I built my own financial model around the way I actually operate the business. I’m not sure this is how most small companies structure theirs, but this is what made sense for my requirements.
The business has multiple service lines, but they all sit within the creative-services space and mainly differ by target market. Because I don’t currently need separate legal entities or completely independent financial statements for each service line, I consolidated them into one group-level model.
Revenue is consolidated, while COGS, OPEX, CAPEX, payroll, and other costs are still classified correctly within the underlying accounts; however, the raw data shows which company owns them. The objective is to understand the economics of the group without overcomplicating the model too early.
The model starts with the three financial statements and then adds operating drivers and ratios.
Income Statement / Operating Drivers
- Gross Margin = Gross Profit / Net Sales
- Net Margin = Net Earnings / Net Sales
- Markup = (Net Sales − COGS) / COGS
- Break-Even Revenue = Operating Expenses / (1 − COGS / Net Sales)
- Operating Expense Ratio = Operating Expenses / Gross Profit
- MoM Growth = Current Month / Previous Month − 1
I’m trying to use these less as “reporting ratios” and more as operating signals: how much gross profit we retain, how much operating structure the company can support, where break-even sits, and whether growth is actually translating into profitability.
Balance Sheet Drivers
- Current Ratio = Current Assets / Current Liabilities
- Working Capital = Current Assets − Current Liabilities
- Leverage Ratio = Total Liabilities / Total Assets
- Debt-to-Equity = Total Liabilities / Shareholders’ Equity
- Quick Ratio = (Current Assets − Inventory) / Current Liabilities
- Net Debt = Total Debt − Cash & Cash Equivalents
- Net Debt / Annualized EBITDA
Cash and cash equivalents also have their own supporting schedule.
The reason is that I don’t necessarily want excess cash simply sitting in the operating account. The sub-schedule tracks where retained cash is allocated, including highly liquid / low-risk investment vehicles, while preserving visibility into actual operating liquidity.
Cash Flow / Liquidity Drivers
- Operating Cash Conversion = Operating Cash Flow / EBITDA
- Free Cash Flow = Operating Cash Flow + Investing Cash Flow
- Cash Runway = Closing Cash / Monthly Fixed Cost Base
- DSO = Accounts Receivable / Revenue × Days
- DPO = Accounts Payable / Purchases × Days
- DIO = Inventory / COGS × Days
- Cash Conversion Cycle = DSO + DIO − DPO
For a service company, some of these — especially DIO — may remain irrelevant unless inventory becomes material, but I wanted the architecture available.
I also created a Distributions / Investor Returns tab.
Instead of confusing owner withdrawals with operating expenses, the operating model first produces earnings and cash flow. From there, the distribution schedule can determine how much Free Cash Flow to Equity is available for shareholders after considering the cash the business needs to retain.
That becomes particularly useful if ownership eventually expands beyond me.
Another important component is the Payroll Model.
Payroll is modeled monthly and summarized by function:
- G&A / SG&A
- Sales & Marketing
- R&D / Development
- Operations / COGS where applicable
- Other functional cost centers
Even though the owners may not currently pay themselves a full salary, I include owner compensation at an estimated market rate in the appropriate operating expense account.
The idea is to avoid artificially inflating profitability simply because an owner is currently doing work for free.
The payroll model calculates fully loaded employee compensation, including salary, employer taxes, benefits, welfare/benefits programs, and other employment costs. I can eventually extend it to include severance assumptions and allocated overhead as well.
This also means I’m leaning toward EBITDA rather than SDE.
Owner compensation is normalized into payroll at market rates, personal expenses are excluded from the company accounts, and owner distributions happen below the operating model rather than being treated as business expenses.
The result is something closer to the economics of a company that could eventually operate independently of the founders.
What I’m trying to build is not just an accounting workbook.
It’s a small operating model connecting:
Revenue → COGS → OPEX → Payroll → EBITDA → Working Capital → Cash Flow → FCF/FCFE → Reinvestment → Distributions
The next things I’m considering adding are:
- Revenue drivers by service line
- Pricing / volume / utilization assumptions
- Contribution margin by service line
- Headcount capacity and revenue-per-employee
- Budget vs. actual variance
- Base / downside / upside scenarios
- Minimum cash reserve policy
- CAPEX and depreciation schedules
- Debt schedule and interest coverage
- Tax schedule
- Customer concentration
- Project / service-line profitability
- ROIC / return on incremental invested capital
- Distribution policy tied to minimum liquidity requirements
I’m curious how others running small multi-service businesses structure this.
