Flawless Financials the Financial Forecasting Online Newsletter from Minotaur Financial and David Brode May, 2004 Sent monthly to over 400 subscribers. Please pass on Flawless Financials to those in your network. To leave Flawless Financials, follow instructions at bottom. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * This month: Finance and Sales Can Be Friends! * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * I. Finance Abuses Sales Revenue is critical. Companies brag about the size of their top line, and executives focus on revenue growth. While finance professionals have fair quibbles about profitability and cash flow, we all know that the financials tend to look much better as the revenue line goes up. In financial forecasts for early-stage companies, the easiest way to make the financials look better is project increased sales. It’s so easy! Hey, why don’t we sell thirty units per quarter instead of twenty? This is the start of the historic tension between Sales/Marketing and Finance. An experienced sales executive once told me, “Non-salespeople always think selling something is easy.” The reality, especially in early-stage companies, is that it’s not. In this newsletter I want to focus on one tool Finance can give to Sales to help improve the top-line and also discuss a tool the two groups can work on together to improve the short-term revenue forecasts. II. Boosting Sales: ROI analysis For companies selling big-ticket items, an ROI analysis can be a powerful tool. What’s more, it’s a way Finance can help out, as Sales & Marketing teams aren’t always skilled at making formal financial projections. Just as investors hear a story and want to see numbers, the same is true for customers. Some potential customers will buy based on the soft benefits. Others will want a more rigorous cost/benefit analysis. III. Creating Your ROI Analysis Let’s look at the components of a typical ROI analysis. First, start with the punch-line: convince your customers that they will either make or save money by using your product. Ideally, you will be able to quantify this to the penny. Some analyses discuss percentage increases in productivity, but that’s a pretty soft concept. I prefer saying that you can save $100,000 per year and that’s 2x the cost of our product to saying that productivity will increase by 35%. The former is a “Wow!” and the latter is “So what?” How do you get these results? The trick is to get into your customer’s head and discuss the stuff he/she deals with on a daily basis, whether it’s hours, employees, or widgets. Typically once you’ve developed an approach methodology, you can gather some of this information in conversation. Then, you turn the benefits of your product into results that change operational units. Finally, when you price those units, you have created an ROI for your product. Typical pricing metrics include average fully loaded salary per employee, hourly wage rates, and analysis of the costs avoided per unit. Basically, you’re quantifying why customers should purchase the product. Maybe it saves them time; if so, you can multiply the hours saved by the hourly cost for the relevant employees. Maybe it cuts down on material costs; if so, you can estimate by how much, and multiply that by the unit volume. Maybe it eliminates the need for the customer to spend a large amount of money on a substitute solution. Once you have the analysis done, it can also be used with investors to show that the company has a solid value proposition. IV. Pipeline analysis Now that Finance and Sales are friends, there’s more that can be done. From a Finance perspective, the top-line is magic— it just happens. But to the Sales team, it’s a process, and you will have a much better forecast if you understand the resources and timeline Sales & Marketing requires to get results. This is where pipeline analysis comes in. By defining the stages you go through from an unqualified lead to a sale, and laying out the timeframe for each stage and the percentage that get converted to the next level, you can understand how quickly sales can ramp. And if you add expenses to the analysis—whether in terms of people’s attention or dollars, you can get a handle on the cost of getting that revenue. V. Sales Forecasts Support The Fundraising Process When you combine the Sales Pipeline Forecast with a Single Customer Model (see October 2003), you’re well on your way to a solid forecast. If investors have confidence in your ability to generate top-line revenues, you’re a big step closer to getting funded. Until next month, all the best, David Brode -- Minotaur Financial Removing Financial Issues as a Deal Roadblock * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 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 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * ABOUT DAVID BRODE I’m a financial modeling specialist. Over the last fifteen years I’ve completed dozens of models and certainly thousands of versions to support corporate development, M&A, strategic planning, and debt and equity transactions. These models have raised over $1B in debt and $100M in venture capital and private equity. Over time I’ve consistently revised software tools and work processes to get the job done quickly and well. If you have a financial forecasting issue, I’d love to help. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * (c) 2004 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 do 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. And you'll get Minotaur's Financial Forecasting White Paper in the deal. To be REMOVED from this list, send an email to mailto:remove@brode.net. (Please note that this message needs to come from the email address that originally subscribed. If you need help determining this, please email mailto:David@Brode.net.)