Pro Excel Financial Modeling: Building Models for Technology Startups

Copyright © 2009 by Tom Y. Sawyer

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Contents

About the Author . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv

About the Technical Reviewer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvii
Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxi

Chapter 1 Business Thinking and Financial Modeling for

Technology Startups. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Analyzing, Demonstrating, and Explaining the Value of the Financial Model. . . . . 1
Attracting the Resources You Need to Grow Your Business . . . . . . . . . . . . . . . . . . 2
The Big Three Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Strategies That Build Value and Credibility . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Common Ways of Getting Stuck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Looking at Startups from the Perspective of Value . . . . . . . . . . . . . . . . . . . . . . . . 13
The ­Value-­Based Enterprise Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Four Primary Value Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Thinking Critically About the Business and Financial Model . . . . . . . . . . . . . . . . . 17
Financial Model Design Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Financial Model Design Dimensions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Major Functions Performed by the Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Chapter 2 Company Business Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Designing a Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Business Thinking About Financial Modeling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Applying the Project Planning View. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Applying the Software Development View. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Creating the Company Business Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Taking the 35,000-Foot View . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Using the Top-Down Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Deriving the Model Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Organizing the Sequence of the Models. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Developing the Models’ Design and Functionality. . . . . . . . . . . . . . . . . . . . . 33
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
vii
viii ■CO NTENT S

Chapter 3 The Green Devil Control Systems Business Case. . . . . . . . . . . . . . . 43

Founding Green Devil Control Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Giving Birth to the Idea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Getting the Company Started. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Testing Market Feasibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Assessing Technical Feasibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Validating Resource Feasibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Designing the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Stating the Company Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Defining the Product. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Establishing the Value Proposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Identifying the Target Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Assessing the Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Developing a Marketing Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Creating the Sales Strategy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Defining the Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Establishing Naming Conventions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Identifying Assumptions and Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Developing the Production Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Assigning Roles and Responsibilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Company Deliverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Master Schedule, Critical Milestones, and Earned Value Criteria . . . . . . . . 48
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Chapter 4 The Staffing Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Business Thinking About Staffing: Evolution or Intelligent Design?. . . . . . . . . . . . 51
Staffing the Startup Phase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Staffing the IOC Phase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Staffing the FOC Phase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Moving Through the Phases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Reviewing the Staffing Business Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Exploring the Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Exploring the Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Understanding the Critical Components of the Staffing Model . . . . . . . . . . . . . . . 55
Planning the Staffing Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Planning the Organizational Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Creating the Staffing Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Defining Cost Assumptions and Key Planning Variables . . . . . . . . . . . . . . . 59
Using the Building Blocks of the STAFF Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Understanding the Staffing Plan Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . 60
Understanding the Staff Calculation Worksheet . . . . . . . . . . . . . . . . . . . . . . 61
Understanding the Executive Dashboard . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Understanding the Executive Chart Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
 ■C O N T E N T S ix

Exercise ­4-­1. Using Microsoft Excel’s Sumif Function to Count

Requirements for Phones, Computers, and Work Spaces . . . . . . . . . . . 67
Exercise ­4-­2. Using Microsoft Excel’s Find and Replace
Command to Link Large Spreadsheets Quickly. . . . . . . . . . . . . . . . . . . . 69
Exercise ­4-­3. Using Microsoft Excel to Create a ­Double-­Axis
Management Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Chapter 5 Sales and Revenue Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Business Thinking About Sales and Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Validating the Value Proposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Analyzing the Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Positioning the Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Planning for Product Availability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Crafting the Sales Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Making Sales Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
The Products, Services, and Sales Strategy Business Case. . . . . . . . . . . . . . . . . . 79
The ECS Value Proposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
The ECS Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
The ECS Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
ECS Product Availability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
ECS Sales Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
ECS Sales Forecast Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
Planning the Sales and Revenue Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Defining the Product Configuration and Component Revenue
and Cost Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Developing Sales Forecast Assumptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Developing Methods for Forecasting Revenue . . . . . . . . . . . . . . . . . . . . . . . 82
Developing Cash Collection Assumptions Based on Revenue . . . . . . . . . . 82
Exploring the Building Blocks of the REV Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Understanding the Sales Forecasting Worksheet . . . . . . . . . . . . . . . . . . . . . 83
Understanding the Product Pricing and Margin Worksheet. . . . . . . . . . . . . 86
Exploring the Revenue Calculation Worksheet . . . . . . . . . . . . . . . . . . . . . . . 87
Exploring the Recurring Service Rev and Maintenance
Rev Worksheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Understanding the Accounts Receivable Worksheet . . . . . . . . . . . . . . . . . . 90
Exploring the Revenue Summary Dashboard. . . . . . . . . . . . . . . . . . . . . . . . . 90
Exploring the Revenue and COGS Chart Data . . . . . . . . . . . . . . . . . . . . . . . . 91
Exercise 5-1. Using Microsoft Excel to Forecast Recurring
Subscription Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Exercise 5-2. Using Microsoft Excel to Model
Accounts Receivable (AR). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
x ■CO NTENT S

