Taylor Davidson on Building an Early-Stage SaaS Financial Model

[00:00:00] Taylor Davidson: Building out a tool that applies across all different situations is never an easy thing to do, and I don’t think it’s ever possible to make something that’s perfectly usable across every different business model. What I try to do is build on, like, layers of, like, progressive complexity 

[00:00:37] Joe Michalowski: Hello, and welcome to another episode of The Role Forward Podcast. My name is Joe Michalowski and this episode is brought to you by Mosaic, a strategic finance platform that transforms the way business gets done today, my guest is Taylor Davidson, founder of Foresight, a company that offers a big library of financial model templates for entrepreneurs.

[00:00:52] Taylor, thank you so much for joining me today.

[00:00:55] Taylor Davidson: Thank you for inviting me.

[00:00:57] Joe Michalowski: Awesome. So, before we get into to main topic, which, you know, if you offer library financial models, it should be no surprise that we were gonna talk about financial modeling, would love to get the quick background on you, what your BA, job history is and, and how you ended up starting Foresight.

Taylor Davidson Introduction

[00:01:11] Taylor Davidson: Sure. So, I’ve been building models for companies for nearly 25 years now, kind of started in private equity and then worked first, worked in startups, in business school and did a lot of other things, worked in venture capital for five years. I’ve run Foresight full-time for the past five years

[00:01:29] and basically Foresight’s, you know, what I think is like a, like a boutique, like, product-and-services company where I build actual kind of product for models, for people to kind of use and download and deploy for their businesses and then I also provide help and support and people kind of adjusting it for what they need.

[00:01:44] Joe Michalowski: Cool. Well, I think, you know, we talked a little bit about this right ahead of time. It’s that, you know, we’ve had a lot of, like, operational finance people on in the past, but financial modeling’s such a big topic for everyone we have on obviously, and just really excited to get your perspective because you’ve been doing this so long and, yeah,

[00:02:01] how you see about, see things going for the people you work with? So, there are all kinds of industries and verticals available on Foresight, but we’re gonna focus on SaaS because that is what we focus on in this app or in this podcast, and would love to set the stage by just talking about what the target audience is for your SaaS financial model template that’s available on Foresight.

[00:02:21] Taylor Davidson: So, the majority of entrepreneurs that I work with are typically people who have started a company, typically working with founders, typically companies that haven’t really made their first finance hire or more have a more junior hire, typically, like, the CFO roles, you know, know how to even, like, even typically a part-time CFO, typically like the one of the executives or head of ops or some other roles kind of fulfill in that kind of core function

[00:02:41] and they don’t really have, like, a finance team and capabilities kind of built out yet. So, that typically falls from, like, pre-seed through seed rounds up into A rounds as they’re kind of making that transition to bring people on.

[00:02:53] Joe Michalowski: Gotcha. What are, I don’t know what the, the Foresight library looked like. Maybe this was like one of the first models you built? I know there are a lot of them on there now, but what was kind of the impetus for making this template? What were pain points you were hearing from entrepreneurs?

[00:03:07] Like, why, why did you decide to offer this? And, what do you think the value is that, that people get from, from it when they download it?

[00:03:13] Taylor Davidson: So, I started building financial models for friends, for companies, doing consulting services back in, like, 2004, 2005 era and I did a bunch of, like, consulting projects, building models, all custom models for people and at a certain point I got tired of doing that basically

[00:03:30] and I kept doing the same thing repeatedly over and over and over, and a friend of mine said, “Hey, can you help me on my company?” And he didn’t have any money to kind of pay. He was kinda going through an accelerator, and I said, “Yeah, and you know what, I’ll use this as an experience to create a productizable approach towards building a model that can be a broader kind of share,”

[00:03:49] and use that experience to kind of then use the past experience and that specific experience with his company to build, like, a template and kind of first release that is, like, a downloadable thing, like, 2008, 2009 era, I guess. And then, so, it’s evolving, kind of building on, building on top of that into releasing, into actually charging for it,

[00:04:05] and then building up more kind of verticalized approaches or generalized approaches towards doing models, kind of thereafter. And so, you know, for me, it’s always been about building models is a way to provide some kind of structure towards kind of thinking about, understanding the business.

[00:04:21] Taylor Davidson: Like, for me, a model is not, you know, this is not, you know, the future. It is an analytical tool to think about the future. And so, the pain points is basically about, like, understanding kind of what structure to use, how to think about all these different kind of components. It’s really easy at caught in the mess of, like, all these different things that people talk about in terms of metrics of those things

[00:04:40] and it can be hard to kind of boil it down to the things that matter for certain stages of your business. And so, the goal has been, always provide, like, clarity around that and provide some standardized structure and repeatable kind of processes to kind of build models around that you can, you know, leverage without having to kinda learn everything on your own.

[00:04:58] Joe Michalowski: I think that’s such a, such an important point, you know, I’ve talked to, you know, a handful of, of finance leaders and in one instance had the VP of Finance from Fivetran, Kalor Lewis on the podcast and talked to him for an article for the website and I remember he was talking about being the first finance hire at Fivetran and kind of coming in and not having that structure that you’re talking about.

[00:05:20] So, I love this idea of using the financial model as kind of like the structural backbone of, you know, all of the metrics and the things that you need to look at in the business, but I’m curious, like, is there, when you’re talking to these entrepreneurs, like, is, is there a set of people who don’t really see the value in a financial model?

[00:05:38] Like, it, it’s really easy when you and I are talking about it and we’re saying like, yeah, you know, put it in and, like, you have the structure, but I guess I’m trying to think of the other side of the coin where it’s people that are running their business without one, like, what do you run into without, you know, something as early as possible?

[00:05:52] What are some of the problems you have?

Challenges of Early-Stage SaaS Financial Modeling

[00:05:54] Taylor Davidson: So, there’s a couple of areas there. So, like, first off, like, think about the core use of the model usually is, right? So, usually, usually, the model is built for, like, actually kind of a plan and operate, manage the business. The other one is also probably used to, like, 

[00:06:06] communicate something externally in terms of, like, a fundraising process.

[00:06:09] So, lots of times, people don’t know models unless somebody else asks them to, like, in general, in general, we don’t do hard work unless someone else forces us to do so. 

