12. Insights from Projections

Overview

In this lesson, we reveal some initial insights from the financial model we have built for TrackerTime.

To explore more Kubicle data literacy subjects, please refer to our full library.

Summary

  1. Lesson Goal (00:04)

    The goal of this lesson is to analyze the implications of the financial projections for TrackerTime.

  2. Revenue and EBIT Growth (00:17)

    Revenue growth is the most important Key Performance Indicator, or KPI, for a startup. This is because revenue growth indicates demand for the company’s product or service. Profits usually lag behind revenue growth, as the company spends their early revenues on growing the company. Startups typically need to cash to fund this growth until they can become sustainably profitable.

    In our case, revenue for TrackerTime is projected to grow steadily in the coming years. Profits do not increase for the first few years, however the company does not make significant losses in the first few years, which puts them in a better position than many startups.

  3. Revenue by Customer Type (01:20)

    Software as a Service companies have both new and existing customers each year. Existing customers are significantly more profitable than new customers. As the company grows, the number of existing customers each year should grow, leading to rapid expansion in the company’s revenue and profitability. This assumes that the company can maintain a reasonably low churn rate. A higher churn rate would lead to more revenue coming from new customers, and would reduce profitability.

  4. Analyzing the Cash Balance (02:09)

    Investments in a company, such as the venture capital investment in our example, provide a large boost to the company’s cash balance. For a loss-making startup, this cash injection can help them maintain a positive cash balance until the business becomes profitable. In our case, TrackerTime is not making significant losses, and the investment appears to just create a large cash pile for the company. This raises questions over whether TrackerTime really needs the venture capital investment.

Transcript

With our projections now complete, let's take a step back from our model in this lesson and analyze the implications of our projections, starting with a look at revenue and EBIT for TrackerTime.

For startups, top-line revenue growth, shown here in white, is probably the most important key progress indicator or KPI, because it indicates that a big market exists for the products and/or services that the startup is offering. Typically for startups, profits will lag revenue because the company will be spending a lot more of marketing dollars acquiring new customers in the early years. This is the case for 2016 to 2018, whereby revenue is growing but profits are not.

Startups typically need cash to fund growth in this time period until they become sustainably profitable. In this scenario, TrackerTime is actually doing very well by simply keeping EBIT positive for many of these years. It shows that they are not burning any cash in funding this pretty aggressive growth. It's still worth asking ourselves, however, what's happening in 2019 when profits jump considerably from 1 million to 6.6? Well, to understand this, let's take a look at annual revenue by customer type.

And in this chart, I show annual revenue for recurring customers in green and for new customers in white.

As we know, the profitability of existing customers is much higher than that for new customers. In 2019, the revenue from recurring customers moves ahead of the running costs of the business, and suddenly the business becomes a profit machine. As long as TrackerTime remains adept at keeping customers and has relatively low churn, this business will become very profitable. However, if churn occurs, the company will have to spend more on marketing to reach the same revenue target, and the white bar will contribute more of total revenue. Let's see how this reflects itself in the cash balance of the company. As you can see, the proposed 20 million injection of cash in 2017 boosts the cash balance almost 10 times, but subsequently we don't start generating more cash really until 2019. Most of the time, companies will raise this 20 million to fund losses as a company grows. But from our projections, it doesn't appear TrackerTime will need to support losses at a large scale. Perhaps TrackerTime doesn't actually need to raise the money at all. Let's put this question to TrackerTime's CEO in the next lesson.