Welcome to part 2 of our special 2-part series with Michael Hutchens of Modano. In part 1, we looked at the differentiation opportunity for business owners and advisors to business in using financial analysis to drive growth and strategy for the business.
Today we talk a bit more about Michael’s software which enables you to build and maintain a scalable investment banking quality financial model of using Microsoft Excel. We’ll go through a few examples of businesses who have used financial modelling to power their growth. All these and more!
- A cheaper and effective way to build financial models
- Examples of SMEs who used financial modelling to power growth
- Opportunity for annuity-based revenue streams for accountants
- The problem with plug and play solutions
- It’s a risk not doing it
- Investment banking services without the conflict of interest
- How to get started
A cheaper and effective way to build financial models
All the software is, and I say all it is because people get people get scared of it. All it is is a system that enables you to more efficiently use Microsoft Excel to build financial model.
We looked at WordPress as an example 10 years ago. We built our website using WordPress without actually hiring an engineer. We looked at modelling and thought why aren’t financial models able to be like WordPress. The reality is WordPress is successful because the vast majority who were using it don’t actually build the content that makes the website work. So on WordPress if you want to plug in a shopping cart, you can plug in a module that does that. Over the years a whole community of people has built the code that does that and that’s why you can build a WordPress website and start such charging somebody from a widget you’re selling from your home without really understanding how to write code.
We walk that fine line between giving people a whole lot of information that they can then use to do their modelling more efficiently and effectively, but also automating it. Therefore one of the discussions we always have with people is you still need to know what you’re doing when using our system, which is where the training comes in.
To give you a really simple example, in the old days, to build a financial model you’d start with a static template. You got off a mate or your accountant and you type numbers in and work out what was going on. With our system, we’ve built 10,000 pieces of financial models. An example of a piece is a SaaS revenue projection. Another example might be some depreciation calculation for your fixed assets.
What our system allows you to do is to cherry pick, like Lego pieces, and slot them in. But then even after that, you still need to then know how to customise the model for your business. What we sort of pride ourselves on is getting people as far down the line as we can in terms of a model that looks just like their business, and then we work with them to get that final bit across the line.
It is very similar to web development. When the web first came out, you’d have to pay an engineer tens of thousands of dollars to build your website from scratch and only big companies had websites. Now the opposite is the case, you can go to India and get a website for $300 without knowing anything at all about anything.
With financial modeling, you do need to know something about what you’re doing because it’s risky stuff if you don’t know what you’re doing and that’s why we do so much training. We have such a big support system that we help our users with. But at the same time, it doesn’t mean you need to spend $50,000 to $100,000 to get a model up and that’s the traditional problem.
The software for us is really just a medium. I’m not an Excel nerd. We just happen to be using Excel because it’s still by far the best solution for the vast majority of things that we do with financial modelling and our system is just a tool that expedites the process. But ultimately, the end point is still a financial model that is effectively a numerical representation of your business and it’s a really good one. It literally lives and breathes the way your business does.
Our software really is just a part of enabling people to get to the same point they get to if they were paying 50 to 100 grand for a financial model. But doing it cheaper and doing more of it themselves.
Examples of SMEs who used financial modelling to power growth
A good example that I like because I love their food is Fonda Mexican. These guys started Fonda Mexican like Grill’d. I think they’re probably up around 10 or more stores now. But those guys effectively opened a quick service, really high quality Mexican food restaurant which also has like a cocktail bar and all the beautiful people go there. It’s really doing well.
From really early on, they hired an actual financial accountant that wanted a good financial model and we help them build some modules that they use to analyze each store. To add a new store, they can reuse the same module and effectively be able to do peer analysis between the different stores using this analysis. They can preemptively put a module in.
The franchise space is really ripe for this because it’s scalable and doing it manually is a nightmare. But there’s a lot of repetition which means you can create a piece of analysis and our software enables you to reuse it.
Stories like Fonda Mexican are just fantastic because you see these guys that have started businesses in their late 20s early 30s. They’re turning over tens of millions of dollars within five years and they’re just fighting to get their head around the growth.
A big part of being to chat with investors or potential investors or banks or even looking at IPO is actually knowing your numbers. It is such a big difference when somebody can walk into a room and say this is where we’re making money, this is why, this is when and this is how versus someone coming in and say we’re doing pretty well, the average store does this and we’ll open a new one next month that we’re expecting to go pretty well. What does that even mean?
There is a fear inside of a lot of small business owners that if they look at their company hard enough they might not like what they see and I know I had that feeling when I started looking at my proper subscriber numbers late last year.
It’s one of those things where actually understanding how your business works, if you’re really risk averse it can be really scary because you do analysis and think wow this business is actually quite risky, especially in service business.
A lot of the services business that we look at that aren’t large, if they lost two or three of their main content clients they’d have to get rid of half their staff. That clarity can be scary for some companies where people would rather just assume everything’s fine and not think about it.