[00:06:18] And so, oftentimes, you don’t build, like, an actual 

[00:06:20] kind of model, kind of fully protective business, ’cause you’re too busy running the business,

[00:06:23] you’re too busy dealing with the operational stuff, managing cash. You’re doing all those sorts of stuff. And so, it’s not until, like, a, you have to actually kind of forecast the future of the business and tell a, a story and create some financials that backs up the narrative of your growth, usually convince somebody else to what the future of the business is like an investor.

[00:06:41] And so, that’s often, like, the point at which somebody says, “Okay, fine. I need to create an actual kind of forecast against that,” it’s common to be running a company and not even have, like, a budget for the next 6 months or 12 months, and it makes sense, and part of the point is, like, a model encompasses a wide variety of things, right?

[00:06:56] So, the way I like to think about it is they’re components that are necessary, they’re valuable for different stages, right? C-stage company, early-stage, creating an expense budget is always important. You should 

[00:07:06] always have a budget to build, to manage your expenses and be able to lay out a strategy in terms of how you’re gonna spend your money.

[00:07:12] Partially because, one, you have to do, have to manage cash, but also, two, it’s, it’s like, who you’re gonna hire, who you’re gonna bring on board, where you spend money on, it’s an indication of your strategy as well. You’re actually thinking about, like, how you’re gonna manage business and so, that’s an important thing for every stage.

[00:07:26] Now, forecasting revenues depends on stage. I see just as much of a fault as in terms of a, of a company not forecasting revenues, not having a model is actually having too much of a model, doesn’t fit this stage of your business. It’s really easy to build something really complex, goes at all those sorts of things that doesn’t actually, like, reflect kind of where your, where the company’s at.

[00:07:48] You don’t need a really detail-complicated, you know, forecast or revenue forecast and modeling out churn and all these kind of different growth channels. If you don’t have a business yet, right, if you don’t actually have that, or if you’re not leveraging kind of all those kind of levers that are, are kind of embedded within that SaaS business, you don’t need that.

[00:08:03] So, what I like to say is, like, early stages, focus on the things that kind of matter, that are under your control, and then, as your business evolves, build more kind of complexity and detail into your model to the degree to which you can use the model to help you make business decision and the, the, the decisions themselves that matter are gonna vary at different stages,

[00:08:22] right? So, that’s the thing kind. I like that we kind of drew back to is how do you use the model to, like, accomplish something that you have to do with your business.

[00:08:29] I think that’s great. I, I love this idea of, like, you know, the model is kind of like a living breathing thing, like, it’s going to keep evolving, like, as the business continues to evolve and, you know, totally with you, it’s, I think it’s true in any job function. Like, the simpler you can keep things for as long as possible, the better off you’re probably gonna

[00:08:46] Joe Michalowski: be.

[00:08:46] Taylor Davidson: But often not done, right? So, 

[00:08:48] like, like, my point is, you know, oftentimes we build a model, and then we kinda go away from it. We never kind of go back to it at all. 

[00:08:54] And well, oftentimes it’s just ’cause it’s too hard, right? Like, it’s too hard to actually gonna update and manage it. Yeah, we may build a model as, like, a one-off kind of forecast of the future, but we don’t build in all the structures necessary to kind of use it as a living document going forward.

[00:09:08] And so, we don’t use it. We don’t actually kind of, like, use as a, as a, as a tool of managing your business. And so, you know, there’s ways to address that as, as well, but, 

[00:09:15] you know, lots of times we don’t use it as a kind of tool to kind of like, really kind of manage the business going forward, but it’s important to kind of think like that.

[00:09:23] Joe Michalowski: Yeah. I mean, that’s why, you know, people are lucky that people like you are out there. It’s why people are lucky to have, you know, any software tools that they have available. So, love, love all of this, and I think, you know, we’re, we’re gonna dig into kind of the, the building blocks, like, the real nitty-gritty of, kind of

[00:09:38] the balance there of simplicity versus, like, adding complexity over time, but before, before I get to that, I wanna do, like, one more sort of preliminary setting-the-stage kind of question, which is comparing, like, a SaaS financial model to some of the other industries that you have. I know you have a background in e-commerce,

[00:09:53] so, how does the complexity or the process of SaaS financial modeling compared to some of the other early-stage models that you deal with on a daily basis?

[00:10:03] Taylor Davidson: Well, okay. One, there’s a lot more levers in SaaS, right, and there’s a lot more, I think in general knowledge about SaaS business online, as there was a lot more complexity that people kind of know to kind of build into it, so, a lot of levers. The other one is, often comes down to how we think about remodeling out, like, retention churn in 

[00:10:25] those aspects is often, like, one that kind of core difference between a lot of different businesses.

[00:10:30] The other thing about SaaS kind of comes up is, there’s a whole set of, like, alternative, like, metrics around, right? You know how you think about buildings, deferred revenue, revenue recognition, revenues. That side can be very different from other businesses, and there’s more kind of inherent complexities

[00:10:43] Taylor Davidson: in terms of like understanding those components of, you know, revenues and cash that aren’t necessarily applicable like a lot of other business models, and the other part is the thinking about the business around MRR and ARR, right, is again, additional level of, like, management-level metrics that are kind of valuable to think about the business that don’t really, aren’t really applicable or don’t you have that same kind of degree of extra kind of management metrics on top of the business that you find for other kind of business models.

[00:11:10] I think those are kind of the major things, but billings, in terms of, like, actual kind of model stuff, billings, revenues, cash, churn, those things are the kind of most, you know, things that are most different between SaaS and other, other, other models.

[00:11:22] Joe Michalowski: Gotcha. Makes, makes a ton of sense. I think this kind of answers that question so fine if there isn’t another one, but you know, what I wanted to ask if, if you’re, like, an entrepreneur changing from, like, an eCommerce industry to, you know, starting a first SaaS business, is there anything else other than what you just listed as, like, you know, what to expect to change if you were running that kind of model? You’re used to e-commerce models versus a SaaS model, I think, to your point, it’s a lot of retention and a lot of, like, the things that come in with a subscription business,

[00:11:50] but I wanted to give you the stage if there was anything else that stands out as kind of differentiators

[00:11:54] Joe Michalowski: there. 

