How a 10-Year Financial Blueprint Saved a Business from Overpaying: The $10M Investment Revelation

This week, I finished helping a great business in Brisbane complete their 10 year financial plan.

They have a complex and fast-growing manufacturing business, so it has been an exciting 6 months putting this plan together with the Founder and their excellent and very experienced CFO. .

I believe small business strategic planning starts with the numbers - a 10 year financial model, and from there the other 3 key strategic documents can be completed:

Agile Business Plan
Mini Marketing Plan, and
Simple Quarterly Strategic Plan.

The CFO initially sent me her massive and complicated forecasts.

I pointed out that, while it was a good start, there were a few fundamental problems with it.

This is common when a bean counter tries to put together a highly impactful 10 year financial model, they come at it from a debit bean and credit bean angle, not as a powerful management tool - which should be used as the foundation not only for the above 3 other strategic documents, but also to align the team so they are laser-focused on only a handful of projects and KPIs each quarter.

The Sales and Human Resourcing Disconnect in financial modelling

The biggest one was the disconnect between sales and human resources.

As they produce a great product, which is sold all around Australia and in ever increasing export markets, some of the roles on their team were variable.

That is, the more widgets they sell, the more hours are needed in the manufacturing roles.

The CFO and Founder estimated lumpy changes in salary and wages each year, and sometimes when the Founder changed the sales plan, he forgot to change this important bucket.

Further, they didn’t have the non-variable roles clearly broken out, so you could see each financial year which hats the Founder would take off and hire someone to then own 100% (eg. the Marketing Manager role).

And as the business grew to the next big level of sales, a higher calibre resource was needed in some roles, like the Sales Manager.

So, the wage should increase by a large amount to reflect that reality.

The hidden benefits of an exceptional 10 year financial model

In our final meeting this week, I pointed out these benefits they gained from using our financial modelling for small business approach we use.

They now have:

1. A clear sales plan: how many widgets they will sell in each channel each year, and the different growth rates each channel would experience - if they hit their sales and marketing plan. This now was their sales plan, they knew how many widgets they needed to sell in each sales channel each financial year, and could cut those targets down to the next quarter - so the sales and marketing teams had greater focus

2. A more accurate marketing budget: as they export, this lower margin channel can skew the marketing needed if they simply used a percentage of sales. Instead, we had the marketing budget set as a percentage of gross profit. This is especially important as your channel mix changes (eg. export will grow faster than their retail sales on-site, which is their highest margin)

3. A detailed human resource plan: they have laid their best assumptions for when they will add more people to the team, and those costs are reflected in the overheads and therefore profit, as the sales plan changes, and

4. An estimated valuation of the business over the 10 years: our models include the 2 main valuation methods used in valuing non-SaaS or subscriptions business. They are a multiple of EBITDA (operating profit) and a Discounted Cash Flow (DCF). As they changed assumptions and tested new scenarios, the Founder could see the impact this had on the valuation. Especially as some of their product take 2 - 3 years before they are ready to be sold, this has an impact on cash flow and assets on the balance sheet.

Check out this small business podcast I did with an owner who went through our ‘Business Transformation Program’, and we built a powerful 10 year financial model for her growing professional services business.

How their shiny new 10 year financial model stopped a $10m investment

The CFOs’ initial modelling informed the Founder that they needed to raise $16m over the next 7 years.

They had planned to talk with investors and ask for these rounds:

$1m this year
$5m next year, and
$10m in 7 years - to fund moving to a much larger site and invest in more efficient equipment.

As the new model was fully integrated - if you changed the sales plan, the cash flow, profit & loss and balance sheet all automatically reflected the change, it meant the growing cash balance was even more accurate.

When we sat down to plug in when the tranches of cash investment would actually be needed to keep the bank balance at the minimum $100,000 buffer in each financial year, this is what we landed on:

$500,000 now
$500,000 late this year
$3m next year, and
$2m the year after that.

They didn’t need the $10m in 7 years, IF the team hits the new targets and overall plan.

The cash balance would grow enough to cover the planned $15m expansion project in 7 years ($5m of that was coming from cash flow, the other $10m was what they thought they needed from investors).

This not only protected the Founder and current shareholders equity, but it also made it a much easier conversation with new investors - needing $16m is very different to only needing $6m.

And, as they $6m was spread out over more time and investment rounds, it meant the value in each round could be increased (as more time had passed between rounds, and therefore the risk was lower each time).

This adds an element of urgency in the earlier rounds “get in this tranche, as the valuation goes up in the next one, and more than just the cash amount invested in the current round.”

Examples of 10 year financial models for 2 small businesses

We have built many 10 year financial models to give small business owners confidence to grow their business.

Hear how Sharon’s model allowed her to start piling on more bookkeepers and accountants in her business, on the path to exceeding her initial $1m a year sales target.

And how Stu had the confidence to finally pull the trigger on a new site for his organic gin distillery, 30 minutes out of Adelaide. He had been close with 4 other sites in and out of the city, and each time he copied the last model and changed the things that were different for the new opportunity (eg. rent, sales, opening hours - which therefore impacts casual wages).

If you don’t know your numbers well enough, or at all, and a 10 year financial model will give you the clarity and confidence to grow your business, jump on our ‘Business Transformation Program’ waitlist. We build a model for each business in the Program, and only open to a group of 8 business owners 3 times a year (March, June and September).

Cheers,

Troy | Founder | Grow A Small Business

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