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Wisdom network financial forecast model and shareholder value

1m subscribers acquired in 2 years generates annual revenue of $100m yielding $70m in profit and creating more than $700m (Telco P/E of 13) to $1.2b (Internet P/E of 25) in shareholder value. 100k subscribers acquired over 2 years generates 10m in revenue yielding $7m in profit and creating more than $70m (Telco P/E of 13) to $120m (Internet P/E of 25) in shareholder value.

Wisdom Network Assumptions

The template provides a base case for a Wisdom Network. It calculates our view of the revenue and shareholder value derived from 1m customers. The model will forecast outcomes based on 5 types of revenue, 4 geographies (or communities) and assumptions regarding new customer activity, customer base, subscriptions, devices sold with each subscription.

We assume an Average Revenue per User (ARPU) of $100 per user per annum. Users can pay $US600 per year for telecommunications services. Telewisdom is likely to have a greater consumer value proposition than telecommunications. The model also assumes 5 six monthly periods. The first six months customises and launches the wisdom network. For each of the subsequent 4 six monthly periods, 250,000 customers are acquired.

wisdom_network_financial_model_six_month_periods

Creating shareholder value of $700m in 2 years

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wisdom_network_financial_model_six_month_periods

Private version

NOTE: We are keen to share our content, but some is private. Editable versions and more commercial material are only available to clients, potential clients, partners and evangelists. Please introduce yourself. Your email address should allow us to determine who you are (when you request one of our documents).

For due diligence purposes, please click here to request access to the Wisdom Networks financial model. You can then select "File / Make a Copy" to make a copy of your own to modify and explore different scenarios. This particular document will be shared with people doing due diligence on deployment of a wisdom network. We also build custom models for third parties on a project or hourly. The template has application beyond software industry and been used in many other industries. This includes mining.

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Instructions

Introduction

Over the years, we have developed an Excel spreadsheet which provides a financial forecast. This is integrated with a business plan/Information memorandum (word document), Investor presentation (powerpoint) and a Excel worksheet to manage the transaction process. I plan to publish these other elements. This financial forecast model is the easiest to publish and share. However, like all models it must be customised to your specific and unique requirements.

Most of my financial models have been built for high growth technology companies, specifically enterprise software. As a result, the initial structure of the models is particularly useful for high growth companies.

Financial modeling is a specialist task. A template is useless unless the skills are available to customise it for a specific need. The skills required include Microsoft Excel, a knowledge of accounting standards and being able to communicate the business model by using a financial model. I was reluctant to provide this model, but it does represent a "start". Even with the instructions below, a quality outcome is not assured.

This particular model was originally derived on projects for enterprise software and internet companies. It is now specifically modified for Wisdom Networks. It can, however, be modified for different jurisdictions and businesses quite quickly by simply renaming 5 revenue types, 4 geographies and a currency field on the assumptions sheet. The underlying assumption is that revenue is derived by multiplying price (initial and/or recurring) by quantity in each of the assumed geographic areas. I will update the model when new projects result in improvements. If you improve the spreadsheet, I would also welcome the opportunity to include those improvements here.

Worksheet - Assumptions

The "Assumptions" page in the model allows many different aspects of the model to be changed quickly. This includes time periods, product/business lines (five allowed for), gross profit margin of each product/business line.

Company name

Please enter the Company name in Cell A1 on the Assumptions worksheet. It will be reproduced throughout the model.

Time period

The model is set up for five time periods. These are typically calendar or financial years. Please enter the time periods. The usual approach is to forecast for the next five years. Although, I generally prefer to forecast next five half-years. This should be integrated with the strategic plan which identifies the key tactics and objectives of each six month period.

Revenue

The model allows for five revenue categories. Please enter the names that represent the key products or business units of the business. These will need to be driven by units of business activity. Units sold. For each revenue category, revenue is divided between non-recurring revenue and recurring revenue. Recurring revenue is the annual revenue expected from the customer. Recurring revenue is calculated from a customer base which is the sum of sales through the life of the financial model. The direct cost of recurring and non-recurring revenue is also required as an assumption.

Operating expense

The model is set up for five categories of operating expense. Please enter the most suitable. In the past, I have often used "sales and marketing", "research and development", "Management and admin" and "strategic opportunities". Strategy often referred to those expenses that an investor was being asked to fund.

Proportion of new customer activity

This field determine the proportion of sales during the time period that will be recorded as revenue for that period. For example, if you sell a widget and it is invoiced immediately, then 100% of business activity should be recorded as revenue. If a large sale is sold and revenue is recognised over 18 months, then 66% the revenue should be recognised for the period. This area will need to be customised. I recommend you set it to 100%.

Worksheet - Business activity

The model is driven by business activity. Specifically, the number of units sold in each revenue line. Revenue will be caclulated by multiplying the unit by the assumed price.

Please go through the "Business activity" worksheet and enter the number of units sold in each time period.

Worksheet - Operating and capital expenditure

In the assumptions spreadsheet, you were required to enter the operating expense categories. The details concerning the expenditure should be entered on this worksheet.

It is often difficult to outline specific marketing costs with any credibility. It may be prudent to research the industry the business is in and determine the industry average. Enter marketing expense as a formula based upon revenue. The same may be done for research and development.

Worksheet - Summary historical

This worksheet contains the historical information for the business. Please enter the details. You may need to adjust the graphs and other tables, if the model does not display all historical information.

Worksheet - Graphical summary

The "graphical summary" worksheet contains summary graphs of the key information in the financial model. These can be dynamically linked using Microsoft's object linking and embedding feature to the Information Memorandum/Business plan and the Investor presentation. As the model changes, related information also changes.

Worksheet - Summary financial

This worksheet provides a single A4 page summary of the financial model. It is designed to be included in the business plan.

Worksheet - Mezzanine and IPO analysis

The financial model forecasts the potential performance of the business. However, the financial forecast may not be the primary purpose of the model. The primary purpose of the model is to estimate the potential value of the business in the future and to estimate the capital required from investors to achieve that value. An investor wants to know what their funds will be used for and what the outcome will be.

If business value is created, the investor and promoter of the investment opportunity may then negotiate the terms and valuation of a potential investment. The investment may, ofcourse, be structured to share the business value, or lack of it, to ensure shareholder value is fairly divided between investor, promoter, founder and management team.

Graphical summary

Summary graphs are contained on the "Graphical summary" worksheet. These can be cut and paste into presentations and documents. We use these graphs in our Wisdom Networks: Business model, financial forecast and shareholder value presentation.

Financial summary (2 pages)

A summary of all key activity, financial and investor information is contained on this worksheet. When printed, it is 2 pages long. This is a good summary for current and prospective stakeholders.