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Financial Model Template for e-commerce
Our mission at Chiefmetric is to help startups and small businesses succeed. That is why we've decided to offer three financial model templates, one for each of these business models: e-commerce company selling physical goods, marketplace and software as a service (SaaS).
We're starting with the financial model template for e-commerce, including instructions on how to adapt it to your company. This article is a complement to our Financial Projections for Startups Complete Guide, where we'll show you step-by-step how to generate a financial model template that you'll use continuously to update your business financial projections, as well as facilitating scenario planning.
Contents
- Assumptions
- Sales
- Cost of Goods Sold (COGS)
- Human Resources
- Operational Expenses
- Financial Model
- Profit and Loss Statement
- Cashflow Statement (coming soon - subscribe to be notified)
- Balance Sheet (coming soon - subscribe to be notified)
Assumptions
First of all, you should always have a tab with the top line assumptions of the business that you've considered in order to build your financial model. On this tab, you will find some of the assumptions that actually had an impact on the structure of this document, such as the company's first month of operations, detail on the company's product portfolio or the fact that this particular company is actually the manufacturer of its products, which has an obvious impact on the business bottom line.
Apart from that, you will notice that the entire document has cells with different colors. On this tab, you can check what these colors mean so it is easier for you to adapt the main inputs to your business. There are three colors in place:
- blue cells are inputs that you can change without affecting the structure of the document;
- grey cells are formulas that, if edited directly, will likely have an impact on other cells and tabs;
- orange cells were added in order to facilitate the visualization of monthly data when shown together with annual data as well.
Sales
Some call it Revenue, others call it Sales - we've decided to go for the term that everyone will understand. This is one of the most important tabs on the entire document, as it is where you'll identify your company's revenue streams, or ways in which it generates income, as well as the prices applied for each unit of your products, and the growth rate you're expecting for each of these streams.
On the example used to create this financial model template, the company has three products on its portfolio, sold at different prices, and with different monthly and annual growth rates. As it is increasingly difficult to predict monthly sales growth more than two years ahead, we've included the monthly growth rate to reflect on the years that have that detailed projection - 2020 and 2021 -, as well as an annual growth rate impacting directly on the sales projections for the third year onwards.
As you can see in the financial spreadsheet, the three products start being sold in different periods. For example, while Product 1 registers its first 300 units sold on December 2020, Product 3 starts generating income only a few months later, with 30 units sold on February 2021.
Cost of Goods Sold (COGS)
The way this tab works is very similar to the previous one, except that here you'll give details on the direct cost of goods sold, impacting your business margins. Depending on your business model, you should include the costs of manufacturing (if your company is the manufacturer of the goods sold) or acquiring (if the company operates as a retailer, for example) the same products included on the Sales projection.
You'll notice that next to the majority of input cells on the document there is a last column where you should "Add notes to explain the assumptions behind your inputs". On this particular case, as the company is the manufacturer of goods sold, an idea would be to include the cost of materials used, direct labor and manufacturing overhead per unit.
Human Resources
One of the most relevant things to consider when calculating personnel expenses is the concept of total cost. A very common mistake at this stage is to consider only the cash compensation for each of the employees the company plans to hire, but that's not all. On this case, we've included the bare minimum, or what is legally demanded: payroll taxes and personal insurance expenses.
On another note, you should always consider annual salary progressions, as you probably want your employees to grow as your company continues achieving its ambitious projected results.
Lastly, you will notice there is an area on this tab where you can put the limit sales for each position. As you know, certain jobs are very dependent on the amount of actual sales and/ or customers, such as customer service - the more clients you have, the more you'll need to provide customer service. That is an example that is easy to understand, but you should also consider establishing a limit to other positions as well. On this financial mode template, by inserting a certain limit of sales per position, the grey cells on the last three projected years will automatically update according to sales projected for the same period.
There is also one column called "year 0", where you should include all the expenses with personnel prior to the first month of operations - as you might know, companies aren't born out of nowhere, and the co-founders initial effort should be properly quantified and stated here, as well as other expenses you might have had to start your business.
Operational Expenses
This tab is dedicated to all the other expenses required to keep your business running, that are not related to direct costs of sales (COGS) or the company's employees. This is also likely the tab you'll have to change more in terms of structure in order to adapt it to your business, as most of the decisions made here are not linked to sales, but rather virtual decisions that follow the final sales projections.
On this case, as the company is actually producing its goods, you'll see expenses such as 'production related costs' and 'building related costs', but also other more general categories, exemplified by 'marketing and business development' or 'specialized services' (e.g. legal; accounting).
Financial Model
If the previous tabs were properly completed, you should end up with an automatic Profit and Loss Statement for your business, which includes the summary of all your sales, COGS, human resources and operational expenses, a four year projection on gross margins and respective EBITDA and Net Income.
To have a realistic projection on Net Profit, you may adapt the Income Tax Rate at the bottom of the statement - we've considered 30% on this case, but it really depends on where your business is geographically registered and in some cases on the nature of that business.
We will soon add the Cashflow Statement and Balance Sheet to complete this Three Statement Financial Model template, so if you don't want to miss out, subscribe to be notified of news on updates about our financial model template!
