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Inputting Expenses for the First Time- Without Quickbooks Integration
Step 1: Determine What "Buckets" You want to Group your Expenses Into. Make sure each of these broad, high-level buckets are entered into the model as "custom" expenses objects by clicking the big purple "Add Expense" button followed by "Custom" from the drop-down.
It's okay if there's a more formulaic approach that needs to be taken such as an expense being based off of some % revenue or based on units sold, etc. For now we are only worried about making sure the broad categories are present and we can use the videos further below in the article after we've accomplished these first 2 steps to make expenses function more "true to life" afterwards where necessary.
Example: Monthly subscriptions for Mailchimp, QuickBooks, Zoom, Asana, Slack, etc. should be shown as "Dues and Subscriptions" or "Software Subscriptions. 1 line item to represent major expense categories where possible.
Step 2: Use 10-15 minutes to Make your existing P&L / Income Statement and Balance Sheet values easy to copy and paste into the model each month by doing the following these two steps:
To set up this Mapping Template (Click Here to Download the Mapping Template)
The template will do all the work of making sure each of the smaller line items you have on your P&L / Income Statement is accounted for in your model while making sure your model stays low maintenance, easy to comprehend, and easy to pull insights from. The important thing isn't that we list every item line by line- the important thing is that we make sure all the items are accounted for in the broader categories. Don't worry about if an expense is categorized "technically" right now- instead just focus on making sure that every expense is totaled into a category.
Once QuickBooks integrations is released, you will be able to individually map your line items to Quickbooks from directly within the platform and eliminate the need to use the mapping template.
Step 3: Last Step: Make sure the "cost" metric is filled in for every expense with either your most recent P&L / Income Statement value or your best expectation.
Why it's important to keep your expenses section SIMPLE
General Overview: How Expenses Work
Key Takeaways from the Video:
Broken Out Explanation of Each Item / Function that Applies to ALL Expenses:
Expense Name: This is where you would "title" your expense
Expense Category: This is the "bucket" your expense belongs in.
If you want to select an existing "bucket" you can click the dropdown arrow located to the left of the "Cost of Goods" button.
If you need to create a new "bucket" that you want to place expenses in, just click into the white bar below "Expense Category", type in the name of this "bucket" and click "enter" to save the new category.
By default, the model sorts these categories numerically and then alphabetically. This means if you don't put a number, like "1." before a "bucket" name then the model will automatically sort them A-->Z.
Starting Month: This is when the expense begins impacting cash flow
Ending Month (Optional): This is when the expense stops impacting cash flow
Cost: Either an input or a formula/calculation- this is the amount that will be deducted from cash each month.
Specific Expense Types
Per Person Expenses:
Key Takeaways from the Video:
Common Expenses that fall under this category:
Travel & Entertainment Budgets that are given for every employee (or particular employees)
The important metric here is the "headcount" metric which, by default, is linked to the "Total Headcount" line in the "People" section of the model.
This means, by default the model is pulling in the number of standard hires (or names) you have in your people section, no matter what department they're in.
You have the ability to alter the logic / formula of the "headcount" so that you can be as specific or general as you'd like with which "headcount" the model uses to determine the expenses.
Example: If a particular expense is tied to the headcount of ONLY your sales team, this video walks you through how to change the "headcount" formula to reflect this or any combination of specific departments that should be included in this count.
To change the headcount logic:
Click "Edit" next to the "Headcount" metric
Change "Metric type" to "Calculation"
Change "Operation" to "Add"
Click the white bar next to "Metrics Used"
Locate each metric that should be considered in the headcount and add them one at a time.
When there are Modeled Hires present within the model you'll also need to be aware that changing the headcount formula follows the exact same steps above but in order to make sure you're using your accurate headcount (since having modeled hires throws off the default model headcount and this is explained in the "Modeled Hires" article that you can access by clicking the underlined words "Modeled Hires" above) you'll need add your "True Headcount" metric if the expense applies to all employees OR you'll need to mindfully add the "Total Hires Needed" metric for the modeled hires that the expense ties to.
Percentage of Revenue Expenses:
Key Takeaways from the Video:
Common Expenses that fall under this category:
Sales Commissions and Payment Processing Fees
By Default, the "Revenue" metric in this expense is looking at "Total Revenue" from the Revenue Streams section.