[00:11:55] Taylor Davidson: I mean, a lot of the ways that we use the data and pull data is the same, right? You can still do core based off, you can still look at subscribers and customers the same way, repeat and new, like, you can still use a lot of that, but the way, the way you have to understand the metrics is gonna be different because the idea of, like, churn and repeat is kind of, like, fundamentally kind of different underlying it,

[00:12:12] so you have to think about how you kind of build the metrics up a little bit differently, but those are the core ones.

[00:12:16] Okay, cool. So, I mean, you know, we’ve been talking for a little bit, and I wanted to make sure that there was a, a meaty part of this conversation that, you know, before we got to it, that we got to talk about really where we are in terms of, like, a Foresight customer, which would be, like, that early-stage entrepreneur versus, you know, maybe that really mature or increasingly mature SaaS company,

[00:12:38] Joe Michalowski: but now that we’ve kind of set that stage, we know where we’re at. I want to dig into the actual model because I try to make these episodes, like, as tactical as I can, like, it’s hard to learn, like, anything just on audio, so, like, you know, this isn’t really, like, a guide to, to building your own SaaS financial model,

[00:12:56] but as much as we can, I would love to do that, so I’m just gonna leave this question being very simple, although it’ll probably be, like, the meatiest question I have, and it’s just, to you, as someone who builds models all day, what are the core building blocks of that early-stage SaaS financial model?

[00:13:13] Joe Michalowski: What are the absolute essentials, and how do you go about putting it together?

The Building Blocks of a SaaS Financial Model

[00:13:17] Taylor Davidson: So, I try to build a model for SaaS and maps back to the levers that are important in terms of understanding the growth of the business, right, and so, growth of the business, you know, when SaaS is specific, comes around, acquire new customers and then retaining them, right? So, they are kind of core building blocks, but what I tend to kind of focus on is acquisition, conversion,

[00:13:36] retention, churn and revenues and billings, right, as, like, a five kind of distinct entities and they capture, like, acquisition in terms of, like, how you actually grow the channels used for growth conversions, how you use those channels to convert to customers or retention and churn. I, I think of like, you know, just inverse of each other, but maps out how you get often you get people to kind of,

[00:13:56] then you have revenues that recognize revenues from that, then you have billings, which is like the cash, you know, the billings and cash associated with that. The SaaS specifically, you really do have to pay attention to, you know, the difference between, like, revenues and the, the contract cycles that are embedded in the retention curves.

[00:14:12] I mean, which may be different from the billing cycle, monitoring at the billings and handling the, the difference between when you actually receive cash, when you actually kind of recognize the road associated with it. So, those are, like, the, the core, like, five building blocks that I kind of focus on in terms of building a model.

[00:14:26] Now, the degree of complexity may get in each one of those, may vary depending on what you’re doing, and there’s a variety of approaches to it, right? Like, going down from, like, acquisition to come on down, you can model acquisition as, like, overall just growth. Like, how do I acquire kind of new customers, right?

[00:14:41] And you can, but you can go even deeper into monitoring out different kind of channels. You know, the more complexity you have in the business, the more understanding you have in terms of a multichannel approach, the more metrics and data you have about that, you can get more detailed in mapping out acquisition from social or search or SEO, or, you know, paid media or those sort of things, breaking down organic and paid, and C and all those sort of things.

[00:15:03] And so, you can get, you can expand acquisition to as many kind of different channels and acquisition metrics as need. The next layer on top of that is, like, a conversion. It says, okay, so you have this, like, top-of-the-funnel approaches all across different channels. How do you convert them into new subscribers?

[00:15:19] Taylor Davidson: Now, conversion is one of those things where you could, there’s, like, simple ways to do it, you know, say, “Hey, I have, you know, I have a certain level of, like, top-level funnel and a certain percentage of them convert to become customers or in a B2B SaaS setting, you know? I have leads, and I’m growing from a Salesforce, a growing number of leads, and I’m taking through an actual kind of conversion funnels, like, new subscribers from them. Now,

[00:15:41] you can also get more detailed around building out lags from, you know, first touch to conversion, you can build in multi-touch lags where you know of a certain kind of cohort of, like, new leads or new, you know, new touch kind of in one month, kind of a percentage of, kind of comes in over time. You can have multi-C license, enterprise SaaS companies where you sign initial agreement and then kind of grows this number of seats over time.

[00:16:03] So, there’s a, a variety of ways to do the model conversion, simple, but also, you know, much more, like, detailed in terms of, like, you know, lags and kind of cohort base. So, all that’s gonna feed into then your acquisition of, like, new customers, and then you build a normal, normal building block, subscriber building block, which is, you know, subscribers beginning a period, new, churned, renewed

[00:16:28] Taylor Davidson: subscribers kind of end of period, kind of core block to understand the change to subscriber base over time. Churn as well as you can do it very simply, you can just say a certain percentage of customers churn over time.

[00:16:40] In SaaS specifically, there’s a great value to do a cohort-based churn. It’s meaning you’re gonna vary the churn over time as a function of how long a person’s been a subscriber, very, like, it’s gonna vary, vary differently based on, like, the type of business, you know? In typical enterprise SaaS, it’s probably 12 or 24-month, like, cycles of churn, which is, cohort-based thing as approach is gonna be a little less, like, important,

[00:17:04] but especially for, you know, SMB style SaaS or mid-market SaaS being able to, to break down the churn on a cohort, a new cohort bases of, like, new subscribers at a per-period is, like, a really very important thing. And then, reason for that is it’s very common to model churn as, hey, you gotta turn off a bunch of people early on

[00:17:23] Taylor Davidson: and then the, the later a person is a subscriber, the longer the person’s subscriber, the less likely they are a churn. So, you create that kind of churn curve, that kind of models out this way, and it’s, I, especially in businesses that have, you know, distinctly different churn as a customer kind of ages, it’s important to kind of break out that kind of churn retention curve into, you know, monthly cohorts to be able to model the mechanics appropriately as you kind of model out kind of a growth company as well.

[00:17:48] And the good thing is, like, we have so many, so many tools nowadays to actually measure this. We have so many cohort-based tools that we can kind of pull data from that allows us to kind of look at all the cohort performance, and there’s such a great, I’d say, language and understanding around how to understand historical cohorts, but we can use those historical cohort performance and forecast,

[00:18:08] forecast performance as well to, to forecast out the existing performance from those cohorts over time, then also forecast the performance of future cohorts as well. So, there’s a lot of, like, detail we can get into there, into creating a core-based forecast around that for SaaS if, if that’s kind of valuable for, for the business.

