Subject line: [Flawless Financials] 25-Point Financial Model Scorecard Flawless Financials the Financial Forecasting Online Newsletter from Minotaur Financial and David Brode June, 2003 Please pass on Flawless Financials to those in your network. To leave Flawless Financials, follow instructions at bottom. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * This month: 25-Point Financial Model Scorecard * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Potential clients often send me their current financial model. Over time I've developed a standardized approach that I use to evaluate someone else's model. This month's newsletter describes the main tool I use during this standardized process, the 25-Point Financial Model Scorecard. In creating my scorecard I considered why we use forecasting models. I think it's to prove four things: that you're trustworthy and smart, that the investor will make lots of money, that the revenue plan is solid, and that the costs are well known so that future profitability seems realistic. I discussed these four themes in an earlier newsletter; now we're putting detailed checklist items under each item. And so without further ado, here's the scorecard: 25-Point Financial Model Scorecard I. Clear Investor Returns (6 points) 1. Funds requested 2. Pre-money valuation/% of company given 3. IRR to investor 4. Investment multiple to investor 5. Exit time frame 6. Exit valuation reasonable II. High Financial IQ (9 points) 7. Professional looking IS/BS/CF 8. Standard use of financial terms 9. BS balances and properly in sync with depreciation, amortization, net income 10. CF properly ties out cash 11. Period detail is reasonable 12. Tax calc is accurate 13. Working capital reasonable (AR, Inventory, AP days) 14. Capex reasonable 15. Debt ratios reasonable III. Credible Revenue Forecasts (6 points) 16. Market size/penetration/share analysis 17. Customer/average price analysis 18. Pricing over time is reasonable 19. Units make sense 20. Sales productivity analysis 21. Sales & Marketing spending to revenue analysis IV. Proving Profitability (4 points) 22. COS/COGS variable with revenue 23. Clear how opex moves in response to volume 24. Rev/HC is reasonable 25. EBITDA margin is reasonable Add up the scores and multiply by four and you have a score out of 100 possible points. It's been eye-opening for me to use a standardized approach. Models that at first look pretty solid to me wind up scoring 36 out of 100. Of course, this doesn't mean that the model is bad. Instead it points to *where* work needs to be done to get the model to a point where numbers are not a roadblock to doing a deal. Every model doesn't need each of the items. Some items are for internal use only and have information that typically isn't released until later in the process, i.e. certain cap table details. Where do most models fall down? The worst fail the High Financial IQ test entirely. We've all seen of models like this, where it's just so awful that you can't even evaluate the business. The next major dividing line is between models which are static as opposed to dynamic. The most basic static models present one basic scenario, with most of the revenue and expense numbers hardcoded. Hey, it's a start, but it doesn't let investors understand the true economic dynamics of the business model. In some businesses, 10% decrease in revenue would cause a 7% of revenue decrease in expenses. In others it would cause a 1% decrease. These dynamics are what's measured in the Proving Profitability section, and this is the section that takes a real modeler to build. So get systematic in how you evaluation the numbers with the model scorecard. I find it essential for being able to give solid feedback quickly. This 25-Point Financial Model Scorecard is available on my website as an XLS file at www.brode.net/resources/25_point_scorecard.xls Until next month, all the best, David Brode – Minotaur Financial Removing Financial Issues as a Deal Roadblock * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * JOEL SPOLSKY UPDATE Joel just released "Fixing Venture Capital" and writes, "There are certain fundamental assumptions about doing business in the VC world that make venture capital a bad fit with entrepreneurship. And since it's the entrepreneurs who create the businesses that the VCs fund, this is a major problem." Read it at http://www.joelonsoftware.com/articles/VC.html * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * NEWSLETTER ARCHIVE AVAILABLE Make sure to visit the Minotaur Financial website for the Newsletter Archive at http://www.brode.net/resources/ * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * http://www.brode.net mailto:David@Brode.net 1919 14th Street, Suite 510 Boulder, CO 80302 (303) 444-3300 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * (c) 2003 Minotaur Financial, All rights reserved. You are free to use material from the Flawless Financials newsletter in whole or in part, as long as you include complete attribution, including a live web site link. Please also notify me where the material will appear. The attribution should read: "By David Brode of Minotaur Financial. More articles on financial forecasting can be found at http://www.brode.net " * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Are you struggling to convince others to fund a deal which you think is a no-brainer? To discuss how you can take numbers off the table as a deal roadblock, call (303) 444-3300. I'm very accessible and glad to help. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * DO YOU LIKE THIS NEWSLETTER? You are welcome to share this email with colleagues who would benefit from better numbers. Your feedback is always welcome and appreciated. Write in to mailto:feedback@brode.net. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * PRIVACY POLICY: I never rent, trade, or sell my email list to anyone for any reason whatsoever. You'll never get an unsolicited email from a stranger as a result of joining this list. To SUBSCRIBE FREE to this newsletter, send an email to mailto:subscribe@brode.net. 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