• 048 05/10/2016
    Q: "I have a case study interview next Monday; I will be asked to calculate the cash flows necessary to meet a certain IRR hurdle rate. Can you please provide me with instructions as to how to do so – cant seem to find a succinct answer online!"

    A: The math is fortunately pretty straightforward for this calculation. I believe what throws people off is that an IRR is often explained as the rate that makes the net present value of all cash flows equal to zero. On account of this definition people think about working backwards from the cash flows received. But it can also be thought of as the annualized effective compounded return rate. This language makes it easier to think about growing an investment (cash outflow) by an annual rate of return to achieve an outcome. 

    In other words, if you are provided an IRR of 20% and asked to determine the proceeds achieved in year 5, the result is simple: Your investment will grow by 20% for 5 years.

    (1 + 20%)(1 + 20%)(1 + 20%)(1 + 20%)(1 + 20%)

    or...

    (1 + 20%)^5

    This works out to 2.49. So you can take the dollars invested, and multiply by 2.49 to determine the proceeds required to achieve an IRR of 20% over 5 years.

    Assuming you invested X dollars, the proceeds required to achieve an IRR of 20% over 5 years is as follows: 

    X*(1 + 20%)^5

    Please see video for additional detail:


    In Excel, you can also use the =YEARFRAC() function to automatically adjust this calculation for different dates. The formula is as follows:

    =X*(1 + IRR)^YEARFRAC(date1,date2)

    Where X is the investment made, IRR is the desired IRR, "date1" is the investment date and "date2" is the exit date.

    Note: Keep in mind all of this is relevant when you assume that all proceeds are realized in the exit year. It is most relevant to an LBO scenario assuming no dividends. 

    This video also includes a calculation to permit showing multiple IRRs along the same row (another question I receive frequently). This only works if you have one cash outflow (the investment) and one cash inflow (all proceeds received in the same period). 

    I will upload the calculation mentioned in the video momentarily.

    The Excel template referenced in the video is available HERE.
 



  • 047 05/10/2016
    I have received this question via email a few times, so I thought it might be helpful to write a short post on this topic. To take an average and exclude all zeros in a selection use the following formula:

    =AVERAGEIF(range,"<>0")

    Where "range" in the formula above represents the range of cells selected for the calculation. As an example, if you were selecting cells A1, A2, A3 and A4, the formula would appear as follows: =AVERAGEIF(A1:A4,"<>0")

    I have included a short video should it be helpful:

 



  • 046 04/24/2016

    The Business Development video series on this website uses real data to build a financial model for ASM, which effectively makes the series a startup financial model tutorial. When I launched this website in July of 2013, my professional experience analyzing companies was limited to large public or private businesses. I did not have any prior exposure to startups, but that started to change rapidly as I began contemplating this project. Since ASM went live, I have found myself interacting with entrepreneurs and VC investors more frequently. It's been a terrific experience to gain this new perspective.

    To share the story I am including information detailing the process of building an online following. I still recall uploading the first videos and Excel templates thinking that the website would take off immediately. I was terribly wrong as you can see by the first year of Google Analytics data captured in the image below.

    ASM Google Analytics Year One


    In the first year I had a total of ~8,000 visits, which was, needless to say, frustrating. But today the website generates that much traffic in a month, and has developed a user base across the globe. The image that follows, also taken from Google Analytics, shows how ASM's reach has expanded.


    ASM Google Analytics Geo View


    How did we pull it off? The videos provide some of the resources and strategies employed. This is not the focus of the material, but I believe it helps to have context. The time required to gain traction online is relevant as you look to the future and start to develop financial projections.

    I also believe it is telling that the first financial models I developed for ASM were not at all useful. My approach was off, and at the time I didn’t really know what my objective was. Beyond providing financial modeling instruction, there was no business plan. This was new territory, and I point out why the first models were not useful in an introductory video.

    By the time I started developing useful models for this video series I had 43 months of expense data to work with. The video-driven instruction will demonstrate how this data was collected and organized. As an example, the data is first provided in the format visible below:


    ASM Startup Expenses


    With the information labeled on the appropriate worksheets, the video instruction continues by explaining how formulas can be used to organize and track the data by period and expense category:


    ASM Startup Expenses


    The objective, of course, is to establish a revenue model that will cover the cost of maintaining ASimpleModel.com, and permit investing greater resources into generating more content and developing better technology. In March of 2016 we relaunched the website with this objective in mind. Whereas the old website simply provided the means to share content, the new website incorporated the following features:

    Membership Profiles

    Quizzing Platform

    Content Paywall

    The decision to incorporate a quizzing platform was influenced by several texts I had read on the science of effective learning practices. Retrieving knowledge from memory is essential to the learning process (click HERE for more information about the science of learning), and my hope was that by charging primarily for quizzing it would be possible to keep a lot of the instructional content available free of charge. But putting some content behind the paywall also encourages users to explore the quizzing platform, so for the time being as new content is added to the website it will be placed behind the paywall. We are, however, attempting to keep prices low and currently charge $3 per month (cancel anytime). It’s slightly cheaper if you subscribe to the annual plan, and the website benefits substantially from this plan over the monthly plan (the video series explains why).

    What’s exciting about this is that we can start incorporating a revenue model in our financial projections. I hope you will find it sufficiently intriguing and subscribe to learn more about this process. This video series is essentially a live entrepreneurial experiment. Whether it succeeds or fails you will get to witness it via the financial models and video instruction uploaded. It should be interesting.

     

 




 



Models are:
 
A) really boring
B) pretty sweet
C) super important
D) somewhat easy
E) kind of hard
F) fun
G) all of the above

 

 


*Answers a, b, c, d, e, f and g are all correct.