Chapter 6 Cost of Goods Sold and Inventory Model . . . . . . . . . . . . . . . . . . . . . . . 97

Using Business Thinking About COGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Defining “Cost of Goods Sold”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .97
Defining “Inventory”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Assessing Profitability and Contribution to Margin . . . . . . . . . . . . . . . . . . . . 98
Considering the Green Devil Control Systems Product Offering and
Sales Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Product Development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Making Product Availability Fulfillment and Inventory Assumptions . . . . 100
Product Pricing and Variable Cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Planning the COGS Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Defining Product Configuration Assumptions Related to
Component Revenue and Costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Developing Cost of Goods Sold and Profitability Assumptions
for Each Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Developing Inventory Assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Developing an Inventory AP Model and Assumptions . . . . . . . . . . . . . . . . 102
Examining the COGS Model’s Building Blocks . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Understanding the Product Pricing and Margin Worksheet. . . . . . . . . . . . 103
Understanding the Revenue Calculation Worksheet. . . . . . . . . . . . . . . . . . 105
Understanding the Contribution to Margin Analysis Worksheet. . . . . . . . . 106
Understanding the Inventory and Inventory AP Worksheet. . . . . . . . . . . . . 107
Understanding Revenue and COGS Chart Data. . . . . . . . . . . . . . . . . . . . . . 110
Exercise ­6-­1. Using Microsoft Excel to Forecast Inventory Usage. . . . . . . 111
Exercise ­6-­2. Using Microsoft Excel to Model Inventory AP. . . . . . . . . . . . 113
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115

Chapter 7 Cost of Sales and Marketing Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

Business Thinking about the Cost of Sales and Marketing . . . . . . . . . . . . . . . . . 117
Completing the Market Assessment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Developing the Value Proposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
Understanding Sales and Marketing Strategy. . . . . . . . . . . . . . . . . . . . . . . 123
Exploring the Sales and Marketing Strategy Business Case . . . . . . . . . . . . . . . . 123
Exploring the Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Assessing the Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Creating a Resonating Offer to the Customer . . . . . . . . . . . . . . . . . . . . . . . 125
Capturing the Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Planning the COSM Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
 ■C O N T E N T S xi

Using the Building Blocks of the COSM Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

Understanding the Staff Calculation Worksheet . . . . . . . . . . . . . . . . . . . . . 129
Understanding the Bonus and Sales Commission Worksheet . . . . . . . . . 129
Understanding the Trip Type Calculation Worksheet . . . . . . . . . . . . . . . . . 130
Understanding the Trip Plan Calculation Worksheet. . . . . . . . . . . . . . . . . . 131
Understanding the Cost of Sales and Marketing Calculation Worksheet . 132
Understanding the Capital Plan Calculation Worksheet . . . . . . . . . . . . . . . 133
Understanding the Cost of Sales and Marketing Dashboard . . . . . . . . . . . 134
Understanding the Cost of Sales and Marketing Chart Data Worksheet. . 135
Exercise ­7-­1. Using Microsoft Excel to Develop a Bonus
and Commission Plan Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
Exercise ­7-­2. Using Microsoft Excel to Model Trip Expenses . . . . . . . . . . 139
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

