 Welcome to everyone who is joining us for this session of the SDSN Youth Investment Readiness Program. Today, we're very lucky to have Manu and Roxandra here to experts who support the Babeli platform that the course in the program is running on. And they're going to talk today about financial modeling. So over to you. Hi, Lauren. Thank you very much. We are thrilled to do this webinar for you. We are the two co-founders of the Babeli platform. We have been doing workshops on business modeling for social entrepreneurs in 16 different countries with over 600 entrepreneurs trained. And yeah, we are thrilled to share our experience and we are going to go through examples of Babeli as well in this webinar. Yeah, I have one. So we really like the financial modeling workshop because that's one of the most fundamental aspects of being a social entrepreneur. Because if you are a social entrepreneur, you've got to be more than just a visionary. You cannot just be the product guy. You need to be also a business person at the same time. And being a business person, it means that you also need to pay attention to finance. And that's what's actually going to make a difference if you, for example, meet impact investors and ultimately change your life for the better. And so you need to understand the underlying financial flows of your business. And that's key to your understanding of how to manage your social enterprise. Yeah, like there is, I believe, a misconception, which is sometimes entrepreneurs, they think that they can lead the whole financial aspects and the numbers to the bookkeepers and the accountants. And that couldn't be more wrong because you certainly want to have a bookkeeper and accountant, but you also need to be able to analyze the financial data and you need to be able to understand all the underlying financial flows of your business. Because that's ultimately how it's going to allow you to manage your business. So this is why in this webinar we are going to explain you what financial forecasting is about and how to do it. But also explain you these main financial statements, the balance sheet, cash flow statement, and income statement in order to better understand your bookkeeper. And so first thing first, financial forecasting, what is it? It's a fancy word, but it means actually forecasting your revenues and your costs. And in the previous webinar, webinar seven on revenue modeling with Richard Leaplicht, you have done forecasting of your revenue streams. So what we are going to do now in depth is forecasting the costs. My presentation got blocked. Sorry. Yeah, so forecasting your costs. And then we are going to see an example of financial forecasting that we are going to do with our own example on Babylon. So for assessing your costs, you have to make a list of the things that you need. And the costs are going to be very specific to your social business. So we are going to make the example of Babylon, but the Babylon is an online platform so it can depend. But there are some main categories that you can think about. So what's the rent that you're going to pay? What are the utilities? What is the equipment? If you are producing something, then you maybe need some raw materials. You need licenses and intellectual property stuff. For us, website servers, these were important costs. Marketing, this you have in any case, insurance, lawyers. So the most important thing is to think about these categories to make sure you don't forget one when you make your financial forecasting and cost forecasting. And you have to think about two main categories. The one is the fixed costs, the one that you need to cover anyhow. And they are not going to depend that much on how much you are going to sell. So it can be rent. OK, if you increase incredibly and you have many more employees, the insurance is going to increase as well, but at the very beginning this is going to be a fixed cost. And then you have variable costs. And these are costs that depend on how much you are going to sell, especially, for example, for products. And we have the category raw material. This is typically a variable cost. For example, utilities, if you are going to use a lot of electricity in order to produce things or equipment at a certain point, if you're going to need more. What's very important in all these, OK, you have the categories, but you have to have, as Manu was talking in his workshop on Lean Startup, you have to think how to reduce these costs, how to stream them back, how to maybe buy some stuff that are already used or see how you can reduce as much as possible these costs. And usually when you're doing forecasting, you're going to do some forecasting of costs and you're going to try to reduce them as much. And usually what happens is that we are always much too positive on how much revenue we are going to make. And as well as how we are underestimating the costs. And it's funny what I wanted to share with you next is like the example of Babelé and our online platform. And this example is forecasting on financial modeling that we did three years ago. And we can show how positive we were on regarding our forecasting also for revenues and for the costs. I'm going to put into the menu full screen or that's fine. So one of the basic things is to put these categories that we were talking about in some lines, like personnel costs, IT costs, because we are a web platform, we have a lot of IT costs, marketing. This is a traditional category. Maybe some other stuff, if they are small. So put the categories that you thought about when you identified them here. And then try to be as specific as possible and also put them month by month. So we had for our cases, sorry, I'm moving around, very important. We were trying to forecast how many backend developers we are going to need, how many front-end developers we are going to need, how many designers, community managers. Very important when you forecast the personnel costs to think also about the labor taxes. Because this is something that people especially at the startup level forget. And you're thinking about the net salary