The project that has two different IRRs

When cash flows are ‘well-behaved’, then the IRR makes more or less sense, because you can argue that it is equivalent to the yield (interest rate) that a bond would pay to bondholders, and the cash flows are the (variable) coupons that you receive, and the Face Value of the bond is the cash flow you receive in the last year (at ‘exit’). Phew!

Let us take a look. In the ideal world, your cash flow stream might look like that, and the IRR is 15% in this case. In the last year, we have simply assumed that the business is sold at 5 times the cash flow generated in the previous year.

Business Planning Excel template for the telecoms and ICT industry

Finding a good business plan template in Excel format can be really hard, for the following reasons:

You need the right level of detail. More often than not, the templates provided by others (your corporate HQs, your boss, you name it) are much too detailed – if you work for a large company, you know what I mean. In those horrible templates, you really wonder who might ever read the hundreds and thousands of rows that try to forecast what could happen 10 years down the road….

Bus_Plan

If you are looking at an existing business, the financial projections should also take the recent past into account. Too often, the templates don’t seem to care about what happened in the last couple of years. If you haven’t analysed the recent performance of the company, how can you pretend that your 7-10 year forecast is realistic?

Forecasting ‘costs’ is hard, but forecasting markets and revenues is really a lot harder. One way to address this problem is to forecast the market in two different manners: by regions / countries on one hand, and by products / product lines on the other hand. And then reconcile them so that the two projections are aligned.

Finally, the financial plan must look good. Not only it must support the story that you are trying to sell (to your management, or to investors), but it must also be visually appealing.

In the ICT industry, there are quite a lot of software and service businesses (as well as hardware, for sure), with the added charm that gross margins can be (very) high, and working capital requirements low (who doesn’t love prepayments or annual software / service fees paid upfront?). So we have reflected these salient features of the ICT industry in the template below.

Enjoy the template in PDF format!

Download “Business Plan in the ICT industry Template” INVESTAURA_Business-Planning-Template.pdf – Downloaded 4970 times – 1 MB

You need to register for free as a ‘Business Plan’ member on our ‘The Art of Business Planning’ web site to download the Business Plan template in Excel (more than 7500 downloads). Go to the registration page

Financial ratio analysis: FREE Excel template!

There are 4 main categories of financial ratios and KPIs used by financial practitioners, each addressing a specific question:

Question 1: “Is the business profitable?” -> Profitability ratios, calculated from the P&L (e.g. Gross margin, EBITDA margin, EBIT margin)

Question 2: “Is the business liquid in the short term?” -> Liquitidity ratios, calculated from the Balance Sheet (e.g. current ratio, liquid ratio, cash ratio)

Question 3: “Is the business financially stable in the long term?” –Stability ratios, calculated from the Balance Sheet (e.g. debt-to-equity ratio, gearing, debt cover ratio)

Question 4: “Is profitability high enough compared to what we have invested?” –Capital Efficiency ratios (e.g. ROE taking an ‘equity’ perspective; ROIC taking an ‘entity’ point of view).

Business Planning and Costing made easy: free financial template!

Business planning and costing don’t have to be complicated. They aren’t! INVESTAURA is pleased to provide you with this simple Excel template to help you get started.

You need to register for free as a ‘Discovery’ member on this web site to download the Business Planning and Costing simple Excel template (more than 1800 downloads). Go to the registration page.

Supply side forecasting: Forget Moore’s law, there is now a better model

“Prediction is very difficult, especially if it is about the future”

Nils Bohr, Nobel laureate in Physics

Yes, forecasting can be hard. But on the supply side, the good news is that many technologies display constant growth rate over time. This means that capacity is growing exponentially and when plotted on a logarithmic scale, capacity is a linear function of time. Sounds familiar? Yes, this is Moore’s law: the number of transistor per chip has been correctly predicted by to double every 2 years on average since the 1960s, giving an annual growth rate of +40%.

Stop using the IRR!

It’s funny that the IRR – the Internal Rate of Return – is still in use with finance professionals.  Actually it is not funny, it is sad, especially when you consider the many flaws that the IRR has.  But it is human after all: the IRR looks like a wonderfully simple selection criteria.  If a project delivers 15% IRR and my cost of capital is only 10%, then I should invest in this project!  And if another project delivers 20% IRR, then I should invest in that one instead!  Unfortunately, things are not that simple.

But what is the IRR?  It is really hard to find anyone who can explain it in terms that make sense.  No surprise there: the IRR is a mathematically defined percentage and most people hate mathematics.  By the way: do you know that the IRR is so fuzzy that it can only be calculated by computers (and Excel) using iterative methods i.e. you can simply calculate IRR as a simple sum or ratio of other things.  Unlike your beloved NPV, ROIC and the likes.