Opportunity for annuity-based revenue streams for accountants
I spent a lot of the last two years speaking to accounting firms. I’m probably one of the world’s pre-eminent experts on accounting firm mentality and philosophy now. It was tough for me because I came out of uni into investment banking where within weeks of being in banking you’re pitching and you’re selling and you’re also looking at opportunities so your whole thought process is “where is the opportunity, where can I do something special?”
I think with accounting firms the first thing you get taught is that you need to not mess things up because you’re effectively a pillar of strength for companies. You provide them with assurance. Accounting is effectively assurance in essence for a lot of businesses. The person you go to for the most stable advice probably isn’t the person you go to when you want to go have a big night out to go get really drunk.
I think a lot of accounting firms feel like their role isn’t to go into companies and talk about “Let’s grow fast. Let’s do crazy stuff.” A lot of people I spoke with immediately started saying conflicts of interests. There’s a huge difference between aligning yourself with the company so strategically that effectively its success depends on your advice and if it fails you’ve sort of let them down, and just providing them with a better understanding their own business.
Our General Commercial Legal Services
Are you looking for a top quality legal team to assist you in your organisation?
Aspect Legal is an innovative commercial legal practice that specialises in providing fast and professional services for their clients. Our commercial legal services cover a wide spectrum of disciplines – contract law, dispute resolution, business sales and acquisitions, brand protection and IP.
We work with clients both large and small, and we’re all about helping you grow while protecting you from the unexpected storms of business. If you’d like to chat about how we might be able to assist you, simply head over to our website at aspectlegal.com.au to book in time for a free discussion with one of our lawyers. So get in touch today!
The problem with plug and play solutions
I think the other thing is that accounting firms are all focused on when they talk about annuity revenue streams, all of them are focused on one subscription type software. I’ve got no problem with Xero and Quick Books. I mean they’ve made things a bit easier than MYOB used to be. If you’re a good accountant, I think MYOB was a bit easier in many regards and faster the desktop version. But Xero is a great sexy program and so is Quick Books and a lot of the add ons.
The big issue with a lot of these programs is that a lot of people are using them and just typing numbers in and not really understanding how the business is working. What a lot of the accounting firms are trying to do is take those programs and convert that into a sort of 50/100 dollars a month revenue stream for them where they don’t have a human element involved.
A really good example of this is one of the Big Four, where one of the Big Four looked at everything including our system and decided the best thing to do was buy an off the shelf Xero add on, rebrand it and then try and sell it as a $2000 a month strategic analysis package and they’ve sold quite a lot of it. But the reality is it’s not particularly good because it’s a plug and play solution It’s all cloudbase, which everyone gets excited about, but that means for me (as far as I’m concerned) is it’s slow compared to desktop Excel. What it does do is provide people with some great looking dashboards and some cutting and slicing of the data, but it doesn’t give them a good strategic projection tool.
The subscription model for the accounting firms I see that we have proven exists in our business over the last 15 years is the model where you go in and you help a client get a budgeting, planning, and strategic forecasting system together, so a whole infrastructure. You help them with their accounting package and their projections. You help them build a financial model which is strategic so they can run scenarios and they can use it for refinancings, capital raisings, what-if analysis. Then once they’ve got that, then the annuity comes from that client then being in such a close relationship with you that they call you all the time now to help them with their decision making.
It’s a risk not doing it
We pitched our software to a very small firm about three years ago and they were actually working with a really fast growing company. These guys didn’t really dedicate resources to financial modelling. Then the client came back to them about six months later and said “Listen. We need a financial model. We’re doing a capital raising.” They turned around and said “Oh, we spoke to this Modano company” so they gave us a call. We ended up stepping up and helping them. We ended up working directly with the client.
Then the client actually then turned around and said to “Listen guys. To be honest, you guys aren’t strategic enough for us.” They moved to another accounting firm that was using our system. So these guys came to us and said “You burnt us.” And we said “No, we didn’t. You guys couldn’t service them and we didn’t want to service them but they needed a model badly.”
The funny thing is the other firm they went to were probably less impressive in terms of the staff they had. But they actually invested some time in learning financial models. So ironically, this small accounting firm lost its biggest client because they outgrew them and they were not providing those skills. At this point in time, you don’t need to be particularly good financial modeller to impress an SME.
With financial modeling right now, if you can understand integrated three-way modeling and build a model that the client can use run scenarios and get what they want done, whether it’s a capital raising or IPO or even just something as simple as a rolling budgeting model which they haven’t been able to do automatically, you become a rock star to them.
The annuity stream here is the annuity that comes from providing a service that companies need real time. But it’s also annuity stream which comes with the fact that you become the preferred supplier of the services that are based on the model.
There is this weird scenario where we are running deals alongside investment banks where the modeling isn’t being done by the investment bank and investment banks don’t overly care about it. They’re a bit apprehensive about it, but they’re like “If it’s a good model, it’s a win for everybody because we can focus on more strategic things and using the model.”
If accounting firms really want to move forward and be savvy, they need to focus less on plug and play tech which gives them some little annuity stream without them having to do much other than sell it and focus more on empowering their staff, getting greater skills that empowers their clients that then forms a relationship almost of analytical dependence.
