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| The Brode Report | July 2016
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I have a new niche website at www.brodetelecom.com. It details the specific work I’ve been doing in telecom including wireless, cable, fiber, small cells, etc. |
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Of course, behind the scenes was a scenario manager/inputs page, and model consumers would see that when I gave a model tour. On the tour we’d go through sections: typically volume and revenue, with all the assumptions that went into that and intermediate calculations like breakouts by mix or such. Then we’d move on to expenses, capex, investment, etc. All the while we’re flipping back and forth between the assumptions, calcs, and reports while adding a verbal overlay.  And this is where the magic happens (if I may) in delivering a model. It’s more than just the bits that you email. It’s the process of taking people through the model and explaining it to them and getting them on board with it. Often the value of a model is in letting investors know what assumptions they need to believe for this plan to be a good idea. During the back-and-forth of the presentation investors ask questions the management team justifies the assumptions. All the while we’re seeing in real time how the model changes as we tweak the assumptions.
At times I’ve created videos of me giving the model tour and made that available to clients, who would send that out directly to potential investors. That kept the explanation part of the tour intact, but clearly doesn’t allow for questioning. And this leads us to the new report. I call it the Narrative. What makes it unique is that it’s a subjective presentation of the key inputs and outputs to the model along with a measure of explanatory text. Here’s a portion of one: Products and Pricing
 The goal of the Narrative is to walk people through the key assumptions so they get a sense of the economic dynamics at play and the scale of the company. If done well, you can explain most models in two to four pages of mixed text and numbers.
In this next example the Narrative explains nearly half a billion dollars of costs in half a page: Cost of Service/Cost of Good Sold
The hardware margins are straightforward. The largest component is, naturally, the cost of the unit itself.
The service margins are based on these factors:
Why the Narrative is good: It’s an intellectually honest way of explaining assumptions and methodology. It’s both clear and open. As it is a customized section for every model, it forces me to think about the dynamics we’re really modeling here. I’ve seen models where, say, you see the equivalent of “Energy is an $800 Billion market. If we capture 1% of the market, we’ll be an $8 Billion company.” And I  always laugh because the idea is that it’s conservative because, as we all know, there’s no number smaller than one. (Except zero, for starters.) So that model’s Narrative would show $800B x 1% = $8B pretty easily and you’d realize there’s no meat to this plan.
The problems with the Narrative:  Unlike a standard income statement which is part of the core model and thus is technically correct every time, the Narrative might be custom to a particular scenario or methodology and might not update perfectly if there are big changes to the model. I’m willing to live with this fault because I’m seeing first-hand how people can use the Narrative to quickly understand a financial model. As I’ve done model tours for two different businesses recently, the presentation focused on the Narrative and used it to structure the tour. For both startups the presentations were great successes, and I’m planning to stick with this new method.
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The Brode Group |
Strategic Financial Consulting - Real-World Results |
(303) 444-3300 |
Narrative Reports in a Model