financial-modeling

Files (4)

• README.md
• SKILL.md
• evals.json
• saas-metrics.md · references/

SKILL.md (first lines)

## Key principles

1. **Assumptions drive everything - make them explicit** - A model is only as good
   as its inputs. Every key assumption (growth rate, churn, gross margin) should
   live in a clearly labeled inputs section, not be buried in formulas. If you
   can't defend an assumption in 10 seconds, it's not ready.

2. **Build for scenarios, not point estimates** - A single-case model is a false
   sense of precision. Reality will land somewhere between your bear and bull cases.
   Structure every model with at least three scenarios from day one - it forces you
   to think about the range of outcomes, not just the hoped-for one.

3. **Separate inputs, calculations, and outputs** - Inputs (assumptions) belong in
   one section. Formulas (calculations) reference only inputs or other calculations.
   Outputs (charts, summaries) reference only calculations. Never hard-code a number
   in a formula that should be an assumption. This separation makes auditing and
   updating the model fast and safe.

4. **Stress test the downside** - Most financial models are too optimistic. Reverse-
   engineer the downside: "What churn rate makes this business unviable?" or "What
   growth rate do we need to hit break-even in 18 months?" Knowing the failure
   thresholds is more valuable than the base case.

5. **The model is a tool, not the answer** - A model produces a range, not a verdict.
   Use it to understand sensitivity, pressure-test logic, and communicate trade-offs.
   Never present a DCF output as a price target without showing the key sensitivities.
   The goal is better thinking, not false precision.

---

## Core concepts

### Three-statement model

The foundation of any serious financial model. The three statements are interconnected:

| Statement | What it shows | Key link |
|---|---|---|
| **Income statement** | Revenue, costs, profit over a period | Net income flows to retained earnings |
| **Balance sheet** | Assets, liabilities, equity at a point in time | Cash from cash flow statement |
| **Cash flow statement** | Actual cash in/out, reconciles profit to cash | Starts from net income |

For most startup models, a simplified version suffices: revenue build, gross margin,
operating expenses, and ending cash balance. Add the balance sheet and full cash flow
statement when modeling working capital, debt, or M&A.

### DCF mechanics

A DCF (Discounted Cash Flow) values a business by the present value of its future
free cash flows. The mechanics:

1. Project free cash flows (FCF = EBIT*(1-tax rate) + D&A - capex - change in working capital)
2. Choose a discount rate (WACC for the whole business, cost of equity for equity-only)
3. Calculate terminal value (Gordon Growth or exit multiple)
4. Discount all cash flows back to today using: `PV = CF / (1 + r)^n`
5. Sum the present values - that is the enterprise value

The terminal value typically represents 60-80% of DCF value. This makes the discount
rate and terminal growth rate the two most important (and most uncertain) inputs.

### Unit economics

Unit economics measure the profitability of a single customer or transaction:

- **LTV (Lifetime Value)**: `(ARPU * Gross Margin %) / Churn Rate`
- **CAC (Customer Acquisition Cost)**: Total sales & marketing spend / new customers acquired
- **LTV:CAC ratio**: Benchmark 3:1 or higher for healthy SaaS
- **CAC Payback Period**: `CAC / (ARPU * Gross Margin %)` - months to recover acquisition cost
- **Contribution Margin**: Revenue minus variable costs per unit

### Cap table structure

A cap table tracks ownership in a company across all shareholders:

- **Pre-money valuation**: Company value before new investment
- **Post-money valuation**: `Pre-money + new investment`
- **Price per share**: `Pre-money valuation / fully diluted shares outstanding`
- **Dilution**: Each new share issued reduces existing shareholders' ownership percentage
- **Option pool shuffle**: Investors often require the option pool to be created pre-money,
  which dilutes founders, not investors - model this explicitly

---

## Common tasks

### Build a SaaS revenue forecast - bottoms-up model

Start from customer counts, not a top-down percentage. Bottoms-up is more defensible:

```
New customers per month  = (Website visitors * conversion rate)
                         OR (SDR capacity * meeting rate * close rate)

Monthly Recurring Revenue (MRR):
  Starting MRR
  + New MRR       (new customers * ARPU)
  + Expansion MRR (upsells/upgrades)
  - Churned MRR   (prior MRR * churn rate)
  = Ending MRR

ARR = Ending MRR * 12
```

Layer in gross margin (typically 60-80% for SaaS) to get gross profit. Model
cohort-level retention to capture expansion revenue and logo churn separately.

> Key assumption to stress test: monthly churn rate. At 2% monthly churn, you lose
> ~21% of revenue per year. At 5%, you lose ~46%. The business model changes entirely.

### Build a DCF valuation - step by step

1. **Project revenue** - use a bottoms-up model for years 1-3, apply a fade to a
   long-run growth rate for years 4-10
2. **Project margins** - start from current gross/EBIT margin, model expansion
   toward a steady-state comparable (check public comps)
3. **Calculate unlevered FCF** - EBIT * (1-tax) + D&A - Capex - change in NWC
4. **Set the discount rate** - For early-stage: use 20-35% (reflects risk premium).
   For public comps-based: use WACC (8-12% range for established businesses)
5. **Calculate terminal value** - Use exit multiple (EV/EBITDA or EV/Revenue) anchored

From mkurman/zorai, MIT.

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