and not the labor costs, which can be significant. In Romania, they are over 70%. So I have to pay 170% compared to what the net salary is. Our second big category was the IT, so maintenance, certificate, server, hardware and other stuff. And the idea is really to try to think month by month what these costs are going to be. So it's nothing, let's say, super hard. The hardest is actually to think about all the possible costs that you could have. And not oversee one of them. So for us, for example, regarding marketing, marketing can be very different from one company to another. For us, marketing meant being present at conferences where we were talking about Babelia where we had stands and we were paying for the tickets at these conferences. Or professional, promotional material, leaflets, roll-ups, visit cards. Or the promotional Google AdWords or Facebook ads or doing the promotional video. So it really depends on your categories. This is why it's very hard to do, actually, what we are on financial forecasts without knowing the specific cases of your business. So I have put at the very end the overhead head costs. So these were like the fixed costs for us. Accounting, legal consulting, the rent for the office. And then I made the total. And I made this forecasting for an application for funds. So it was their template. And strange enough, they had the revenues at the end, usually. And one is going to show that it is when we have cash flow statements. Usually you have the revenue, the cross-profit. You take out the value of the goods sold and then you have your net revenue and then the whole list of the costs. But anyhow, the profit is usually revenue-less costs. And then we are going to enter into more details when we go with Manu to show the different profit margins types, operating profit, net profit. And I'm going to do this for this. Wonderful. So we get back to the presentation. And so after the forecast, so to start with the basics regarding the financial statements, we want to present to you a finance pyramid that was presented by Bill Reichart in the art of startup finance, which is one of the best YouTube series that you can find on how startups should manage their finance and those made by the Kaupman Foundation. And as you can see at the very base of the pyramid, there is the foundation of your business. And the foundation of your business is reflected with your bulging. Above that you see processes and these are the processes of your business and these are reflected in the income statement, in your cash flow statement. And we're going to be focusing on these three tools. Above that, there are also other tools that you can actually check in the art of startup by Bill Reichart, which are business model operating budget and then building a management dashboard. And these tools are really important because they help you understanding what is happening in the company, what has happened in the past and what you can expect to feel happen in the future. And if you watched the Lean Startup webinar and you saw the statistics of how many startups and social enterprises they actually failed, they know that the whole world of entrepreneurship and social entrepreneurship is really filled with uncertainty. So things are changing rapidly all the time, so you really need to have those tools in order to manage this uncertainty and make sure that you can find the right iteration for your social business. Well, so the foundation of your financial structure is the balance sheet. And the balance sheet is nothing else than a picture of the financial condition of your company at any given time. And the balance sheet is split in two, as you can see in the slide. So on the one hand, you've got the assets and on the other hand, you've got the liabilities and the shareholders equity. And your asset being at the top with cash, which is probably the most important asset that you got, then you've got the so-called account receivable, which is nothing else than the money that you expect to be paid by your customers. And in some cases, you can have inventory, for example, products that you haven't sold yet and that you still have in stock. And those together, they are your current asset. Then you also have a long-term asset, and this may include improvements, for example, on your office or your building, you can have equipment, for example, to build your product or service in the car, etc. And then you can have property, you can have, you can possess actual property, you can possess an office, you can possess a factory. And put it all together, these are the assets of your company. So on the other side of the balance sheet, you can actually find your liabilities and the shareholders equity. And as for your liabilities, these include things like that. So, for example, payables, this is the money that you owe to other people. And then you have accrued liabilities. And this is the money that you owe to people like your employees. And your payable and your accrued liabilities are considered your short-term liabilities. And that's really important because you want to know what kind of things you need to pay sooner rather than later. And when you look at things that you would actually have to pay later, then you look, for example, at your long-term debt, which is the money that you borrowed and that you need to pay off, but not immediately. And put it all together, this makes your total liability. I would say that the most important part of the balance sheet and these two facets of the same of the balance sheet is that the assets, they always equal the liability and the shareholders equity. So when you build your balance sheet and you do not get the same number on the left and on the right, then it means that you actually have a mistake somewhere. So check with your bookkeeper if the assets are not the same as the liabilities and shareholders equity, then there is something very wrong there. Yeah, absolutely. And then you need to ask yourself, when a banker, for example, looks at your balance sheet, what are these guys going to look at exactly? So the first thing that