[00:18:26] The next two components, revenues and billings kind of goes into the thinking of how do I recognize the revenues from subscribers? How do I charge for them? And then billings is, how do I actually kind of receive cash from them? The, the most, you know, the, the nuances to think around this is around

[00:18:42] that I always have to think about in term of modeling is, how detailed do I have to get in terms of breaking out the components of my subscribers, right? It’s really easy to say, right? We, we cover subscribers before is, like, all subscribers, but do I need to break that up? Do I have significant difference in my subscriber base? They are gonna have significantly different performance metrics over time?

[00:18:59] Can I assume just an average revenue across all subscriber tier, or do I need to assume some substantially different churn retention metrics associated with them? You know? Is it valuable for me to break out the subscriber basis into, like, multiple subscriber blocks that map back to different acquisition channels

[00:19:15] ’cause, I want to think about their growth uniquely. I wanna grow one, maybe I wanna grow one subscriber base very differently than other ones, especially if you have, like, small, medium, large-style businesses, you know, at a fundamental, like, level, you can just assume average is across things.

[00:19:27] But, once you start changing the mix of customers over time, then you have to kind of break all this thing out into, like, the different subscriber builds. The additional kind of caveat, I think, by revenues is, are the revenues changing over time? So, oftentimes we say, somebody signs up for a, they sign for subscription, and they pay that amount over time,

[00:19:42] that’s totally fine. Maybe the renewal price for subscription is different. Maybe they have more of a land of, a land-and-expand strategy where you’re signing it at, at some rate and then growing that kind of rate over time. I’m sorry, growing the kind of revenue from that customer as a function of how long they are a customer, modeling out the underlying growth of, like, their business as well.

[00:20:02] And so, like, when you do that, you have to, you know, do more kind of cohort base approaches to kind of capture, like, the kind of mechanics as part of it, but, you know, oftentimes when we’re building a lot of models, we don’t have to, we can just assume kind of averages as well. The only, only additional layer on top of that is modeling out billings

[00:20:19] and typically, with billings, we have to model out the billings cycle kind of separately from the contract cycle so that we can model out the churn on a contract basis. Separately, if we’re modeling out when the actual billings come. Is an annual contract gets billed annually? Is an annual contract,

[00:20:34] billed monthly? Is annual contract that’s billed quarterly? You know, there’s a lot of, like, different ways to kind of approach that, and the more that we get away from a pure one-month contract, one-month billing cycle, the more important it’s to kind of model out the differences associated with that.

[00:20:48] Joe Michalowski: Man. I, I feel like I could tackle a whole Excel spreadsheet on my own, which is not something that I ever do. The thing that I, that I wanna follow up with is not the all-amazing, I feel like I got a masterclass in, like, what goes into putting a financial model together, but I think at every turn there’s this way to do it,

[00:21:10] there’s a different way to do it, there’s multiple ways to do it, which I think, I mean, is the point, it needs to adhere to what the business model is. Before we kind of keep going down that path, I wonder, like, how do you even build a blank template that you can offer to, like, a broad variety of people?

[00:21:27] Like, how do you, how do you offer something to someone that isn’t just, I don’t know, entirely built for one of these instances that they can actually iterate on? Like, what, what’s that process

[00:21:39] for you? 

[00:21:39] Taylor Davidson: That’s a good question. And, like, I don’t know if, that’s something I’ve kind of continued to evolve my own perspective on over time, you know, all the models themselves I kind of rebuild everything every effectively, like, six months or so, as I kind of learned from, like, actually utilizing it with people, like, how to actually kind of change the, the approaches in there.

[00:21:56] Ultimately, so, like, the most important thing and when someone asks, “Hey, how do I use the model to do this?” The first question I always ask is like, “What do you want to do? Like, what is your business, and what is your goal?” And I, I’m always trying to understand is, what are the major things that you’re trying to

[00:22:13] use this model for in your business? And then once we identify the goal in terms of how it’s gonna used, then we can think about the level of complexity that’s necessary as part of it ’cause I, I have multiple models for SaaS that do, you know, that do SaaS in different ways. So, I’m in simple, and speaking back to kind of the earlier point is, I have models that do with SaaS in fairly simple ways.

[00:22:34] I also have multiple models that do SaaS in very detailed and complex cohort-based ways. Building out a tool that applies across all different situations is never an easy thing to do, and I don’t think it’s ever possible to make something that’s perfectly usable across every different business model.

[00:22:47] And also, like, people like different approaches in terms of how they want to do things in terms of how they wanna think about, you how they wanna break out their business, how they wanna break out the subscribers’ sets, how they gonna grow all the sort of things. So, there’s no, there’s no one kind of way to do it. In general, in terms of building models,

[00:23:02] what I try to do is build, like, layers of, like, progressive complexity, and what that means is, I try to make the inputs fairly simple and, like, the first level inputs, fairly simple, make a lot of, like, hide a lot of, like, the complexity in terms of calculations in an actual, like, calculation sheet and then present the output in a separate sheet.

[00:23:22] So, the separation between inputs, calculation, and presentation. For a lot of people, what I want them to do is, use the inputs and look at the presentation and not really dig into the calculation part because to pre-build a template that works across a wider variety of models means I have to build a fairly complex calculation of the kind of level things

[00:23:39] and I don’t want, I don’t wanna force someone to try to understand the calculation as part of that. I wanna focus on inputs and outputs and then, but I do build in a lot of additional layer of inputs into the calculation layer if someone needs to make those modifications towards it. So, like, you know, for example, most of the SaaS models I build, I have an assumption for, like, average revenue,

[00:24:02] right? Cool, cool. You can build in weighted average tiers, weighted average tiers for different subscriber tools, all sort of things, but one of the core things that I, then the next question, when the next input is gonna be, “Okay, does the revenue change over time?” Right? I’m just gonna leave and I usually express that as, like, a simple growth percentage, right? Now, 

[00:24:20] what that does is that then creates a forecast of average revenue going forward over time. Now, under the hood, what I do in that set of calculations is I, I have actually another set of inputs that forecast out that growth and kind of revenues over time using one method, but both on the quarter models is, like, 20 different methods, right?

