Flawless Financials the Financial Forecasting Online Newsletter from Minotaur Financial and David Brode February, 2005 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: After The Money Comes: What Next? * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * What role does financial modeling play after you’ve raised money and received a big infusion of cash? This month’s newsletter discusses ways to leverage financial models for an operating company. I. Investor Relations Typically, investors want to see updated forecasts over time, and what better format than the model used to substantiate the basic concept? Further, debt covenants often need to be included in the ongoing financial model to reflect requirements on cash balance minimums, interest payments, etc. to highlight periods where the company is not complying with the terms of the agreement. If equity raises are planned, existing investors need to see cap table forecasts showing the dilution from new investors. II. Fundraising Just because you’ve raised money successfully, don’t think you’re done with that challenge forever. Companies can always use more money and should be anticipating the next request well before next infusion is needed, so it’s best to keep a model updated. Such a model will will serve as your “early warning system,” and will be the primary tool for communicating financial forecasts to future investors, whether it’s for equipment/vendor financing, bank lines of credit, term loans, or additional equity investments. III. M&A If you’re ever thinking of growing by acquisition, keeping a current functional model will help to evaluate the target and show what the combined company looks like. IV. Board / Senior Management Education on Economic Drivers In most early-stage businesses, the senior management team starts to run the business with certain ratio targets, like the capex per cell site or the number of customers per widget. Then, inevitably, the infrastructure people want to spend more on widgets, the sales & marketing folks want more money to attract customers, etc. In the spirit of getting things done, the company does spend this extra money. This is where the finance team steps in, assisted by the model. The model can show the financial implications of changes in major assumptions. Often a CEO won’t realize that changing a ratio from 7.75 to 7.25 can have such a major impact on the financial forecast, but it can. I use the model to run these scenarios, identify the ones that are truly critical, and quantify the full impact and timing of problems the change would create. Interestingly, I find that most senior executives and board members will view the model as a black box. So it’s necessary to create a VERY simple (e.g., 20-line) model and a few PowerPoint slides to demonstrate why this change has a large impact. Over time, this education process can have a powerful effect as board members know how to ask the right questions about financial impacts and can more easily take input from a financial perspective. V. Tactical Decision Screen Every short-run decision ultimately has an impact on the financial results, and the model can be used to evaluate whether decisions are in line with the approved model. For example, the initial budget should have the same totals as the first year of the strategic plan. At one telecom services company, they compared their financial model to a planned market rollout to ensure they had proper funding and resource allocation. There are myriad decisions that should be run through the strategic model, including large lease vs. buy analyses, staffing levels, sales commission rates, sales channel analyses, and cost optimization studies. Sometimes these analyses can be done with small scale models. However, I find that a well-conceived full model automatically adjusts to reflect dependent items (e.g., AP balances) allowing a 360-degree view of cash impacts of these decisions. In the next newsletter I’ll highlight the difficulties I’ve faced when trying to “operationalize” a strategic model, and share solutions to these problems. Until next month, all the best, David Brode -- Minotaur Financial Removing Financial Issues as a Deal Roadblock * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Many thanks to Troy Duran and Tom Simonson for their very helpful comments on a rough draft of this piece. And long overdue thanks to my editor, Dan Jacob, who has improved 1every issue of this newsletter. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 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. 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