they look at is definitely the cash, because they want to know if you have enough cash to keep going. And then they're going to be looking at something else, which is called the working capital. And the working capital, it includes everything that you can convert into cash into a relatively in a short amount of time. So you take into account not only the cash, but you also take into account the account receivable that you hopefully you're going to convert into cash pretty soon. And this together is called the working capital. Then beyond the working capital, the banker is also like might want to subtract the short term liabilities. And then you obtain the net working capital. And this like this net working capital, so the working capital minus your short term liabilities is actually what you want to focus on to keep the company going. And another thing that bankers might actually also look is the ratio between your debt and your equity. And as you can imagine, they want to know that you have plenty of equity and you have a little amount of debt in comparison. And to improve the performance of your company, if you improve the performance of your company, then you will naturally improve your debt to equity ratio. This means that to increase your equity, you must make more profit and so add to your retained earnings. Then another thing is, there you go, the two strategies. So the other thing is also that some investors can also ask you at some point that some of the people that borrowed your money to convert their debt into equity, because this is also a way to reduce your debt and to increase your equity and make your company more appealing. So you hear maybe about convertible shareholder loan. That's what it means, actually. So sometimes you have your shareholders that don't put the money directly in equity. They put it as a loan towards the company, but it's convertible, so that these loans become equity afterwards. And this makes a lot of sense when your company is really difficult to evaluate and so it's really difficult to underestimate how much is the value of the company. So a person might find it less risky to give you a debt first and then eventually transform that debt into equity in case the company really becomes financially attractive. And then when you also, of course, when you talk to investors, the important thing is that you want to be able to produce the latest, the most current balance sheet. And so you should produce a balance sheet at the end of each month. And so theoretically right now you should have on your hands the balance sheet from last month. Yeah, if you have your company already incorporated. Correct, okay. Then after the foundation, then we continue with the processes and with the financial processes and the financial processes, as we said before, they encompass the income statement and the cash flow statement. And as you can see in this image, the income statement and the cash flow statement, they sit right on top of your balance sheet. So on top of the financial foundation of your company. And the balance sheet is a static snapshot of your company health at any given point in time while your income statement and your cash flow statement, they show your financial processes. And that's like a video of your business over a period of time. Yeah, so the balance sheet is a photo, the income statement and the cash flow statements are like a video. Some other people make comparisons with the bath where you're filling water into a bath cube. And then the balance sheet is looking at the level of the water and then the cash flow statement is what's exactly what the water is pouring in and pouring out and how it is distributed. And if you want to see the different roles of these three different financial processes, then the balance sheet simply measures the current state of the company. So the assets, the liabilities, the earnings equity. While the income statement, it shows how profitable the company is. Like does it make money? Does it lose money? While the cash flow statement, it shows how much money came in and went out and what the cash was used for. These are the three main short explanations about these three processes. So let's talk about the income statements. So at the top of your income statement, as I was saying and explaining in your example, usually in the example I was showing with Pabelle, usually they come the revenues. And then out of that, you have the cost of goods sold, which is usually a variable cost. So this is why you put it actually really depending on the revenues. And once you have these two and you extract the cost of goods sold less the revenue, this is what your gross profit is. So yeah, I would say it's just like that. And then when you look at the margin, very important is that you put the gross profit divided by the revenues. So sometimes, for example, in an example where you have a product that costs 100 dollars and the cost of the goods sold costs 50 dollars, then you have your gross profit 50 dollars. But this doesn't mean that you have 100% margin because you sell at 100, no, you have 50% margin. So that's very important in order to understand. And usually investors, they love it when you have a big gross profit margin. And that's something that you're going to be asked, what's your gross profit margin? And of course, the higher the gross profit margin, the better. And because then it means that your business has the potential to be really profitable. So once you have your gross profit margin, then you extract the cost of other stuff, like the revenue, the research and development, engineering, marketing, sales, administrative costs. So these are other operating expenses. So once you extract these other operating expenses, you have the operating profit or the famous EBITDA. So earnings before interest, tax, depreciation and amortization. And how do you calculate then the operating profit margin? You take this EBITDA and you divide it by the revenues at the very beginning. And you multiply it by 100. Of course. And so if we take away also this interest, taxes, depreciation and amortization