[00:24:40] So, you can then go and select a different method for the growth. You don’t have to assume a, you know, standard, standard percentage change over time, you can do a log within change, or you can create your own curve, right? You can directly input your own curve, and then you can apply those kind of differently,

[00:24:53] right? So, instead of saying it’s an average revenue that applies across all cohorts, you can say, “No, no, I wanna have this start as a certain, like, whenever a subscriber starts,” and then have that change be a lag effect over time. Meaning, each new subscriber starts at the same number, then grows over time, which means average revenues and applied across all.

[00:25:11] Now, I don’t wanna force someone to deal with that level of complexity-level inputs because they’re not, they’re like, they’re not gonna know how to handle it. And so, what I try to do is keep simple base level inputs at the base level of input level, but then provide additional layers of input complexity in the calculations if it’s necessary, or if someone kind of, kind of utilize in that way.

[00:25:33] It’s a really cool approach to making this as flexible as possible. Like, I wasn’t really sure where, I haven’t seen the model myself, and honestly, I, I don’t work in this business, so even if I did see it, I’m not sure I would, you know, get that nuance on my own anyway. So, really cool how you build the, the flexibility in there.

[00:25:49] So, yeah, I was just curious how the template-building process actually goes.

[00:25:53] Taylor Davidson: And my goal is for someone to not even care about that, 

[00:25:55] right? Like, I want someone to not have to necessarily understand all the complexities as part of it, because I, there’s a certain bit of it where I want, I don’t wanna force someone to understand the calculation as a part of it now. And aside is, as an entrepreneur, you probably do need to understand the business,

[00:26:11] right? You have to understand the business, you have to understand how to calculate that, and the way I say that is, like, the degree which you’re gonna do that is depending upon your, your understanding of finance. I work with a lot of entrepreneurs. They don’t have that yet, right? So, what they have to understand is,

[00:26:25] does, can I, do I understand my inputs? Do I understand my outputs? Do I understand the base of mechanics? And then as they kind of get more understanding of finance or as they work with people who have more degree of understanding of finance, they even dig more to the complexities and expose into other things to think about.

[00:26:41] I think it’s really easy to, like, get lost in complexity. Like, it’s really hard to make something that’s, like, simple. And so, I try to start as simple first and then build on the complexity, as someone can take advantage of it.

[00:26:52] Joe Michalowski: Yeah. I mean, to that point about, like, what the finance knowledge is of the audience, like, I think one, it, it speaks to your understanding of who you’re building these models for. So, like, that, that’s great. It makes a ton of sense, but I’m curious, like, for, for this, you know, group of people, these entrepreneurs that have varying degrees of finance knowledge themselves, like, you listed out the, the five building blocks, like, that’s great.

[00:27:15] I could hear the, like, massive complexity in, or, like, variance in complexity between them, but I’m curious, like, which aspects of the model in your mind or in your experience give your audience the most trouble, like, which are the most flexible pieces, where do they have to spend the most time trying to customize or working with you to figure out all those different levers that you were trying to explain before?

[00:27:41] Taylor Davidson: That’s a good question. I think, structurally, one of the hardest things to deal with is, is dealing with differences in subscriber base. 

[00:27:47] So, can we assume an average customer, or do we have to break out, break out the calcium, like, separate customer sets and what’s the right stuff customer sets to use?

[00:27:55] Right? 

[00:27:56] That’s kind of like the core thing that kind of impacts a lot of complexity of the model. The other thing I would say comes into the acquisition side, meaning, you know, in most of the models I build, I actually take a fairly vanilla approach to forecasting acquisition channels. I basically say, “Paid organic,” right?

[00:28:15] Taylor Davidson: I don’t get a lot in detail, “Hey, here’s all the different organic channels. Here’s all the different paid channels.” And I find that as people become more, as they use it more for planning purposes, then they’ll want to break out the acquisition side into more channels 

[00:28:29] and utilize the acquisition metrics most applicable for each one of those businesses and even model different ratio support for that.

[00:28:37] So, those are kind of the core things that are kind of important or finding the most kind of scope for kind of changes over time.

[00:28:44] Joe Michalowski: Yeah. Makes a ton of sense. I think, I can think about, you know, the way we, I, I work in marketing here and so, I can think about the, the go-to-market spreadsheets that we have that break out, you know, the different organic channels, like I, I work in content, I do different organic, I own different organic channels,

[00:29:00] and so can think about the conversion rates that we expect for, you know, something like a webinar channel versus, like, our search traffic or something like that. So, you know, really interesting to hear that. 

[00:29:11] Taylor Davidson: The one, and the one thing I’d add to that is, the other component to that is, that it’s not just the channels, but it’s like, where they go, 

[00:29:18] meaning that the way that you would wanna forecast the growth for a, you know, consumer or SMB type SaaS is, is gonna be very different from how you’d wanna do it for enterprise-type business,

[00:29:28] right? One of which you’re gonna have your normal growth channels, you know, from paid and organic enterprise where you’re probably tied much more to a, you know, salesperson, sales cycle, more SQL-type approach for, for it. And so, the more detailed you have to get in terms of breaking components out, the more, like, valuable it is to

[00:29:49] have

[00:29:50] different structures towards it, all the way down from everyone’s kind of the same to every customer is uniquely different, their own kind of customer. That’s, like, the wire kind of range there, and it’s not uncommon for a business to have both of those models embedded in their business, right, where you have, “Hey, here’s the SaaS, here’s the, here’s the normal rates we charge,

[00:30:06] then there’s enterprise. Call us,” and “call us” means there’s a wide variety in terms of, like, how they kind of wanna price that, and so we as kind of modelers have to have to think, like, how do we handle 

[00:30:17] that? How do we handle, like, the, the variation there? Do we, can we assume there’s an average, or do we just need to uniquely model each individual kind of customer differently from that?

[00:30:27] So.

[00:30:28] Joe Michalowski: I think this leads nicely into kind of the, the next question I want to ask, which is like, you know, you’ve addressed how you build flexibility into these templates. We’ve talked about kind of the, the massive variance in, like, how you can approach these things and all the different levers there are,

[00:30:44] and so I wanna talk a little bit about the limitations of a template-based approach, because I know that you are very specifically focused on the early stage, the entrepreneurs that are, like, have nothing in place or have something, like, very basic in place and trying to elevate that, but what’s the, like, breaking point where your customers typically move on to building their own operational model or upgrading from the template-based approach to something new?