This means that all revenue, regardless of which category we've placed it in will be used when determining how large this expense is.
You have the ability to alter the logic / formula of the "Revenue" so that you can be as specific or general as you'd like with which "headcount" the model uses to determine the expenses.
Example: If a particular expense is tied to the Revenue of ONLY your enterprise sales, this video walks you through how to change the "Revenue" formula to reflect this or any combination of specific revenue streams that should be included in this count.
To change the headcount logic:
Click "Edit" next to the "Revenue" metric
Change "Metric type" to "Calculation"
Change "Operation" to "Add"
Click the white bar next to "Metrics Used"
Locate each metric that should be considered in the Revenue and add them one at a time.
Percentage of Revenue expenses make the model a lot more manageable and can easily be used where you ordinarily wouldn't expect if you have enough historical data.
Converting expenses to a percentage of revenue by taking using this formula: "Expense/Total Revenue" can make your financial model much more dynamic and easy to update than it ordinarily would be.
As an example, let's say you have a QuickBooks subscription and it costs $1,000 a month. On its own this may be relevant or it may not be. But, if we know you're only bringing in $2,000 a month in revenue then suddenly that expense is 50% of revenue, which is easy to see is outlandish.
Leveraging percentage of revenue expenses also makes managing your margins for an investor presentation much more easy. if an expense is expected to cost 10% of revenue, then no matter if that revenue is $100K or $1 Million, your operating, net, or gross profit margins will all reflect the same effect without you having to go back in and manually adjust static values until they produce the desired margins you're looking for.
Per Unit Expenses:
Key Takeaways from the Video:
Common Expenses that fall under this category:
Onboarding Costs and Customer Referral Rewards
By Default, the "Number of Units" metric in this expense is just an input metric waiting to be linked to some relevant event in the model that we need to make this expense function properly.
To link the "Number of Units" to some event in the model:
Click "Edit" next to the "Number of Units" metric
Change "Metric type" to "Calculation"
Change "Operation" to "Add"
Click the white bar next to "Metrics Used"
Locate each metric that should be considered in the Number of Units and add them one at a time.
Link to the Article for Building Formulas referenced in the video: Click Here to Learn how to Build Formulas / Link Data
Custom Expenses and How to make an Expense that Repeats at any Non-Monthly Interval:
Key Takeaways from the Video:
By Default, the "Cost" metric in this expense is just an input metric, which means it will make the number you type in repeat every month.
Naturally, as an input metric you can place assumptions on how it will change over time like you can every input metric throughout the platform.
Solution 1: Using Repeat Pattern Metrics for creating a non-monthly expense (quarterly, semi-annual, annual, etc.) requires that you be confident that the values you input won't need to increase at a later date.
To make "Cost" a repeat pattern metric:
Click "Edit" next to the "Cost" metric
Change "Metric type" to "Repeat Pattern"
Change "Pattern Duration" to reflect the number of months that it takes before the value repeats.
Example: Semi-Annual = "Pattern Duration" with a value of 6.
Month 1 is NOT "January" by default, Month 1 corresponds with the month that you have input in the "Starting Month" field for the expense. This means, if the "Starting Month" field says "Mar 2022", then Month 1 is "March of 2022".
If only 1 value repeats each time then it's only necessary to fill in Month 1 with some value and make sure "Pattern Duration is set to the number of months it takes before the value repeats.
Solution 2: Making a Metric a Past Value of Itself to create a non-monthly expense (quarterly, semi-annual, annual, etc.) gives you a lot more flexibility. Any time you make a manual table edit/ manual override in the data table for a future value the model will update every value after that point to reflect that change.
To make "Cost" a past value of itself:
Click "Edit" next to the "Cost" metric
Change "Metric type" to "Past Value"
Click "Select from Metric" and locate, then click the "cost" metric of the item you're currently in
Change "Time Periods" to reflect the number of months that it takes before the value repeats.
Example: Semi-Annual = "Time Periods" with a value of 6.
"Initial Value 1" is NOT "January" by default, "Initial Value 1" corresponds with the month that you have input in the "Starting Month" field for the expense. This means, if the "Starting Month" field says "Mar 2022", then "Initial Value 1" is "March of 2022".
You can also make manual edits in the "cost" line of this expense and anywhere you make a manual edit will change all values moving forward to match the new value you've input and repeat at the interval you told it to in the earlier steps.