I was recently working for a company building their financial model to prepare for a series B raise. We started by building a base case, which continues the current trends in a ‘business as usual way.’ We then started layering in a growth case: What if we got additional money for sales or IT projects?
Quickly it became clear that we needed way more than 2 different scenarios and it really mattered who we were showing the numbers to. Each audience was different, so they needed to see different numbers.
I remember early on in my consulting career presenting to some senior level client. They were probably only a director but they were more senior than the clients I normally worked with and when I presented some analysis I had done, I went into early little detail. My manager at the time gave me the feedback that you need to know your audience.
Knowing your audience is also important with your financial model as employees, board members, investors, and lenders all have different uses for the numbers.
Investors and Investment Bankers
In a fundraising model there are going to be people who look at it to see if it is going to be a good investment or not. There may even be investment bankers or other people who are going to shop the deal around and they want the numbers to be very positive because it makes their job easier. The emphasis needs to be on how much money you need, how you are using the money and what the return to the investors will be. It can be optimistic and include upside if you have additional money to hire more sales people.
This is a very different perspective than an internal employee who is looking at the budget to decide if their targets are reasonable. Based on the spend allocated, do they feel it is reasonable to achieve their goals for the year. For your employees you want the numbers to be very believable and make sense and for them to be behind the numbers. You ultimately want to get their input and buy in that the amount of money they are going to spend is the right amount and the sales targets make sense.
When looking at your spend in certain departments it is important that employees know what they can spend and not what they might be able to spend if you raise your target amount in an upside case. Some versions that employees are going to see may not include salary details so that people will not know how much everyone is getting paid. Another example of things that may need to change between models is sometimes the internal or employee version has higher sales targets to motivate employees to achieve higher targets than what is communicated to the board and lenders.
Employees
Lenders
When it comes to lenders, you want to be very conservative so that you can continue to meet and exceed your forecasts and continue to grow and build trust. You do not want to show them a growth case scenario that involves you hiring more people and achieving very high growth that has a certain revenue target because if you don’t get funding and hire those people the lenders will still have the aggressive revenue target in their minds when they are looking at your year end numbers.
Your board needs to understand all of the different scenarios and numbers. You still may not want to share super aggressive and/or optimistic numbers but they do need to understand that depending on how much money you raise and which initiatives you pursue, there will be impact to both the revenue growth and your cash burn.
Board Members
So what is the best way to build a budget?
I have seen a lot of financial models over the years and sometimes people have a “good”, “better” and a “best” scenario. This is a little different than just changing your conversion rates or your revenue targets – it’s really about thinking how each audience is going to use the numbers to understand how the business is doing and to drive their behavior and expectations for the business.
Ultimately you need to build different scenarios that have toggles that you can turn on and off. You can quickly switch between the base case and growth case. You can increase your sales and marketing spend or hold it flat. You can invest in one time projects to improve the technology infrastructure or delay them if you don’t get all of the funding you need.
These toggles help answer the questions of how much money you need to raise and what the cash burn is going to be and you can change the scenario based on who you are presenting the numbers to. It also serves as a good check to compare the different scenarios. One of the best ways to do this is to have some key metrics like: Revenue, Gross Profit, OpEx, Net Income and Cash Burn show the difference between the base case and the current model.
The different scenarios are useful for you to understand your business and help explain to different stakeholders what your plans for the business are.
Ultimately, the budget should be a reflection of how you think the year and next few years will go. You should know your runway, how and when you can get to break even or hit that next revenue milestone. You should know how long you give your current strategies before you pivot and try something different if sales or profitability is lower than expected.
Final Thoughts
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