magnus919_agent-skills/financial-modeling/references/financial-modeling.md

Financial Modeling

Financial models translate assumptions into projected statements. Their value is making assumptions explicit and internally consistent, not predicting the future.

Model Structure

A complete model links three statements and the schedules that drive them.

Statement	What it shows	Key line items
Income statement (P&L)	Profitability over a period	Revenue, COGS, gross profit, operating expenses, net income
Balance sheet	Assets, liabilities, and equity at a point in time	Cash, receivables, payables, debt, equity
Cash-flow statement	Cash sources and uses over a period	Operating, investing, financing cash flows, net change in cash

Supporting schedule	Feeds into	Contents
Revenue build	P&L revenue and receivables	Customers, conversion, pricing, collections
Headcount plan	P&L operating expenses	Roles, start dates, compensation, benefits
Capex and debt	Fixed assets, depreciation, debt, interest	Purchases, useful lives, principal, rates, terms
Equity	Equity and financing cash flow	Rounds, options, dilution

Use one currency and a stated period convention throughout. Reconcile ending cash on the cash-flow statement to the balance sheet. Accounting classification and recognition require the applicable accounting framework and professional review.

Revenue and Costs

Build the base case from operational drivers. Use top-down market sizing as a reasonableness check, not the primary forecast.

Bottom-up revenue = customers x revenue per customer + expansion revenue

For a monthly subscription model, if all inputs are monthly:

Month N recurring revenue =
  (prior-month customers x (1 - monthly logo churn) x monthly ARPU)
  + (new customers x monthly ARPU)
  + expansion revenue for the month

For usage-based revenue, model active accounts, usage per account, price per unit, and seasonality. For services, model billable headcount, utilization, billable rate, and billable days. Keep bookings, recognized revenue, invoicing, and cash collections separate when timing differs.

Cost type	Examples	Modeling approach
Fixed	Base salaries, rent, subscriptions	Step changes at hiring or capacity thresholds
Variable	Hosting, payment processing, commissions	Per unit or percentage of the relevant driver
Semi-variable	Support and sales capacity	Fixed base plus staffing tiers triggered by volume

Ratios such as R&D, sales and marketing, G&A, and gross margin as a percentage of revenue are context-dependent heuristics. Compare like-for-like business models, maturity, and accounting treatment rather than treating ranges as targets.

Scenarios and Sensitivity

Always show a base, upside, and downside case. Change observable drivers, such as customer additions, churn, price, sales capacity, collection timing, headcount, and variable cost, rather than only changing the final revenue number.

Use one- or two-way sensitivity tables to identify inputs that materially change ending cash, profitability, or a financing need. Label every illustrative percentage or dollar amount as hypothetical; do not mistake a scenario for a forecast.

Common errors include linear growth assumptions, hidden customer concentration, automatic expansion assumptions, omitted churn, and confusing revenue timing with cash timing.

Runway

Define monthly net cash burn as a positive cash outflow before calculating runway:

Net monthly cash burn = cash operating outflows - cash operating inflows
Runway (months) = available cash / net monthly cash burn

Use a cash-flow forecast, not P&L loss, when receivables, payables, deferred revenue, capex, debt service, financing, or taxes are material. If the business is cash-generative, runway is not meaningful as a finite quotient; model the cash balance and liquidity risks instead.

Runway bands, such as when to reduce spending or begin financing conversations, are management heuristics. They depend on financing access, contractual commitments, volatility, and the time needed to execute a contingency plan. Include one-time costs and test slower collections, delayed revenue, and higher spend.