Chapter 8 Cost of Product Development Model. . . . . . . . . . . . . . . . . . . . . . . . . . . 143

Business Thinking About Product Development . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Product Development Objectives, Strategies, and Tactics. . . . . . . . . . . . . . . . . . 144
Creating Product Concept and Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Planning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Optimizing the Time to Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Adopting Agile Product Development and Production . . . . . . . . . . . . . . . . 146
Forming the Team. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .146
Managing the Product Life Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Building in Quality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Sustaining Development Capacity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147
Taking Care of Your Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
Know Your Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
Capture Intellectual Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
Developing the Green Devil Control Systems Product Development Strategy . . 149
Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Scheduling Product Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Targeting Operational Dates for Product Availability and Inventory . . . . . 152
Strategizing Product Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
Considering Other Product Development Strategies. . . . . . . . . . . . . . . . . . 155
Planning the DEV Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
Exploring the Building Blocks of the DEV Model . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Using the Staff Calculation Worksheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Using the Bonus and Sales Commission Worksheet . . . . . . . . . . . . . . . . . 157
Using the Trip Type Calculation Worksheet . . . . . . . . . . . . . . . . . . . . . . . . 158
Using the Trip Plan Calculation Worksheet . . . . . . . . . . . . . . . . . . . . . . . . . 159
Using the Cost of Product Development Calculation Worksheet . . . . . . . . 160
Using the Capital Plan Calculation Worksheet. . . . . . . . . . . . . . . . . . . . . . . 161
Using the Cost of Product Development Dashboard. . . . . . . . . . . . . . . . . . 161
xii ■CO NTENT S

Using the Cost of Product Development Chart Data Worksheet . . . . . . . . 162

Exercise 8-1. Using Microsoft Excel to Develop a Bonus
and Commission Plan Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
Exercise 8-2. Using Microsoft Excel to Model Trip Expenses . . . . . . . . . . 163
Exercise 8-3. Using Microsoft Excel to Develop the Cost of Product
Development Calculation Worksheet. . . . . . . . . . . . . . . . . . . . . . . . . . . .164
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166

Chapter 9 Operating and Capital Expenditures Models . . . . . . . . . . . . . . . . . . 169

Business Thinking About Cash Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
Criteria for Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .172
Calculating Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
Defining Expensed Items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
Considering Categories of Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
Planning the Operating Expenditure (OPEX) Model . . . . . . . . . . . . . . . . . . . . . . . 173
Planning the Capital Expenditure (CAPEX) Model . . . . . . . . . . . . . . . . . . . . . . . . . 174
Building and Using the OPEX and CAPEX Models . . . . . . . . . . . . . . . . . . . . . . . . . 174
Exploring the Building Blocks of the OPEX Model. . . . . . . . . . . . . . . . . . . . . . . . . 176
Developing the Operational Expenditure Calculation Worksheet. . . . . . . . 176
Using the Operational Expenditure (Monthly) Worksheet. . . . . . . . . . . . . . 177
Reviewing the Operational Expenditure (Yearly) Dashboard . . . . . . . . . . . 177
Utilizing the OPEX and CAPEX Chart Data Worksheet . . . . . . . . . . . . . . . . 178
The Building Blocks of the CAPEX Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
Understanding the Capital Plan Calculation Worksheet . . . . . . . . . . . . . . . 179
Understanding the Depreciation Calculation Worksheet. . . . . . . . . . . . . . . 180
Understanding the Fixed Assets Calculation Worksheet. . . . . . . . . . . . . . . 181
Reviewing the Capital Plan and Fixed Assets Dashboard. . . . . . . . . . . . . . 181
Exercise 9-1. Using Microsoft Excel to Compute Straight
Line Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
Exercise 9-2. Creating a Combination Bar and Line Chart to
Display Capital Expenditures and Depreciation. . . . . . . . . . . . . . . . . . . 187
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191

Chapter 10 Statements of Profit and Loss and Cash Flow. . . . . . . . . . . . . . . . . 193