[00:31:12] Taylor Davidson: Yeah. So, that, that’s a good question. There’s a couple of different ways to kind of take that. One is, I view all templates as a mixture of, like, execution and education and even inspiration for that degree, right? And so, you know, for some people who don’t have, like, capacity to kind of build out a model or kind of understand mechanics of it, because building a model embeds a number of a different kind of skill.

[00:31:34] Do I know how to use the tool, right? Spreadsheets, whether it’s Excel, Google Sheets, or whatever? Do I understand finance or accounting to be able to know the kind of terminologies and structure in terms of how to understand revenues then presented in a standard accounting format? Do I understand how to do business modeling in general?

[00:31:50] Right? And so, there’s a, there’s a, can I break out the components of the business from an operational sense outside of just a pure accounting finance perspective? So, you know, can I use the tool? Do I understand how to model the business? And then can I present those results in a way that 

[00:32:04] makes sense to, like, an accountant from a financial perspective?

[00:32:06] Right? So, those are kind of core, like, skill sets embedded within there. For a lot of those entrepreneurs, they don’t have that, right? They need actual tool which delivers a thing for them, and it’s very easy to build a template which is not flexible enough for a wide variety of cases for that, but they’re also, if, but as you get more advanced in terms of understanding the tools, then templates can become more of an educational tool to look at it and understand, “Hey, here’s one way to approach it that works for this person, but I wanna do it differently,” right? Or, “I wanna build my own models so I can fully, completely understand it

[00:32:36] and I’m going to use this as an educational tool.” And for me, that’s great. Like, I am not a proponent of, like, you have to use a tool as is. My thing is like, I, I want, my goal is to provide a structure for someone to understand how to do something, whether they choose to use my stuff straight as is, or whether they choose to build their own learning from,

[00:32:54] like, if they’re able to learn about how to build a model from it, that’s a win for me, right, that’s the way I view it. Now, as you build out spreadsheets in general, there are breaking points, and the interesting thing about this is, like, you know, years ago, there weren’t a lot of extra tools available for people to use.

[00:33:10] Like, you could, you know, go onto really heavy, complex things, but a lot of business that were stuck inside come to spreadsheet-paradigm, and I think there’s a lot more avenues for people to build models these days that don’t use spreadsheets, who evolved past that point where they need to regularly update the model on a monthly basis and kind of pull accounting QuickBooks data, and there’s ways to do that.

[00:33:30] There’s ways to use third-party add-ins to pull in accounting data into spreadsheets, but it doesn’t require kind of, you know, a very structured approach in terms of how you use the spreadsheet and then effectively, like, spreadsheet development ability to kind of utilize those tools. Valuable if you wanna do that,

[00:33:46] but, you know, there are limitations in terms of people that wanna do that. And so, that’s where I think, like, when it comes down to, like, managing a business, kind of bringing in, bringing in data kind of on a monthly basis, both the financials and the operational side and kind of constantly utilizing it,

[00:34:00] that’s where there becomes a lot more potential, move outside of a spreadsheet 

[00:34:04] template and move towards more of, like, a web paradigm to kind of build launching models.

[00:34:08] These are all really great points. I love, I, I think the, the kind of summary of, like, the themes that you were talking about is just, there’s so much flexibility in this, it comes down to the time and the, the understanding that you have of, like, how to actually build this out and everything that you’re saying about, you know, taking the time to use this as an educational tool,

[00:34:26] really cool. It’s not something that I have experienced in the past, it’s not something I spend a lot of time in myself, so I really like the way you put that. I had a couple more questions about this, like, limitations of financial model template, track, but I, I think we’ve answered them because they were mostly around, like, what are the, the challenging components that you wouldn’t be able to use a template for or kind of, like, it’s not worth trying to force the, a template or the flexible

[00:34:55] Joe Michalowski: sort of a starting point to do what you needed to do versus just building your own. So, I guess, like, instead of rehashing some of what we’ve said, I, I’m curious if there’s, has there ever been someone that you’ve tried, I know you offer consulting alongside these templates, like, has there anyone been, ever been someone that comes in, they’re like, “I need to change these pieces of the model,” and you’re like, “Hey, maybe, like, there’s a, a better solution for you,” versus, like, spending all of this time updating this starting point. Like, what, what does that look like in conversation?

When a Financial Template Isn’t Right

[00:35:28] Taylor Davidson: Oh, definitely. And so, you know, going back to kind of what point I said earlier, whenever somebody asks me a question whether I wanna do the model, my first question back is, “What’s the goal? What do you wanna accomplish?” 

[00:35:37] And so, you know, if I ask that question and I hear, “Hey, here’s this stage I’m at, here’s the thing that you accomplish,

[00:35:45] here’s what I want to do,” oftentimes, I’ll hear like, “That’s cool. You probably shouldn’t do this in Excel,” right? Your business is probably past that point or maybe there’s other things for you to kind of evaluate or look at, or, you know, what you’re looking to do is different enough from what you’re looking, how the model does it, that you should build a different approach to it. Now, and that’s an important point, we should kinda that. I don’t think I kind of fully brought out about how I kind of approach and think about templates is and how I often kind of work with kind of people around this is, the way I approach putting a template is a very kind of modularly-based system for it,

[00:36:19] meaning that I separate out, there’s aspects of templates which are roughly the same for all the different types of businesses, and there’s aspects that are wildly different. Now, expense forecasting, financial statements, budget, variances, handling actual financial summaries, charge reports,

[00:36:34] those sort of things are fairly similar across a wide variety of businesses. Obviously, some metrics in charge are gonna vary to being a business model, but the core structure used for it is very similar and you can build a, a, you can build, I approach building a model so that I have this kind of core base which works for almost anti-business

[00:36:54] and I have, like, a pre-built kind of revenue model that’s built into it, which can be widely applicable for wide variety of businesses, however, that revenue model itself is effectively a component of the overall model 

[00:37:06] and I try to build a model so that swapping out a revenue model or building on custom revenue streams or scrapping it using a completely different approach to it,

[00:37:15] I try to approach that so it’s easy. Oftentimes someone will come to me and come with a model they’ve already built or they’re already using, and they’ll say, “Hey, I wanna adopt your model.” Oftentimes I’ll say, “You know what? You don’t. Like, this model actually works for you. This is a model that someone else has built.