that is the EBITDA of EBITDA, then that's how we actually calculate the net income. And of course, like also in this case, you can actually calculate the net income margin, which is one of the other indicators that investors or impact investors can potentially ask you about your financials. And net income margin is always net income divided by the revenues multiplied by 100. Yeah. And so the question becomes also what investors want to know when it comes to this information? So investors of course are really interested in your margins. So of course, they're going to be asking about your gross margin, your operating profit margin and your net margin. And of course, they're going to be looking at these indicators to see how profitable you are and how efficiently you're actually running your company. And but beyond this, there are also other things that they can look at which are called operational efficiencies. And the question is how efficient are you running these processes compared to other companies? And so like what investors usually do is that they look at certain ratios. For example, how much you're spending on marketing compared to your revenues or how much do you spend on sales compared to revenues. And then they're going to be looking at how these ratios they compared to other companies in your sector or other companies in their portfolio. So if you're going to be looking at some point to raise money from an impact investor, you also want to learn to look at these ratios and get those ratios in line with the expectation of these impact investors. And even if you're not looking for funding or to raise money, these can also that can anyway help you to be more efficient and to relate yourself to other companies that are doing something within the same sector. So let's look at the third statement which is the cash flow statement. And the cash flow statement starts actually with what we talked about the net income. So it's the last line from the income statement. And then you look at stuff that didn't have an influence on your account. So the changes in account receivable. I hear it's very important to have a look Yeah, the main idea is that we mentioned the accounts receivable earlier and sometimes like we can sell a product for a customer but the customer is actually they might not give you the cash immediately but may pay you after 30, say 60 or 90 days. And so it means that the number of these money that you are supposed to receive, it's a deferred payment. So they don't receive it immediately. And so that's the reason why it's important to look at this account receivable. And you have to take it out from the net income because you have it added in your revenues but you don't have it as cash actually in your accounts. So this is maybe one of the difference between what you have on your bookkeeping and what you have really in your bank accounts. And this is why you take the difference out. So same thing for the account payable because it might happen that you receive a new voice but you pay it after 19 days. So you don't pay it straight away. So when you have the net income, less the changes in these accounts receivable and account payable, you have the cash flow from operations or OPEX. And then what you have to extract is also your capital expenditure. Maybe you have heard about it, CAPEX. Financial people really like to talk in jargon, so CAPEX, OPEX and all that stuff. So you will take out all the everything that you have paid for your equipment, furniture and investments actually. Things that will be seen afterwards in the balance sheet. And then you take out all the money that has been paid for financing activities or that you have received. So this is why we write here change in debt and change in equity. So it can be plus or minus. It depends what happens. If you had to pay your debt back or if you have received more equity from investors, it really depends. So like if you raise debt or you raise equity, this is increasing your cash while if you pay your debt or if you buy back your equity, you're simply reducing your cash. Finally, the cash that is in your account is the cash flow from operation minus the CAPEX plus minus the financing activities. Yay. So we have the three explained. Now what happens? Yeah. So the beautiful thing of these three statements is that you can really see the big picture and how they all relate together one to the other. So this is all we have seen. And if you look at the revenues at the top of the income statement and you can flow down through the expansives to your net income, which is at the bottom of your income statement. And it goes at the top of your cash flow statement. And these flows like to the net cash that you actually have in your pockets and the net cash if you click one more time, you find it in your balance sheet. Exactly. So you can see that these three statements, so your balance sheet, your income statement and your cash flow statement, they are all tied together beautifully in the end that we wanted to talk with you about is the break even point. This is something very important and many people talk about it. Have you already reached break even? What is this famous break even? So it's very important. The total cost less the total revenues and you reach the break even when these equal. And at the very beginning you will have costs that are going to be higher than your revenues. And hopefully at the end you're going to have some profit. So your revenues are going to be higher than your costs. So the break even is the point where the two intersect. And very important that I saw this in another webinar and I really liked it. You can have different break even points. It really depends on you. So you can reach, for example, break even because you don't count your own salary. So it says if you would make self-voluntaryism for your social business and you're just covering your total costs through the revenues but without paying yourself. Then you can have a break even with salary so where you are paying yourself. This is the case right now with Babela. So we are at our second break even