In early 2013, I started a financial modeling exercise that, unbeknownst to me, would considerably strengthen my understanding of rBlock’s strategy, despite having run the Company for years. To appreciate just how valuable it was, consider the true meaning of “strategy” as described on the first page of All Strategy Is Local.
My exercise involved modeling the “unit economics” of our business – a term I was already using a year ago when I stumbled upon it in the second bullet of this blog entry by Andy Sack. Seeing the term in print added to the merit of my exercise. Now I’ll describe three aspects of it – integration, presentation and automation.
First, I integrated the various spreadsheets I had earlier built for rBlock and that covered many facets of our company and business:
- Invested Amounts
- Milestone and Valuation Timelines
- Stock Option Grants
- Debt and Interest Schedules
- Capitalization Table
- Market Sizes
- Revenue Projection
- Operating Budget
- Cash Flow Projection
Each spreadsheet was in a separate excel workbook. So I put them all into separate tabs of a single workbook. Then, since they were highly inter-dependent (through their impacts on cash flow), I used excel formulas to link them. This removed multiple instances of the same hard-input value, considered taboo when building financing or M&A models.
Then, I re-designed the model’s structure to make its information as accessible and meaningful as possible. The front tabs now make up the analysis. They include our consolidated operating and financial performance, go-to-market strategy alternatives in the form of a base case and variants of it, tables of all financial and market inputs as well as cost/growth/timing assumptions, and finally, tables revealing the sensitivity of every key performance indicator to one or more model inputs. The middle tabs show monthly outputs and cash flows. They’re not for presentation, but they’re critical to making sure that the consolidated results at the front are always accurate. The back tabs are the glossary and notes which explain and source everything.
In parallel, I automated the model by iteratively testing and correcting its formulas until it produced results that were entirely intuitive. Automation was the most important aspect because it sharpened my understanding of every internal and external number that affects our business. In turn, this deepened my understanding of our strategy. Today the model is a dynamic budgeting, decision-making and forecasting tool that’s tailored to our strategy.
Upon completing it, I named it a Unit Economics Model (UEM) and wrote this one-pager to make the case for why every organization should build its own UEM.