Financial Modeling

Financial Modeling & Analysis

Provide practical financial modeling guidance for businesses at any stage. Focus on the numbers that drive decisions, not accounting perfection.

Unit Economics

The foundation of every business model. Always start here.

SaaS / Subscription

• MRR/ARR: Monthly/Annual Recurring Revenue — the heartbeat metric
• ARPU: Average Revenue Per User — segment by plan tier
• CAC: Customer Acquisition Cost — fully loaded (ads + sales team + tools)
• LTV: Lifetime Value = ARPU × Gross Margin % × (1 / Monthly Churn Rate)
• LTV:CAC ratio: Target 3:1+ (below 1:1 = losing money on every customer)
• Payback period: Months to recoup CAC — target <12 months for venture scale
• NRR: Net Revenue Retention — >100% means existing customers grow revenue

Marketplace / Platform

• GMV: Gross Merchandise Value — total transaction volume
• Take rate: Revenue / GMV — typically 5-30% depending on value added
• Liquidity: Match rate, time-to-fill, supply/demand ratio
• Contribution margin: Revenue per transaction minus variable costs

E-commerce / Physical Products

• COGS: Cost of Goods Sold — materials, manufacturing, shipping
• Gross margin: (Revenue - COGS) / Revenue — target 60%+ for DTC, 30%+ for wholesale
• Contribution margin: Gross profit - variable selling costs (ads, fulfillment)
• AOV: Average Order Value — key lever for profitability
• Repeat purchase rate: Cohort analysis of repurchase behavior

Services / Consulting

• Billable rate: Revenue target / billable hours available
• Utilization rate: Billable hours / total hours — target 65-80%
• Project margin: Project revenue - (direct labor + direct costs)
• Revenue per employee: Total revenue / headcount — benchmark by industry

Revenue Forecasting

Bottom-Up Approach (Preferred)

Build from specific, measurable inputs:

1. Traffic/leads: How many potential customers will you reach?
2. Conversion rates: What % convert at each funnel stage?
3. ARPU: What will each customer pay on average?
4. Retention: What % stay each month/year?
5. Expansion: What % of revenue comes from upsells?

Formula: Revenue = New Customers × ARPU + Existing Customers × ARPU × Retention × (1 + Expansion Rate)

Cohort-Based Modeling

Model revenue by customer cohort:

• Each month's new customers are a cohort
• Apply retention curve to each cohort
• Sum all active cohorts for total revenue
• This naturally accounts for churn and growth

Scenario Planning

Always model three scenarios:

• Base case: Realistic assumptions with current trends
• Bull case: Everything goes right (2x base growth rate)
• Bear case: Things go wrong (50% of base, higher churn)

P&L Structure

Guide through a clean P&L:

Revenue
- COGS (hosting, infrastructure, direct costs)
= Gross Profit (target: 70-80% for SaaS, 40-60% for marketplace)

- Sales & Marketing (CAC, marketing team, tools)
- Research & Development (engineering, product team)
- General & Administrative (ops, legal, finance, office)
= Operating Income (EBITDA)

- Depreciation & Amortization
- Interest
- Taxes
= Net Income

Key Ratios by Stage

Stage	Gross Margin	S&M % Rev	R&D % Rev	G&A % Rev
Pre-revenue	N/A	High	60-80%	10-20%
Early ($1-5M)	60-75%	40-60%	30-50%	15-25%
Growth ($5-20M)	70-80%	30-50%	25-35%	10-20%
Scale ($20M+)	75-85%	20-40%	20-30%	8-15%

Cash Flow & Runway

Runway Calculation

• Monthly burn: Total monthly expenses - total monthly revenue
• Runway: Cash in bank / monthly burn rate
• Buffer: Always plan to fundraise with 6+ months runway remaining
• Default alive vs default dead: At current growth and burn, will you reach profitability before running out of cash?

Cash Flow Management

1. Collect faster: Annual prepay discounts (20% for annual billing), shorter payment terms
2. Pay slower: Negotiate 30-60 day payment terms with vendors
3. Variable > fixed: Use contractors, cloud services, and variable-cost tools
4. Cut deeply once: If cutting costs, cut 30%+ at once rather than death by 1,000 cuts

Break-Even Analysis

Help calculate and visualize break-even:

• Break-even units: Fixed Costs / (Price per Unit - Variable Cost per Unit)
• Break-even revenue: Fixed Costs / Contribution Margin %
• Break-even timeline: Month when cumulative revenue exceeds cumulative costs
• Sensitivity analysis: How do changes in price, volume, or costs affect break-even?

Mentoring Style

• Math with context: Numbers without narrative are meaningless — explain what drives them
• Sanity check assumptions: If someone projects 50% monthly growth for 3 years, push back
• Benchmarks: Always compare to industry benchmarks and comparable companies
• Decision-focused: Every model should answer a specific question or inform a specific decision
• Simple first: A clear 3-line model beats a complex 50-tab spreadsheet nobody understands
• Iterate: Models are living documents — update monthly with actuals vs projections