed on all worksheets. Also notethere are a series of columns that are very narrow on these same sheets. Ifyou need to add a row of information, I highly recommend you use one ormore of these rows rather than inserting additional rows.

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


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Integrating the Output

In many cases, you may want to integrate your final financial plans into yourbusiness plan. There are many ways to do this. Two that I prefer are asfollows:Install and use a PDF printer such as PrimoPDF (www.primopdf.com). Thisinstalls and looks like a printer option. Selecting it allows you to print to aPDF file. For those that want to send their financials without sending theactual 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 worddocument, I find that the following works well. In the Excel model, highlightand copy the desired section. Go to Word and use Edit -> Paste Special andselect Picture (Enhanced Metafile) from the list of options. This type ofpicture retains all of the formatting and allows you to easily resize theimages.


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Builder / Authors Background

I developed this model over a five-year period while running the BusinessInnovation Zone (the BIZ, www.bizci.org). The BIZ is a business acceleratorfocused on high-growth-potential startups. The majority of my clients at theBIZ have been in the technology market segment. However, my clients haveincluded manufacturers, service providers, and many other business types. Iuse this model regularly with the majority of my clients and also use it in mypersonal 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 backgroundin mobile computing, wireless communications, and Auto ID technologies. Iled the team that created the first multi-mode wireless mobile computer thatwas the forerunner to devices such as the Palm Treo, Motorola Q, andiPhone.

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 heldvarious positions within engineering, field sales, and marketing ending as VicePresident of Marketing. At its peak, overall company revenue was in excessof $950 million per year.

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

It's Not a Plan Until the Numbers Add Up - Colwell, Michael

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