[00:37:28] I, I’ve seen it before. I understand how to use this. This is good. Like, this model that either, either’s using someone else’s template, using or using, like, the model you put yourself, like, you’ve thought about the mechanics of the business that does a good job of that. Don’t try and swap and try to rebuild to get to the same revenue numbers with a different approach.

[00:37:44] Let’s just utilize the revenue structure we already have and do some additional, you know, reporting or reporting structure on top of that.” So, I really try to build templates so that you can utilize any revenue model out there and easily link it into the model to change the reporting or the communication of the model.

[00:38:03] The key, kind of key results from it very easily. And so, I bring up the backstory for that because of what I, because oftentimes when people come to me, as they’ll say, “Hey, I, this is my, they’ll explain bits about their revenue model,” and I say, “That’s cool. The pre-built structure, you could use it for that, but either it’d be too complicated to accomplish it or you can do this far simpler.”

[00:38:23] Taylor Davidson: And so, oftentimes, what we’ll do there is, we’ll just strip out the existing kind of revenue-model approach and build out 

[00:38:28] a custom revenue model which is unique for your business. Honestly, like, if you’re gonna spend time building custom models, that’s a part that’s most important. Rebuilding a set of consolidative financial statements,

[00:38:40] you know, I spent too many thousands hours of my life balancing out balance sheets, you know, having, forcing someone to do that is not, like, a fun process for it and that’s 

[00:38:48] not the, where the value comes in building a model. The value comes from, “Hey, how do I forecast out company is gonna grow and earn revenues,

[00:38:54] and how do I think that way?” That is the part that is unique to your business, that utilizes the most, like, thinking about what you’re doing. And so, I try to make the model to, if we’re gonna do a custom approach tour or we’re gonna do something different, I wanna focus all our time on that part, which is specific for something that can help you actually think about kind of what you’re doing.

[00:39:13] Joe Michalowski: This is really insightful. I, I, I love this. To me, all I hear is maintain flexibility, maintain flexibility, keep things as flexible as possible at all times because you know, we, we wrote an article one time on our site about, you know, the limitations of financial model, but in a lot of ways, it’s, like, those, like, you just search financial model template, and you just grab, like, the first one you see

[00:39:34] on Google and it’s like, we talked about, like, the house of cards that becomes, like, your assumption, so you just build this, like, rigid model eventually that just has, like, if you get one, you know, little calculation wrong, or you have, like, one missed input, the whole thing breaks and, you know, everything I’ve learned from you today as we talk is just, I think just reinforcing this idea that you want to keep things as simple as possible, as long as possible and really just maintaining that flexibility

[00:40:00] so you don’t end in one of those situations, so yeah, just really insightful.

[00:40:04] 

[00:40:04] Taylor Davidson: I mean, and, and, and it’s, it’s hard to do that, right? Like with all my models, like, if you type in input in incorrectly, then things are gonna break, and you’re gonna understand what happened. 

[00:40:14] What I try and do is communicate as much as possible through notes and things to express back to say, “Here’s what you, how you should use it

[00:40:20] and here’s how to think about it and create, build it in checks,” and those sort of things. It says, “Hey, this number looks off. You need to look at something.” Now, most models, in general, are built by a person for the thing they need to accomplish. They’re not built as a productized tool for other people to use for their business.

[00:40:35] And so, they don’t build in all this set of things that are outside the scope of, like, what they have to do. 

[00:40:40] And so, most templates are, you know, they 

[00:40:42] can be used what they’re doing as long as what you’re doing fits that specific thing that you did. You know, as long as the specific thing the person was modeling

[00:40:49] fits the specific thing you’re doing, right? You know, the more that varies, the harder it is to kind of build that, and it’s hard to build a productized tool for that. The more that they become educational tools to kind understand that. And so, like, you know, most, you know, most templates, I’ll say this differently.

[00:41:05] There’s a common regard, like, there’s a common kind of refrain out there that says, “Don’t use a template, build your 

[00:41:09] own model,” and I don’t disagree with that, right? Even as a person who builds multiple templates for people, I don’t, I don’t disagree with that. What I try to focus on is, pick the parts of the template

[00:41:19] that’s most useful for you 

[00:41:20] to really, really, understand and build that. You know, if you, fundamental base, if you wanna, you know, build your unique revenue model that’s specific for your business, go for it, do it, 

[00:41:31] but don’t rebuild everything, all the chart for reports and those sort of things if you can leverage something that, that can easily adapt for what you’re kind of looking to.

[00:41:39] Joe Michalowski: Yeah. I mean, especially for your audience, that early-stage entrepreneur, they’re, they’re scrambling to do, you know, 27 different jobs, trying to get this business off the ground and, you know, rebuilding an entire model that you could, you know, the components that you can definitely steal and, and templatize is probably not high on the list of things that they need to be doing.

[00:41:57] So, yeah, totally understand that. I think it’s a really great point.

[00:42:01] Taylor Davidson: I mean, models aren’t there, we haven’t reached the stage in terms of models where we can deliver components the same way we can with, like, websites, for example. 

[00:42:08] Right? I mean, think of, like, the, the broader, like, software in general. It’s become much more, like, component-based. We 

[00:42:15] can pull in libraries and tools and frameworks and things, and we kind of leverage them and pull different components of code that are pre-built that we kind of pull into our app or our site building,

[00:42:25] so we don’t have to rewrite those things. That’s the whole component. That’s how software kind of works. 

[00:42:29] Excel’s hard to do, you know, it’s hard to do for a lot of reasons. It’s hard to do because all, basically all the code is exposed and everybody uses, it uses a spreadsheet to kind of do that, has to be like a soft, has to think, like, a software engineer to do that.

[00:42:40] That’s never gonna, that’s not gonna happen. People aren’t gonna be software engineers to kind of build that, but I think if you, if you try to, like, think of, like, from that component-based approach towards it, then you’re able to get something that’s a lot more valuable for people, quicker, easier, and cheaper.

[00:42:55] Joe Michalowski: Yeah, love it. We’ve been talking a bit. I got, I got two last questions for you. One is, I liked what, in the very beginning of this and I, I wanted to get to it eventually, but you had mentioned kind of the, the process for getting this to market and actually, like, iterating and how many different versions have come out and how you look at it, like, every six months or something to that effect

[00:43:15] and I’m curious if there’s one thing you remember or that stands out as something that you changed or learned as you were bringing these templates to market, is there something that you learned about SaaS financial modeling that you built into your product to make it better?

