In this video, I wanted to dive down into how a user would use one of the startup financial models here on the site to try and figure out what was financially feasible for the target business. In this case, it was for a plumbing service business, but the general structure you see and methodology behind the flow of assumptions to cash flow forecasting is similar in all the models on this site.
In general, the template starts off with the timing assumptions (launch year, end month of forecast). This template allowed for up to 120 months' worth of data to view.
Then, it is time to dive directly into unit economics. For most businesses, it is best to apply bottom-up assumptions to understand how revenue is generated as well as how related variable costs fit in. On this specific business model for a plumbing service, the driver of scale is number of jobs completed per month by service type and the number of plumbers it takes to complete those jobs.
The actual unit economics are based on the average amount charged to customers per job, the cost of trucks/vans for plumbers to use (the model spits out how many plumbers are needed based on the assumptions about how many hours the average job takes and how many jobs a given plumber can complete per month)
As I start to fill out this data (as you see in the video), it becomes clear the case I was modeling was not feasible. I was scaling out too many trucks relative to the amount of cash flow generated. The monthly compounded growth rate of new jobs per month was way too high as well (40% year over year is not sustainable for 10 years).
This is good to know, and the model is doing its job by showing that there was no stabilization point and I was losing more and more money with the existing assumptions.
So, what I did was lower some of the fixed costs that were high for the level of scale I wanted, lowered the growth rate of new jobs to 0.25% compounded growth, and then adjusted the pricing. My pricing was far too low for the market. Once adjusted to reasonable levels, the feasibility looked much better. I was producing profits after tax, saving some working capital, and was able to scale more conservatively.
In this model, the assumptions driving the number of jobs by service type were automated based on a starting month and starting amount that grew per month, but you can easily go into the monthly detail tab and manually fill in the expected jobs per month without breaking any other logic. This makes it easy to pick an expansion month where you have saved up a good amount of working capital to buy new trucks/vans for a bunch of new plumbers and they can meet the increased service demand that is being input. In that case, there is no need to go into debt or equity contributions to scale. You can simply use profits previously generated.
The model does a really good job at tracking the timing of cash flows and profits based on all these different facts. This is true for all other financial model templates on the site so feel free to explore and start building your own financial projections.
Article found in Accounting and Finance.
