Developing a financial model for your business is tough stuff. Even tougher if you don’t have a MBA, like me.
I’m pretty good at math being that I am a software engineer. However, the math of financial modeling relies so heavily on assumptions, that it barely looks like real math when you’re done.
As a result, its best to draw from the experience of the experts.
With that said, I found an wonderful case study done back in 2007 by Glenn Kelman, the CEO of Seattle-based Redfin, an online real estate brokerage.
The post is titled Financial Models for Underachievers: Two Years of the Real Numbers of a Startup. In it Kelman shares the early financial models he did for Redfin. Kelman states:
Startups face one primary challenge: To never run out of cash. So when projecting costs, we heeded Guy’s advice that “the three most powerful words you can utter at a board meeting are, ‘We beat projections.’” This convinced us to develop the worst possible financial model that could still be used to raise money.
Kelman is very open with how he created his entire financial model. If you are in need of a framework for your financial model, I suggest you start here.
Ditching the business plan is one of the biggest trends for entrepreneurs over the last 5 to 7 years, maybe longer. The prevailing thought is that business plans are old school, and in the new lean startup world they will do nothing but collect dust as history books in the fast changing internet economy.
This is true to some extent, but as entrepreneur turned VC Mark Suster points out in his post from his archives titled Are Business Plans Still Necessary, the financial model part of the business plan remains critical.
In an era of “launch and learn” is there a need for a business plan?
Short answer: absofuckinglutely. I have seen really great product people espouse the death of the business plan. Do so at your peril.
So, definition: when I talk about a business plan I’m not talking about a 40-page Word document outlining your market approach. That died with waterfall software development. I’m not even talking about your 12-page Powerpoint presentation that you need to raise venture capital or to talk with potential biz dev partners.
I’m talking about your financial spreadsheet.
Danielle Morrill had another heart wrenching post about failure today. This time instead of breaking down her own company’s failure, she dug into the failure of one time Silicon Valley darling Ecomom.
This analysis is even more heart wrenching since the founder and CEO of Ecomom recently committed suicide, which some attribute to the companies failings.
Danielle’s main point in her blog post rehashing the failure of Ecomom is that basic business math should have signaled to top management and investors that it was on a doomed trajectory. The company was growing revenue with negative margins (selling a dollar for fifteen cents), and there is no excuse for not knowing when your margins are unsustainable.
operating the business in a way that will ensure its survival is your #1 priority. Sexy top line numbers might get you a pat on the head or line the pockets of the sales guy, but strategic long term thinking by professional managements wins every time (even when it fails).