Frequently asked questions (FAQs)

Building a financial forecast

Creating forecasts can be extremely useful, even if things change rapidly or there is uncertainty about the future. Understanding the financial impact of various outcomes and decisions can improve chances of success. Financial forecasting helps to:
  • Get funded: investors, lenders, and potential acquirers want forecasts to evaluate their investment, anchor valuation and align expectations.
  • Manage cash: make sure you don’t run out of money tomorrow and when/if you’ll need to raise more.
  • Set goals: forecasts can align everyone on concrete goals and create accountability. Budgeting encourages thinking through the details on how to reach goals.
  • Allocate spending: let people on your team know what each can spend while insuring you can cover all needed expenses.
  • Plan ahead: hiring, office space, inventory require lead time. Knowing when you need (or can afford) them helps you start them at the right time.
Estimates (commony called "assumptions") are used to build a forecast. Reasonable estimates are critical to building a financial forecast that is credible, attainable and useful. Ideally, selecting assumptions would be based on lots of historical data for every component of each forecast item (revenue drivers, expense items, etc.). The more uncertain you are about each assumption, the broader range of values you should try to get a sense of the possible outcomes. Sometimes historical data may be limited / non-existent or the company or market is growing and changing rapidly. In this case, industry benchmarks (or norms) are a great way to select reasonable assumptions based on limited data. We’ve compiled benchmarks from a broad group of SaaS companies. Learn more about how we help with assumptions.
Yes. Creating different versions (“senarios”) of your forecast is very helpful when growth is volatile or uncertain. Its common to use scenarios to see potential outcomes. Three scenarios are common: a base case (your best estimate), an upside case (things go really well) and a downside case (things go poorly). You can start with your base case forecast then simply create copies and adjust the relevant items (revenue growth, expenses) to build your scenarios quickly and efficiently.
There will be small expenses you may miss, don’t foresee or aren’t worth trying to estimate in detail. Unexpected costs almost always arise. The expense cushion is a practical approach to account for these costs. It is forecasted as a percentage of the operating expenses (excluding cost of sales).
EBITDA: Earnings Before Interest, Taxes, Depreciation, Amortization. Generally, EBITDA equals revenue less expenses (excluding tax, interest, depreciation and amortization). EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. Its primary goal is to assess the profitability of a company's normal operations. EBITDA is not the same as cash flow.
Cash flow is simply the amount of cash moving into and out of a company. Cash is critical to to pay expenses and keep the company operating and growing. It becomes important when a company’s books are kept under a common accounting method called “accrual accounting.” This can cause some financials (revenue, expenses, profits) to not reflect actual cash transactions. Under this method it is important to look at cash flow which can be found on the cash flow statement (provided in our Try It example). This statement helps bridge differences between the accounting figures and actual cash flow.
Cash management, also called "treasury" in larger organizations, is critical to a company's financial stability. Good cash management goes beyond making sure the company has enough cash on hand at any given time (usually recommended as three months of expenses). These are three areas to improve your cash management:
  • Managing collections: try to increase your collection rates and reduce the collection time.
  • Defer outflows: increase days payable or credit terms with vendors, set up a revolving credit facility with a bank
  • Investments: have your money work for you by investing excess cash in low-risk, short-term investment vehicles
A financial plan or forecast is frequently requested by potential financing sources including investors, lenders or potential acquirers. The plan is often discussed and serves many purposes including:
  • Evaluate an investment: A financial plan is useful for investors or potential acquirers to understand the economics of your business and how you think it will grow. They may have a different view but usually use your plan as an important starting point.
  • Anchor valuation: Companies are often valued based on their expected financial performance. A five-year financial plan is the basis of most standard methods for valuing a company. We discuss valuation later in the tutorial.
  • Align expectations: A financial plan can become a set of expectations for investors or lenders and a concrete yardstick to measure the company’s performance over time.

Valuing a company

Companies are frequently valued on a comparables (“comps”) approach. It has three steps. First, similar companies with a market value (such as listed on a public stock exchange) are selected. Second, their market value is divided by an appropriate financial metric (revenue, EBITDA, cash flow) to create a ratio called a 'multiple'. We further discuss selecting multiples below. Finally, the appropriate multiple is applied to the corresponding metric of the target company (metric x multiple = valuation). Common types of multiples to value non-public companies are revenue, EBITDA, and unlevered free cash flow. The appropriate multiple type depends on the company's financials and its peer group. Other common valuation methods include discounted cash flow (DCF), option pricing model (OPM), and economic value added. These are generally used on large public companies or are more theoretical in nature so we won’t focus on them.
There is rarely a perfect comparable so identifying a group of companies with similar characteristics is common. Usually your competitors or companies in the same industry is a good place to start. If this group is very large, narrow down to those with similar financial characteristics like revenue growth or profitability (EBITDA margin). If your industry is new or their aren't public competitors you can look at companies outside your industry but with congruent operating characteristics (customer base, business model) or financial characteristics.
Bessemer Ventures keeps an up-to-date list of valuation multiples ("Market Comps") for many public SaaS companies. Valuation is usually done on a forward looking basis so we suggest using the 2016 multiples for Revenue, EBITDA, and FCF (free cash flow). Choose the most appropriate peers from the list and then enter a range into the Valuation assumptions section of your forecast.

See market comps >>

Enterprise Value (EV) is total value of a company and incorporates all parts of the capital structure. Simply it represents the value a acquirer would need to pay to buy the company. Equity value is the portion of the company’s value the shareholders own. Equity value = EV - Debt + cash. If someone bought the company for the enterprise value, the debt would be repaid (using some of the company’s cash), then the equity holders would get the rest. Debt less cash is frequently referred to as “net debt.” Market cap is another name for equity value but usually in the context of a public company. It is calculated by multiplying the number of shares outstanding by the stock price.
Better forecasting ahead