Interview with Saurabh Lahoti, Director Finance Services at Ennovent: Financial Modeling for early-stage low-income market focused enterprises
Developing a strong financial model is a key milestone entrepreneurs need to achieve when exploring funding opportunities to take their novel ideas to market or to grow operations.
Jumping straight to creating an excel ‘financials’ sheet, only focusing on impact or isolating revenue are some of the common errors made by entrepreneurs when developing their financial model, especially when engaging with investors.
Recognizing this, Ennovent recently hosted its inaugural Startup Services workshop entitled ‘Get your Financial Model Right’. The workshop uniquely provided entrepreneurs with the opportunity to interact one-on-one with experienced financial mentors – including Joydeep Mukherji, former CFO, Metlife India, Josh Engel, former COO at Anavo Global and Anurag Gupta, Operations Director at VENN Consulting – and work through their financial models.
Saurabh Lahoti, Director – Finance Services at Ennovent was also a mentor at the workshop. We recently spoke with Saurabh to gain some additional insights on financial modeling for early-stage enterprises, in the context of the ‘Get your Financial Model Right’ workshop.
Is developing a financial model for a business focused at low-income markets any different than one a mainstream entrepreneur would be required to create?
Fundamentally, developing a financial model for a business focused at the Bottom of the Pyramid (BoP) is not different from a mainstream model at all. However, since the enterprise targets people in low-income markets, the financial model needs to focus on delivering a low-cost model. For a healthcare company that provides primary care services for example, they would need to highlight cost savings made in terms of salaries and how the company is asset light as well as savings made in operational expenditures.
The financial model also needs to ideally talk about the social impact created by the enterprise. Ideally, the financial model should quantify in a dollar figure the impact created on people through a certain level of sales. By calculating this social return on investment, entrepreneurs add another layer of value proposition for the investor to evaluate.
What are the key ratios or concepts an entrepreneur should keep in mind when developing their financial model?
From a profitability perspective, the model needs to highlight exactly how the enterprise will run profitably. Metrices such as Gross Margins, Net Profit Margins and EBIDTA (earnings before interest, tax, depreciation and amortization) margins need to be included.
From the liquidity perspective, ratios that convey the pace at which the company can generate cash and revenue are important. Here, matrices such as account receivable turnover, inventory turnover and working capital requirement are the key things investors look out for.
When pitching a financial model to an investor should the entrepreneur focus on the profits or the impact and why?
In my view the correct place to be talking about the impact potential is in the business plan. From an investor perspective, I will always primarily be interested to know the profitability of your organization regardless of what sector of society it caters to.
Firstly, investors like to see that the organization is generating an acceptable profit margin. After this, if the enterprise can evaluate the social return on investment then that would also be an interesting figure to have. At the end of the day, the financial model is basically a process that explains your operations in financial terms and needs to strongly reflect the business model you have in place.
If there was one piece of advice you could give an entrepreneur presenting their financial model what would it be and why?
A key point that entrepreneurs often miss evaluating in their financial models is unit economics. Given that most of the time the ideas are innovative and there are no other precedent models for comparison, it is essential for the entrepreneur to reflect how the enterprise will make money in the long-term. Detailed unit economics where direct and indirect costs are bifurcated is important so that the investor can analyse whether the enterprise is able to generate enough revenue or cash to cover the indirect costs of the organization.
Another piece of advice I would give is to strongly link the business plan to the financial plan. All the activities and strategies proposed in the business plan must be reflected in the financial model as well and the entrepreneur needs to have a good understanding of their revenue model, who the customer is and how they plan on selling to them.
From a financial perspective, what are your thoughts on the value mentors can add to a startup focused at low-income markets?
One of the most important things that a mentor is able to assist with is thinking strategically through the business plan and value proposition. Often entrepreneurs are very excited about their innovations and the key thing these enterprises lack is the step by step thinking and process formation on how the enterprise will work with various stakeholders, how these stakeholders will be incentivized etc. Beyond connecting to investors what mentors really bring to the table are their experienced insights on the evaluation of the complete business model.
Ennovent’s Startup Services enables entrepreneurs to interact with a global community of investors, mentors and experts to develop and refine their business models through cost-effective and easily accessible mentor engagements. Join the Ennovent Network now to connect with mentors and accelerate innovations for sustainability.