18 Secrets to Attract Potential Investors by your Financial Model Key Highlights:
- Introduction to best practice for confident financial model
- Ways to make cells in financial model readable and attractive
- Ways to make entire document readable, easily understandable, and detectable
- Ways to make your financial model rational
- Financial Model Tips
Introduction to Financial Modeling & its Varied Parameters:
The average capitalist, lender, and investor considering your proposition must be in their 40’s. Their eyes are losing sight; and brain functioning is slowing down. One of the investor opined to the fact ~ ‘I have gone through many spreadsheets, and analytic reports, I can say they are sometimes too difficult to read’. Thus, the spreadsheets and analytic reports are difficult to understand.
Today, I am trying to bring together the pieces, rational steps, and presentation ideas, which will make the spreadsheets and analytic reports, easy to read and understand. Thereby, you can be hopeful of an investment, in your business.
I started, with interviewing two famed professional of financial modeling. The purpose was to help myself and benefit from their immense knowledge of financial modeling. Their knowledge of reviewing hundreds of financial models, assisting organizations efficiently, building and maintaining financial models; was surely going to be handy for me.
The first advise, I got was, if you’re focused or enthusiast about financial modeling, you need to study the ‘Spreadsheet Standards Review Board’s – Best Practice Spreadsheet Modeling Standards‘. They are a typeset of standard procedures, which help you create an easy to use and easy to read self-documenting model.
The purpose of my article is to make you aware, that investors or lenders or capitalist need to believe in what you’ve created. It’s only possible if it’s easy to read and understand.
The experts also notified, about the significance of ‘what is necessary and what is to be left’, while analyzing the financial model. Generally, companies come up with complex dashboards, for daily or weekly financial model. On the other hand, the investors only needed 24 months forecast, with 12 months reconciling history or past data.
Let’s Look into the Significant Points about Financial Model:
First, we will look into: How to make cells readable in a financial model?
The first goal is to clearly define abbreviations and terms. Many investors may be familiar with different abbreviations and terms, but we should always make it univocal.
The cells should be made readable, by adding a key to abbreviations and terms; also it should define the actions clearly. For, example: mention ‘daily active users, performance of engagement, and action initiated’.
Number formatting should be done with special care, and properly. The standard format suggests, we should use comma for all denominations above 1,000; for example: 20,000. Else, long series of digits, are unmanageable to analyze.The expert recommends practicing appropriate number of significant digits. It’s supposedly misguiding to have two digits to the right of the decimal in a CAC / LTV for year 3 of your forecast.
Therefore, it’s advised to follow standard procedure of applying denomination to long series digits; and it should be applied strictly either in its number formatting or in column header.
3. Color Distinction:
It’s recommended to opt for usage of color coding; however, the color coding should be rational. The standard thumb rule says color coding is a great way to discriminate constants from formulas. This helps in securing a distinction to ensure no changes to formulas and non-assumptions are made by model users unknowingly.The standard financial model recommends opting for grey fill color to discriminate assumptions spreadsheets, and white for output sheets. The reason being, 8% men are colorblind. So, it’s an old rule to print spreadsheets in black and white. So, it be readable to even people with colorblindness.
4. Font Size:
The standard financial model spreadsheet review states, font size is important to make the spreadsheets and analytic reports readable. Thus, standard size of font should be not less than 10 points.Experts, also give troubleshooting advice, regarding adjustment of report on one page. They ask to minimize or contract the column sizes, and use minimum white space.
The experts believe one should go for soft gray lines to divide rows and columns. This is also considered the best alternative to divide rows and columns, instead of the hard black lines.The hard black lines are also considered difficult to scan. They unnecessary make the page clumsy.
Second part deals with: How to make the entire document readable?
6. File Format:
Files should be format in a specific title, so it can be singled out and contradistinguish from the other files, the investors receive. The best way to title your file is: [Company Name] [Forecast] [yyyy /mm/ dd].
The biggest advantage of setting title to your file is it looks professional, easily traceable, easy to identify, and gives detail evolution of document changes. On the other hand file title as ‘forecast.xls’ doesn’t give your file an identity, fail to distinguish, and look cluttered.
