Intro

I commonly preach simplicity when it comes to Financial Modeling.

Afterall, most financial models are completely bloated with stuff you don’t need in a format you can’t understand.

And the reality is most people only care about Revenue, Gross Profit, EBITDA, and Cash.

Sometimes, though, it just has to be complicated.

A short story today…

A “Simple” Engagement

A company I helped with recently:

• Education space
• Learning development

Sounds simple enough: help kids improve test-taking skills.

A cool company I was happy to help.

💡Key Step: It might sound obvious, but make sure you understand the product or service that the company delivers, and the underlying supply chain to help get that done. That makes it easier to conceptualize the model.

The Reality of the Model

Everything had to be done by cohort.

Meaning schools who signed up in January 2024 needed to be modeled differently from schools who signed up in February 2024, which was different from March 2024 (etc. etc. etc.).

(and don’t forget some blank months for summer vacation!)

Each cohort had its own revenue curve.

Each cohort had a different renewal multiple (meaning if schools signed-up again, they would usually renew at a different contract value than when they started).

Also, each cohort was subject to pricing changes over time.

And lastly, there were different pricing tiers based on school size.

Whoa.

Suddenly we had GIANT cohort waterfall modeling as the back-end engine to our revenue forecast.

There was no other way around it: it was COMPLICATED.

It Still Worked

The part we really took our time with: we broke the cohorts down into their main drivers.

This was a “pen-and-paper” conversation and we asked the team, “How do you think about your business? What key information moves things forward?”

We used this information to create assumptions that could be updated easily, even though the “flow” of the model was complicated.

💡Key Concept: Often-times, even though the model structure may be complicated, the underlying drivers are not. Make sure assumption changes can still easily flow through the structure you’re building.

In the end, despite the hundreds of rows of cohorts on our Revenue build, there was a small table where a non-sophisticated Excel user (and usually business operator) could change all the assumptions and the “downstream stuff” would flow automatically.

What I Kept In Mind

The thing I always kept in mind?

The Three Statements.

Yes. I said it.

And I’ll say it again.

Knowing the Three Statements has been the most valuable skill of my career.

It keeps me focused on the big picture.

And reminds me that my revenue forecast is just one small piece of a larger model.

This “North Star” continually reminded me that all these cohorts were going to end up in a single line (or two) on a Three Statement Model, that would then be subject to COGS and OpEx, the net profit of which would ultimately drive Cash.

💡Key Concept: It all comes back to Cash. Will you have enough? Do you need to raise capital? What’s your burn rate? Investors need answers to these questions before they write a check, so make sure your model always communicates the true bottom line: Cash.

The Takeaway

I always prefer to keep things simple where you can. The 80/20 rule.

Revenue. Gross Profit. EBITDA. Cash.

But in reality, sometimes stuff just needs to be complicated.

So go ahead, hammer away on row 1,000+.

Just make sure you know where all that detailed work is headed: a Three Statement Model that ultimately guides us on Cash.

That keeps you grounded on the big picture and ultimate goal.

If you need some help building out a Three Statement Model correctly, then give my courses a look.

That’s it for today. See you next time.

— Chris