Financial Forecasting – ICT Example

Case Description

Horrible bosses had been the hottest topic at the ever more frequent after work beers over the last 12 months. All five were software engineers in their mid-30s that felt that they were losing control over their professional careers with high staff turnover, impossible deadlines and being bogged down by meaningless detailed work anyone straight out of school could start out with to learn the trade. They were all destined for greater things but unfortunately no one of their superiors at their respective employer seemed to realize it. Over the last few months, they had started to compete with each other who would come up with the best start-up idea. The winner got free beers. One idea from a month ago had stuck with the group and after some more evenings full of discussions, they decided to start a company to offer a software solution for freelancers and small businesses to help organize their workflow. They would integrate their and other platform independent software solutions with different hardware devices to cater to all kinds of industry professionals and cut out the need for the usual service providers overcharging for their subpar service levels. Unfortunately, they would not compete with current employers.

They all had extensive experience in software development and thought that they had identified an industry niche with great potential, good scalability and the opportunity to add features to the platform over time. With a sleek design and a unique and highly efficient onboarding process, they believed that they could rapidly penetrate an untapped market. With more users on the platform, they would enhance the growth profile of the company and expand internationally. They expected that it would take 2 years until launch and while working on the product development they would quit their jobs in 6 months and start the company in 1 years’ time. Based on what they knew about industry needs and client workflows, they targeted 2% of all companies with 10 employees or less. This would translate into 6% of the total addressable market with 10 000 clients in Switzerland, 60 000 clients in Germany and 6000 in Austria after 5 years in business. The price per subscription would be 1200 CHF or 100 CHF per month which seemed more than justified given the huge benefits and efficiency gains every client would get.

With a prototype ready in 1 year and an investor presentation to show the potential of the business idea, they would try find to investors to hire the needed staff and rent suitable offices in a good and fashionable location. They targeted having a total of 40 software engineers, 10 customer support staff and 10 administrative staff to rapidly gain scale and scare off any possible competitors. Half of the new staff would be added in the first year of business and the other half in the second year. Only customer support would increase with the customer base. They estimated the total average cost per software engineer to 150 000 CHF, 100 000 CHF per head on average in customer support and 90 000 CHF per head for admin staff. Now they needed to find out how much investor capital they would need to realize this project.

The special issue with this business idea is the highly fixed cost base and scalable business model where it costs very little to add one new client to the platform. In fact, the more people that would use the higher the value of the platform service as clients could communicate with another to solve business related problems in their respective communities. To quickly gain market share and enjoy a first mover advantage, the founders needed to gain access to investors at an early stage. They would need to show proof of concept, a good presentation with great presentation skills to convince investors of their commitment and some positive client testimonials combined with operational milestones on how to reach their longer-term target. With a high fixed cost base, the break-even point in time will be extremely important to assess as the cash burn is disproportional in the development phase compared to a more traditional manufacturing or customer service model.

How to use the case

Download the example spreadsheet in “Attachments” below to see how the case is represented as a financial forecast. Then. for a quick overview of how the financial forecast has been built, watch this film:

Note: The example sheet is built in version 4.00 of the tool and may contain some bugs that have since been fixed. You can download the latest blank version of the spreadsheet and get more instructions for the tool by going to the Financial Forecasting Template learning nugget.