[00:43:33] Taylor Davidson: That’s a really good question.

[00:43:34] Joe Michalowski: Hmm.

[00:43:35] Yep. 

Financial Modeling Lessons from Taylor Davidson

[00:43:35] Taylor Davidson: So, I continually learn from people’s reactions or questions about how to use the model for what they’re doing, and I utilize that as, like, a, as a learning experience to change the features and functionalities in there, so then apply it towards everybody else. I think the core thing that I’ve kind of evolved over time has been specific for SaaS is 

[00:44:01] more flexibility around,

[00:44:02] you’re really around subscriber builds and around retention, and then, more reporting, more SaaS-specific reporting ’cause I know, like, in the first of all, I think I can, the first SaaS build I have, mechanically, it created the numbers, but it probably, it didn’t have the same SaaS-specific reporting

[00:44:24] that people and investors are not sure would, would, would went on. So, you know, and then spent some time thinking, “Okay, what metrics do we need? Do we really need to come out with, are there specific charts or views or metrics that need to be kind of built out, pre-built to do that?” So, the, I think, the major things that I’ve gotten better on over time is that management-level reporting around SaaS, MRR,

[00:44:44] ARR and all the components of that, 

[00:44:46] but then also some of the subscriber ability, MRR movements, kind of those things, which are important for a SaaS entrepreneur to understand the business, which I would say the earliest versions of models didn’t approach.

[00:44:57] Joe Michalowski: Gotcha. Makes a lot of sense. I mean, it, it’s a callback to everything we talked about, that subscriber bill, the, retention and churn being those, like, really flexible, challenging components. I think it makes a lot of sense that those are the ones that stand out as ones that you’ve had to kinda learn

[00:45:11] to build as you keep bringing this to market. So, love all that. I, I wanna leave you one last question. It’s something we ask everybody that comes on, and it’s a simple one. It’s really gonna zoom out. We spent a lot of time in the weeds of financial modeling, which is great. I’m curious if there’s one thing that you know now that maybe you wish you knew at the start of your career, at the start of this whole financial-modeling journey that you’ve been on for so long?

[00:45:34] Taylor Davidson: I would say, let’s say, don’t give up, meaning, I’ve been building models and tools, you know, inside companies or outside for, you know, 25 years now, and I’ve learned a lot along the way and I also learned there’s a lot of parts of it that are hard, you know? Building models and building kind of complicated financial things that are used by tons of people in ways that you had thought of, in ways you hadn’t thought of, it can be hard

[00:46:02] and you’re gonna hear lots of things, you know, about, you have to have, I, I would say you have to have a fairly thick skin in terms of how you approach things to put out the core guts of what you do for everybody to look at. And so, you’re always gonna hear feedback about, “Hey, you should change this.”

[00:46:17] “Is this the best way to do that?” And listening, finding a way to listen to the parts of it that are, allow you to grow without getting frustrated or push back of being able to kind of continue to do this is kinda, like, the most kind of important kind of lesson for me in terms of, you know, knowing what to listen, listen to, and knowing what to learn from and knowing when to kind of push back as well,

[00:46:39] that’s the, and the balance between that is really hard, and that’s why I always drew back to, like, you know, continue to learn, continue to listen, continue to, to learn and continue to learn at such level you can then educate it kind of back to people, and that just takes a long time to be able to do that.

[00:46:58] I think that’s such a great answer to, to tie it back to, you know, some of the other people I’ve spoken to. Whenever I ask this question, you know, it’s funny ’cause you and I have talked about Excel and modeling this whole time, but anytime I ask, like, a finance leader, a CFO, or a VP of Finance, what they wish they knew, it’s never about,” I wish I were, I, my Excel skills were better,

[00:47:18] Joe Michalowski: I, I wish my, you know, my knowledge of, like, my financial models was better earlier on,” it’s always something about relationship building or partnering with the business. So, to your point about, you know, the challenge of, like, putting your workout in front of people and kind of, like, being able to listen and things like that,

[00:47:38] that’s what it sounds like to me all these finance leaders want to be known for in the business, is their ability to partner with other departments. So, it’s not just building a financial model in the background to build it, it’s taking that financial model and actually, like, helping the business to your point,

[00:47:54] what are you trying to do with this model? What are your objectives? What are your goals? So, you know, you and I talked about, you know, some of the other people that have been on and your background being different as someone’s strictly modeling, I think you fit right in as far as this question goes, it’s, like, something that’s really in line with

[00:48:08] everyone I’ve talked to cares about. So I, I really love that answer. It’s a good

[00:48:11] one. 

[00:48:11] Taylor Davidson: Everything I’ve always heard from finance leaders is a degree to which they have to learn to kind of partner and build relationships across the organization so that they can, you know, help them use the thing they do to other parts of the business in a, in a really valuable way. 

[00:48:25] And so, you know, I think there is a degree to which you have to think about like, “Hey, how do I use this sort of thing to help people in their businesses?” 

[00:48:32] And kind of continue to kind of evolve along.

[00:48:35] Joe Michalowski: Yeah, no doubt. Well, we’ve been, we’ve been talking for a while. I, I wanna be respectful of your time. I could probably dig into your brain about financial modeling for hours and hours, I know you got lot of knowledge up there, so I just wanna say, I really appreciate you coming on.

[00:48:48] I think what I’ll leave it at real quick is just giving you the stage. Where can people go to connect with you, to learn more about the work that you’re doing, to download these amazing templates that you’ve been talking about? The stage is yours.

[00:49:00] Taylor Davidson: Yeah, so pretty simple, easy, fine. My company’s called Foresight, foresight.is. You can also find me at taylordavidson.com. My email, my phone number is all on the websites, so those are the best places to contact me.

[00:49:14] Joe Michalowski: Cool. Well, Taylor, thank you again for all the time. Thank you for dropping so much knowledge about financial modeling. I feel like this was a true masterclass for someone like me, who, you know, it’s, it’s a new concept for me, for sure. So yeah, just wanna say really appreciate it and hope we can chat again in the

[00:49:28] future. 

[00:49:29] Taylor Davidson: Cool. I’d love to.

[00:49:30] Joe Michalowski: All right. Thanks, Taylor. Talk to you soon.

[00:49:32] Cheers.