I say that in a positive way. They become dependent on you to understand their business better because they know that you are you are an empowering body. That’s where the accounting firms don’t seem to realise they have that capability. They’ve got the relationship already. It’s just an extension of it.
It’s insane how little money the big firms are making out of financial modelling and most of it is still from audit. That’s because they’re just not respected as financial modellers a lot of them yet, but they could easily.
Investment banking services without the conflict of interest
What we’re also seeing a lot of now is accounting firms that are suddenly buying up a whole lot of bookkeepers just to get their client list. Some of them are just naturally growing fast.
We’ve got in this new world order which is accounting firms coming in and saying we’ll do your tax, we’ll do your accounting, we’ll do your legals, we’ll do your social media, and we’ll do your budget planning and strategic stuff. They’re the ones that are really interesting.
I think about the fact that I came out of a commerce law degree and didn’t even know how to register a company. It’s insane! We don’t get educated on how to actually do things practically. We learn all this theoretical awesome stuff like weighted average cost of capital, DCF and we don’t actually know how to register a company when we got to start one let alone when do you pay payroll taxes.
Where the world is heading with a combination of tech, knowledge and empowerment is the ability to plug and play a new company and within the first three to six months you’ve got the system in place that will last you until you’re turning over 50 million, and then doing without spending a fortune because traditionally that’s cost a fortune. You’ve had to keep paying more and more consultants to do that, whereas I think what’s happening now is technology is meeting it at every stage of the way.
There’s a lot that accounting firms can do to become much more like investment banks without a conflict of interest, and in the process derive a lot more revenues doing stuff that’s a lot more exciting for their staff.
We’ve done numbers and we think that the market in Australia in terms of available fees is over a billion dollars for the SME space alone. It’s because there’s just so many of them. There’s literally a couple of hundred thousand SMEs that turn over multi-million dollar turnover that would spend five or ten thousand dollars a year on financial modeling if it helped their business grow. It’s just a no brainer. But it’s a generational change thing that comes with both technology, awareness, and education.
How to get started
It took me a long time to get to this point because I thought everyone would just want to jump in and add hours of learning which most people don’t and a lot of firms don’t want to invest a lot of money in something until they know it’s going to get an ROI. So the absolute best way for firms to start is to sit down with a few of their clients that they think would most benefit from a financial model, which obviously are the ones that are either in trouble financially or the ones that are growing really well.
Sit down with them. Have coffee and say “Listen. We’re thinking about offering some some strategic financial advisory services where you guys could have a better understanding of your business. You have a real time financial model that would link to your historical data and you’d be able to understand your business drivers a bit better. Is this something that would interest you? And if so, is ten or twelve thousand dollars reasonable?”
Most SMEs you can make money building models for between 10 and 20 thousand and for a company that’s turning over five or 10 million that’s not a lot of money, especially if it saves them from making a bad decision or it helps them make a good one. We found that with the mid-tiers we spoke with, their clients didn’t even blink when they said $10,000 to $20,000. Then it comes back to how can we service this client and still make a marginal that 10 or 20.
We’ve been doing a lot of projects with mid-sized firms where we build the model and they watch alongside the first one or two and we do fee split. Then going forward, they start doing it all themselves. What that does is it creates a dynamic where they can see a cash flow positive deal way through their business and a client come back and high five them without having to actually dedicate a lot of training resources to learning how this all works.
Some of the smaller firms come to us and say we’re just going to partner with you guys and we’re like that’s fine. I mean it means your margins are going to be lower. Obviously, as a SaaS business our growth depends on being able to grow which means we don’t want to be doing everyone’s models. But at the same time, we’ll do whatever works for the different parties involved.
We’ve got a lot of smaller firms that say “we can’t afford to have a full time guy modelling and our guys are really sophisticated enough, but we’ve got two or three clients that are happy to spend 10 or 20 grand a model” and it works for everybody. Then in the process they learn.
Some of them over the last three or four years have evolved from doing that with us to turning over a quarter million, half million dollars and realising there’s money here, we don’t really want to give Modano one or two hundred grand of our half million of new revenues. They’ll hire a staff member and we’ll eventually make ourselves redundant. But at that point in time, often they have five or 10 staff and their clients using our software so we shift to being a software provider.
It’s a really weird dynamic where we can viably do pretty much any scenario clients want. Often the hardest thing is what’s the most appealing starting point and that’s why I suggested the most appealing one we’ve found so far is just see if your clients are interested in how much they are willing to spend and if they are, give us a call. We’ll cut a deal.
The beautiful thing is if this works, advisors grow their businesses, corporates become more successful, and Modano gets to keep building software, which is what we love doing. Our battle motto is it only works if everyone wins.
Disclaimer: The material contained on this website is provided for general information purposes only and does not constitute legal advice. You should not depend upon any information appearing on this website without seeking legal advice. We do not guarantee that the contents of this website will be accurate, complete or up-to-date. Liability limited by a scheme approved under Professional Standards Legislation.