Finance Fridays: The Financial Model edition.
“With every great entrepreneurial moment comes great spreadsheets”. (Or something).
In my regular Finance Friday slot last week, I had my usual Xero & cake fix but I also rebuilt our financial model. In light of new developments, it was due a refresh and the certainty of the past few weeks meant we now have a clearer picture of the next couple of years, which is unheard of in small business-land (corona caveats notwithstanding).
Why did I spend the time rebuilding our entire model instead of updating a previous one? Why didn’t I ask someone more competent to do it?
When you’re in the day to day running of the business, it’s sometimes hard to see the wood for the trees. I used the time to look afresh at our business and pull it apart from different directions. Obviously, noting the bottom line outcome in your forecasting is important but I actually made 3 key insights whilst in the process of building the model.
The first came when I looked at our team budget lines and how we can grow at this next stage. In order to create the budget lines, the pre-work was building an operational chart and looking at how we can flex our team. We have big ambitions in multiple countries and my work with Equal Playing Field means that I can think global straight away. How do we bring the best out of a team that is mostly remote? How do we tap into local knowledge when we’re reaching local customers?
It’s always good to remember when you’re playing with the model, that each team budget line is a person. In this year especially, each line is an opportunity for someone in our business.
The second insight came when looking at our cashflow forecasting over the next few years. Product businesses are interesting because at this stage of the business you’re essentially in a dance with cashflow. There will be certain points in a year or cycle when you need to drop disproportionate money to buy the things you’re selling. It seems quite obvious but as a small business owner, the timing of those payments makes all the difference. Understanding our monthly cashflow gives greater insights into when we need to prepare for new products and all the things that flow from it.
I actually created a visual slide with key activities and milestones before completing the cashflow forecasting. This helps to align our business priorities with key sporting events, team hires and reporting milestones. The visual slide is a good way to double-check that the numbers fit the reality of the business.
Finally, the model showed me the impact coronavirus has had on our changing habits. We just don’t have to budget for an office anymore. We may well do co-working at some point next year but for the first 6 months — meh. Our goal should be now to think about how to make a home-working space work for our team. How else can we connect until life is back to normal?
We have moved heavily online and spend lots on advertising to reach eyeballs but we’ve always thought about how we can reach people where they are and provide interesting content for them. This creativity comes through in our model and entire section on advertising and marketing.
It also showed up how we can get some process efficiencies as we scale. Subscriptions, fees, insurance, legal, bank fees. All of these add up but we’ve gone through the first hurdle and it will be some time before we reach “Enterprise” level (which I always say with a Star Force intonation) so great news for our model — our costs are unlikely to change for the next wee while. Happiness is a static or decreasing cost line.
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Even though I built the model myself and enjoyed (?) the time I spent on it, I’ve now released it to our advisors to get pulled apart and commented on. A model is only as good as the Assumptions tab and we need to know that we are all aligned with our assumptions of how the business will develop.
The model is not the business. Life gets in the way and changes the model. But it is a really good conversation starter for the decisions that have to be made and a way to look afresh at where you’re going.
I put an inspiring picture of the business on my computer when I’m working on the numbers as I also think it’s important to remind myself why I’m working on this.