Business Thinking about Profit, Loss, and Cash Flow . . . . . . . . . . . . . . . . . . . . . 193
Understanding the Profit and Loss Statement . . . . . . . . . . . . . . . . . . . . . . 194
Understanding the Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . 198
Exploring Cash Flow Impacts of the Product Development Strategy
Business Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
Defining the Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
Planning Operating Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
 ■contents xiii

Charting Investment Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203

Reflecting Financing Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Planning the FIN Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
Understanding the Building Blocks of the FIN Model . . . . . . . . . . . . . . . . . . . . . . 206
Understanding the Profit & Loss Statement Worksheet . . . . . . . . . . . . . . . 207
Understanding the Statement of Cash Flows Worksheet. . . . . . . . . . . . . . 208
Understanding the Value and Investment Worksheet. . . . . . . . . . . . . . . . . 210
Understanding the Value and Investment Dashboard. . . . . . . . . . . . . . . . . 211
Understanding the Company Balance Sheet Worksheet . . . . . . . . . . . . . . 211
Understanding Financial Reporting Model Chart Data . . . . . . . . . . . . . . . . 211
Exercise ­10-­1. Using Microsoft Excel to Develop the
Company Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . .211
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214

Chapter 11 Modeling Valuation and Investment with the FIN Model. . . . . . 215
Business Thinking about Valuation and Investment . . . . . . . . . . . . . . . . . . . . . . . 215
Understanding Valuation and Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . 216
Assessing the Value of Events and Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
Exploring the Valuation and Investment Strategy Business Case . . . . . . . . . . . . 225
Defining the Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Creating a Strategy to Build Value and Credibility. . . . . . . . . . . . . . . . . . . . 225
Devising the Investment and Valuation Strategy. . . . . . . . . . . . . . . . . . . . . 226
Planning the FIN Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230
Understanding the Building Blocks of the FIN Model . . . . . . . . . . . . . . . . . . . . . . 230
Understanding the Profit & Loss Statement Worksheet . . . . . . . . . . . . . . . 231
Understanding the Balance Sheet Worksheet. . . . . . . . . . . . . . . . . . . . . . . 232
Understanding the Financial Reporting Model Chart
Data Worksheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
Understanding the Company Master Schedule . . . . . . . . . . . . . . . . . . . . . 232
Understanding the Statement of Cash Flow Worksheet . . . . . . . . . . . . . . 232
Understanding the Value and Investment Worksheet . . . . . . . . . . . . . . . . 233
Understanding the Value and Investment Dashboard . . . . . . . . . . . . . . . . 234
Exercise ­11-­1. Using Microsoft Excel to Develop the Company
Valuation and Investment Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

Chapter 12 Financial Reporting and Analysis Using the FIN Model . . . . . . . 243
Business Thinking About Financial Reporting and Analysis . . . . . . . . . . . . . . . . 243
Understanding the Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
Creating the Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
Using Financial Ratios to Analyze Financial Statements. . . . . . . . . . . . . . . 249
xiv ■contents

Understanding the Business Case Impact on Financial Results. . . . . . . . . . . . . . 250

Impact of Operating Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
Planned Investment Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
Targeted Financing Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .252
Planning the FIN Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252
Understanding the Building Blocks of the FIN Model . . . . . . . . . . . . . . . . . . . . . . 253
Understanding the Profit & Loss Statement Worksheet . . . . . . . . . . . . . . . 254
Understanding the Statement of Cash Flow Worksheet. . . . . . . . . . . . . . . 255
Understanding the Balance Sheet Worksheet. . . . . . . . . . . . . . . . . . . . . . . 257
Understanding the Value and Investment Worksheet. . . . . . . . . . . . . . . . . 258
Understanding the Value and Investment Dashboard. . . . . . . . . . . . . . . . . 259
Understanding the Financial Statements and Analysis Dashboard. . . . . . 259
Understanding the Financial Reporting Model Chart Data Worksheet . . . 260
Exercise ­12-­1. Using Microsoft Excel to Develop the Company
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261
Exercise ­12-­2. Using Microsoft Excel to Create Financial Ratios. . . . . . . .264
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267

INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269