Money is - still - power
Financial modeling for change-makers
by Elena Bondareva
During lunch with a dear friend, I found myself passionately arguing against her preference to leave the financials of the start-ups she’s vetting to somebody else to focus on operations - her forte. So, I’d like to share why I feel so passionate about financial modeling. Yes, you read it right.
If you are a seasoned change maker, you have likely grappled with the role of money in your work. It is the fixation on the bottom line that got us into today’s troubles, and many blue-blood activists see the very construct of money as evil and feel like sell-outs focusing on it.
I used to be one of them. Mind you, I didn’t start there: I didn’t let my parents into the apartment before raiding their wallets and pockets for spare change and used to charge them for “library books” of stapled scribbles (multiple times per evening… because I only had the two customers). Still, as I grew passionate about social and environmental issues, it became about non-financial arguments. Thankfully, I have been able to reconcile the two.
The business case for ‘sustainability’ initiatives has been made, in general and through countless specific projects.
All-round valuable, regenerative solutions deserve market success and get it.
The proliferation of impact modelling has helped connect the missing dots.
Still, many of you – like my phenomenal friend – prefer to stay away from the financials of your world-changing ideas. I have an unusually strong opinion here:
Never give up the finances
I learned this the hard way. And more than once.
The first time was when I was building a company within a company. At 28, I was the most senior woman there, co-creating with the Group CEO. Then – filled with good will and optimism for collaborative ways of doing business – I brought on a 50/50 partner. I had the subject matter expertise, the business vision, the relationships, the sales, and the impact of pivoting tired organizations towards a sustainability-focused future. He wasn’t closing new business and ended up running our P&L (profit and loss) on the basis of the financial model I had built to get Board commitment. Before I knew it, his voice was what mattered at – all-white-and-male – Board meetings, and I felt like I was reporting to my bookkeeper. I quit, taking this valuable lesson with me: keep your power by knowing the financials of your business better than anybody.
Over the years, I’ve built countless financial models, helping many ventures raise seed and expansion capital from private, government, and pension funds. Here is some of what I have learned. I hope it helps you shore up the world-changing ideas you’re germinating.
Why model financial performance?
Many think that “use of proceeds” will do. However, that’s like expecting Craigslist prices to offer a robust budget for a kitchen refurbishment. You shouldn’t start one without understanding your likely – and worst-case scenario – full costs. Those should include the labor, materials, and equipment as well as account for the more expensive meals while you can’t cook, and the cost of not doing other things personally or professionally. Moreover, the budget should reflect whether your neighbors need to okay the utilities shut-off or whether you are refurbishing at a busy time for contractors or during a pandemic- (or war-) induced supply chain crisis.
When do you need a financial model?
Capital raising
Whether you need funds to start up or to expand, any investor – including yourself – needs to know they will get their money back with a return ($ or non-$). Model to quantify expected success: profitability, assets, exit potential, and break-even point. Amidst a prevailing lack of financial rigor, we have seen our financial modeling unlock private, public, and pension funds, significantly outperforming the average.
Business model tune-up
While investment capital may be the sought result, financial modelling works magic on the venture. Do you know where a dollar makes the most difference in your organization? Whether a marginal price increase of a single item makes a greater difference than cutting a cost? Whether it makes more sense to buy or rent? If not, model to super-charge your vision and ensure that you are driving your business, not the other way around.
Exit planning
Starting with the end in mind is good practice. Do you hope to get acquired (we have helped nearly a dozen M&As, including between non-profits), envision staff ownership or a public listing? Or do you prefer to just close the doors when you’re done? However you defined “the end”, financial modeling will quantify - and capture the conditions for - your final paycheck.
What does a financial model include?
Revenue streams
What are your distinct offerings? If you’re a service provider, these are likely your services. In a non-profit, there may be donations, grants, and consulting services. Each may be further split, e.g., into small, medium, and large (or quiet, normal, and rockin’ days for a hospital venture, adjusted both for the number of patrons and the per-person spend).
Rule of thumb: at least seven streams. Sure, some will take off faster and others will fade away, but always have a diversified model.
Cost structure
What are your people costs (salaries, benefits, freelancers)? What are the administrative, operational, and costs-of-goods-sold expenses?
Asset improvements
What do you need to buy? Group by depreciation timeframe.
Any payouts, e.g. for intellectual property or JV arrangements.
Interest and any other cost of money.
Anticipated tax liability.
EBIT and EBITDA (gross and net profit metrics).
Valuation.
Running breakeven.
What does it look like?
I am after action and impact, so I tend to prioritize just two views:
The topsheet of the venture in “full swing”; usually a snapshot of a future state.
The running break-even. This view captures how the revenue streams and costs come on-line over time, progressively dipping further and further into “the red” until it is cashflow positive, i.e., when you’re making more than you are spending. That point occurs the day after your lowest cashflow position and marks the beginning of your climb out of the hole. The break-even point occurs when you’ve made back all the funds spent to date. Now, you can expect profit.
Why model break-even?
A complex model, the running break-even is something most people don’t want to contemplate. However, without it, you risk running out of money before you can make it on your own (a no-no for most investors). The lowest cashflow position (we further lower it via a “worst-case scenario”) is, therefore, the amount you have to raise.
Summary
Why should a change maker fall in love with financial modelling?
The high. Imagine the satisfaction if our work confirms that you’re ready. That said, both “no” and “not now” are invaluable answers if they save you years of angst and loss.
Confidence that your idea will not take more than you’re willing to give. Too many livelihoods, life savings, marriages, and sanities have been lost to being too far in to quit; you deserve better.
Investment. Raise money – with ease and confidence.
While not for the faint of heart, financial modelling will validate your good judgement and test your blindside. In our experience, robust financial modelling materially increases Board and investor confidence. Above all, financial modeling enables you to drive your business rather than it driving you.
Please let me know whether you are finding this helpful and what you’d like to hear more of.