point. And then hopefully in the future we will reach our third break even point which is paying yourself with a good salary. So this is more or less what I wanted to say. I think do you want to add something more Manu? What I really recommend is to have a look at the The Art of Startup Finance, this YouTube series of the Kaufman Foundation. I think we are going to add the link in the Babela overview so that you can have a direct look at it so you can go more into details. And if Manu doesn't want to add anything else what I would do is that I would do like questions and answers for the people that are participating at the Babela. But I'm not able to see how many people have joined. I think we maybe lost our live participant so I think it might do me. But I do have a question. So really fantastic presentation and you gave us a lot of resources to think about doing financial modeling and you showed us an example of an Excel sheet that you were using which I think is a really great tool because almost everybody has Excel. I'm wondering if there are other softwares that you would recommend as being helpful with financial modeling and or you know maybe at what point in your business might it be worth investing in something that's more sophisticated than Excel or do you think that's sufficient for sort of the lifetime of your business a software question? For the lifetime of your business now but it can do a lot of stuff. So the one that I showed is just a very simple one. So these were projections that we were doing more than years ago. In the meantime they are more complex but you can do a lot of stuff with Excel and I don't think what's important is to have a good relationship with your bookkeeper because maybe you're doing some projections but it's not related with what your real business is and to have a real connection there and understand what he's saying and I think that's more important than softwares. You can do a lot of stuff with Excel but understanding the main concepts like accounts receivable, accounts payable, networking capital, capex and all that stuff that's more important than softwares. Yeah absolutely and that's ultimately what an investor is going to look at you know which is as we said at the very beginning that you're not just the product guy or the imaginary innovator but you're also capable to understand exactly what's an income statement, the revenues, the cost, the expenses and so on and that you're really capable of understanding these pieces of information and that's not only the accountant or the bookkeeper is supposed to be managing. Great and do you guys have a start up actually that is working on the softwares right now? Yeah we're collaborating with a friend of ours which is working on a software for these financial indicators so the software is not yet launched but we will definitely make it available to the community as soon as that's online. Nice going off of that answer to my question then too I guess my second follow-up question is how can you tell when I guess you know there are a lot of resources in this lecture and you mentioned some other websites and I think there are a lot of online tools where you can use to teach yourself some of this revenue modeling and bookkeeping and if you're sort of a young startup maybe that's sufficient. How do you tell when you think it's time to bring on a more professional bookkeeper or maybe that's at the very beginning if you feel like you're out of your depth you know how do you sort of figure out when you've crossed a line between maybe you've been able to do this yourself and needing somebody who has more training? That's a very good question so frankly from our own experience we both started in a business school so we used them before we died as learners so in our personal case we didn't need to make the switch but what I can see as other fellow entrepreneurs is that indeed there is a time when they grow a lot and they are not managing these concepts and they might make big errors. Probably the biggest problem is also the fact that at some point the most complicated part is keeping those books in order so that's the reason why at some point you're always going to have because we had for example an accountant since the very beginning right? Yeah but that's the Romanian though I think in the US it's different in the US you can do a lot of stuff on your own without a bookkeeper. Yeah in our case like we were supposed to have an accountant since the very beginning but at some point like you really feel that you want to focus on the really managing the business rather than just keeping the books in order that you simply need to have a great office manager that is going to help you to keep all this information and then it's going to allow you to look at the big picture without having to worry to just do all these bookkeeping on your own. Great well I think that answers my questions which I think brings us to the end of our time if you guys have any closing thoughts or final things you want to leave us with? Yeah so what we are going to do is I really hope it is great to be there as a team so if people have specific questions regarding financial modeling for their own business we are going to be this week like the following the week that comes next week super available to discuss these points and for specific questions and I really think it's tricky what we learn because it really depends on your own situation especially at the very beginning when your people are doing projections for their costs so you have more money to come. Yeah I think it's definitely challenging because it is a variable from business to business and also you know relative to some of the topics that we've covered I think this is one of the more technical sort of skills based lectures that we've done you know it's very practical it's very hands-on as opposed to some of the more theoretical conversations we've had so I'll just encourage people to log into the platform and be vocal with their questions if they're having challenges completing their homeworks. Great thank you Lauren. Yeah thank you. Thank you.