7. Tabs Distinction:
Tabs needs to be organized professionally and rationally. It’s more important for spreadsheets, with multiple tabs in functioning. The best way to distinguish and give an identity to every tab is by assigning meaningful name, be in rational order, and defined. The tabs shouldn’t be without a meaningful name; and every tab should have data. Else, your worksheet will look, amateur financial model.
8. Consistent Features:
It’s the consistency of features in a spreadsheet or worksheet, which distinguish its efficiency or effectiveness. The difference lies in small aspects of the sheets.A confident model will be consistent with different aspects like ‘sheet zoom, heading indentation, decimal, alignment, panes, placement, series, columns, etc.’; whereas, an amateur or inconsistent model will lack these small perfections.One must remember, calculation, logic, formulas, formats, and styles remain the same for everyone; the difference lies in rigorous consistency of features.
9. Styles over Formats:
The standard approach is to op for usage of styles, in place of plane formats. Styles give a better presentation of spreadsheet and consistency to content. It also eliminates the need for formatting each cell manually. They will have distinguished style for headings, assumptions, etc.
Thus, it’s easy, and advantageous for a confident finance model. There are spreadsheet applications, which permit you to set specific style, for worksheets. The same can be used throughout the spreadsheets. One of the popular applications is word processing.
10. Highlighting Key Factor:
Expert states, a well-developed financial model should’ve the key area highlighted for ‘assumptions and main drivers’ at the top of the spreadsheet or financial model.
This gives advantage of ‘easy facilitation of audit and forecasts’; it’s also helpful in assisting the prospective investor or capitalist understand the important drivers of the business. It also makes the investor realize the significant drivers of business, from entrepreneur’s point of view.
The easy way to highlight the key drivers is to dedicate a tab, which is followed throughout the spreadsheet.
11. Focus on Output:
It’s imperative to filter out your financial model output. The decision makers, investors, capitalists, and lenders will only focus on selected output of significance. The output of significance to investors or decision makers can be ‘financial statement, summaries, and valuation along with ratio analyses.Thus, the spreadsheet should be made with dedicated presentation output section. This will make it easy and accountable. The chances of investment rises, if the output presentation is simple; and it should be presented at the front of spreadsheet.
12. Design Printing:
The expert suggests printing key model assumptions and outputs. The reason being, it gives the investors quick look into the important drivers of business; and facilitate impressive meetings.The investors are unlikely to carry handheld devices or laptop to meetings; thus, design for printing will assure key factors as discussions point. Therefore, chance of investment increases.Thus, you’re advised to set the print section, page breaks, and scaling. It’s also recommended to insert ‘report title, date, page number’ on every footer. These design aspects not only is helpful in impressive meeting, but also make it easy for auditing.
13. Design Auditability:
The experts recommend, making visual map of your financial model analysis. This will enable easy readability, easy auditing, if / then trial or testing through each step. Thus, cake walk for the investor or capitalist.
Third part deals with: Financial Model should be Rational
14. Logical Explanation:
The assumptions should be explained logically, and be realistic in presentation. For, example: Any financial model, explaining a certain % growth, over specific time period, should’ve taken into account the sales / marketing factors; along with ROI. If, it shows no correlation of these factors, then the financial model is a colossal failure. It is also a red flag, for qualifying as confident model.You should plan to project ‘future revenues, actual sales pipeline, adjustment of probability, percentage based acquisition report, direct sales model, revenue growth, and customer retention’ in your financial model.These projections will make your financial model more rational and realistic.
15. Integrate Historical & Projected Data:
It’s always suggested by financial model experts to project ‘how assumptions relate to reality’. Thus, it’s imperative to start your financial model with historical data, and integrate it seamlessly with your projected data.
16. Logical Cash Explanations:
The experts think financial model with logical explanations or projection of ‘cash collections, disbursements, working capital, statement of cash flows, and balance sheet’ is considered a good financial model.If your model only shows ‘Cash – Revenue – Expenses = Net Balance’ then it’s an incomplete and illogical cash explanations. It should be supported by inventory details, balance sheet, and other explanations.
17. Sensitivity Analysis:
A good financial model will have inbuilt multiple scenarios. This gives a fair idea, about how any change in key assumptions can affect the financial model output in real-time.
18. Output Metrics:
Financial statements should also be supported by output metrics. It makes the financial model more confident and consistent. The key output metrics to be included are ‘acquisition costs, lifetime valuation, cohort retention, etc.’