This modeling technique has universal application
This planning process can be applied to a start-up, rapid growth firm or a more mature company seeking expansion or merger opportunities.
The Operating Plan construction process begins by loading the model with resource metrics for the next 24 months. This approach enables the management team to visualize the company’s future in terms of the resources they will allocate to the business. To enhance visibility, key milestones can be indexed to each month, ensuring that timing remains clear across all planning schedules.
Loading resource data
We start with a headcount projection, as it is the most intuitive planning tool for visualizing growth. From there, we layer in salaries, operating expenses, capital equipment needs, and finally, sales and cost of sales metrics. This structured process allows us to determine the amount of funding required to navigate early-stage negative cash flow.
A clear breakeven point is identified, with the goal of achieving cash independence. In most cases, we expect a startup to reach self-sufficiency within 24 months of initial funding, and a growth company to maintain a positive cash balance until the next round of funding, if needed.
Construct financing options
All 24-month resource data seamlessly transfers into the financial statements. Debt and equity options are then selected and configured, allowing us to analyze the projected cash balance month by month over the next two years. From there, the business model can be refined to achieve cash independence within this timeframe.
This financial data serves as the foundation for all future financial statements and valuation assessments.
Prepare the 5-year financials
The first two years of the five-year financial projections have now been built using a bottom-up approach. For years three through five, we apply percentage-based growth rates to revenue, expenses, and cost of goods sold (COGS) to develop a top-down forecast that remains both strategic and credible.
The balance sheet, however, will require some manual adjustments to reasonably estimate future assets and liabilities.
Review planning material
We have a metrics section which will help position the company for growth and present the company to other stakeholders.
The equity planning section is particularily important as it helps visualize the milestones the company needs to accomplish prior to moving into the next stage of ccapital raise. It will also help determine the amount of capital to raise for successive rounds of financing to help fuel the growth of the company. This gives us some targets to hit as a team and paints what is possible in the future.
Prepare the corporate valuation
The corporate valuation section starts with the 5-year financials and adds another 5 years of growth to configure a 10 year forecast. Ten different valuation techniques are applied to the resulting financial forecast. A selection of percentages are applied to the different valuation methods, and a resulting overall valuation is determined. This section of the model is comprised of 23 worksheets of valuation calculations and data. There are some helps along the way to explain how an overall valuation profile is established.
