Why Financial Modelling Is Useful

Financial modelling is one of those things that sounds incredibly complex to many folks outside the investment or finance space. But every business can benefit from the exercise, not just those seeking investment—and not only for-profit corporations. The skills you’ll develop learning to create a financial model will help you build a sustainable foundation for your studio, whether you’re a co-op or share corporation, non-profit or social purpose organization. And it’s really not that hard! Hang in there and be patient with yourself. We’ll break down everything as simply as we can. If there’s something you’re not familiar with, you can easily find definitions online.

In the first section of this series, we’ll cover our relationship with money and introduce financial analysis. We’ll focus on the investment readiness aspect of the social finance ecosystem, so if you’re preparing for impact investment, you’re in the right place!

In the other sections, we’ll focus on exploring capital-raising alternatives, building a pitch, and learning investor strategy. All of this will lead to investment readiness. Our goal is to leave you with the confidence you need to pursue an impact investment opportunity.

Investment readiness for us means having the structural capacity to support collective and community impact by building autonomous collectives that operate independently of capitalist market pressures by prioritizing social returns over financial ones.

Some parts of this series may also be helpful if you are preparing to pitch to traditional investors, VCs, or publishers. Just keep in mind that they will have very different expectations of your financial performance.

Our Relationship with Money

We need to explore our relationship with money before we get into investment readiness. As founders serving a broad audience that includes marginalized folks (e.g., worker-members, players, and communities), we need to start by understanding biases and barriers.

Most marginalized founders will encounter systemic and interpersonal biases (related to gender, race, ability, and other factors), which will limit their access to capital, inclusion, agency, power networks, and confidence. These are not just obstacles but are inherent features of a capitalist system designed to maintain class divisions and inequalities.

Cultural programming and narratives reinforce the regressive and binary idea that “women shop” and “men invest,” which affects the way we perceive money, especially when we have experienced a lack of it.

Marginalized founders tend to have a more complicated relationship with money. This issue can affect your willingness to seek funding, even if the timing is right. Many systemic factors hinder marginalized founders from accessing financing:

1. A lack of underrepresented people making investment decisions
2. Bias from traditional investors, who are mostly white men
3. Historical exclusion from financial education and generational wealth
4. A lack of industry understanding of worker-centric studio structures and sustainable growth
5. An underrepresentation of the types of games marginalized founders want to make

… and more.

This is compounded because less experienced folks tend to be more conservative and pragmatic when pitching their ideas, while those with years in the industry are more likely to sell a vision or a dream. Unfortunately, the scales usually tip toward the latter with investors.

If you’re not selling hockey stick growth, it will be challenging to get a traditional investor to understand your value proposition and impact.

This isn’t meant to scare you! But the reality of Canada’s funding system is that you will face headwinds.

Biases and Anxiety

In recent years, funders’ mindsets have shifted toward recognizing the challenges faced by marginalized founders and alternatively structured companies. More support is available now, and organizations like Weird Ghosts, Marigold Capital, EDC, Women in Technology Fund, Disruption Ventures, and many others are leading the way. These groups understand the struggles cooperative and worker-centric businesses face in a world that rewards individual entrepreneurs. Unfortunately, these issues are still prevalent, so let’s take a look at these biases.

Reflection

Use the following reflective questions to tease out your assumptions, anxieties, and biases.

• What words come to mind to describe your feelings about investment?
• What pre-existing assumptions do you have about investment and raising capital?
• What words come to mind to describe what success might look like for you after the investment readiness journey?

You won’t become an expert overnight. But you can identify your uncertainties about the process of raising capital. Take a step back and understand why you feel the way you do.

You may feel nervous about pitching because of your experiences with perfectionism or your relationship with money. Lean on your support network and resources, including bookkeepers and finance experts, to help navigate the jargon and provide support and encouragement. Remember, raising capital is possible, and others have done it. Don’t be afraid to ask questions, Google, and search Investopedia!

Failure is a natural part of the process. But we can redefine what we consider failure and focus on impact as our goal.

Accounting

Let’s start with financial statements and the accounting process. Accounting refers to the practice of recording, tracking, and reporting financial transactions within a business. Financial statements are a tool to communicate this information. We will cover three types of financial statements: income statement, balance sheet, and cash flow statement.

You might wonder: I have an accountant – why do I need to know this stuff? Here’s why:

• To understand your studio’s operations so you can make informed decisions
• To analyze trends over time and make adjustments to the studio or game
• To communicate clearly with stakeholders and investors

Good news: You can do all of these things by analyzing financial statements.

What are investors looking for?

Investors will ask for your financial statements within their first round of reviews to determine whether your business model makes sense. But as a cooperative (or shared-ownership) studio, your financial statements reflect a commitment to equitable distribution and collective benefit rather than merely generating returns for external investors. This is why carefully selecting the investors and lenders you approach and understanding what kind of return they are looking for is critical.

Some questions they may ask:

• Net profit: Are you making money now? If not now, when do you expect to?
• Revenue: Are people willing to pay for your game or services?
• Cash flow: Do you have enough cash on hand?
• Burn rate: How much does it cost per month to run your studio?
• Margin: What’s the cost of making a sale?
• Growth rate: How fast is your business growing? (Growth is likely not something you are pursuing—be ready to answer this by emphasizing how you can scale your impact)
• Debt: What’s your current debt level?

Knowing how investors ask questions and demonstrating your knowledge of relevant terms shows that you are capable and ready to raise capital. Being educated on terminology prepares you to frame community-centric growth and sustainable practices over traditional profit motives.

Financial Statements

Looking at your financial statements from the perspective of an investor or lender, what would they think?

Your financial statements will transparently reflect how revenues are reinvested back into the cooperative and the community.

Income Statement

Your income statement (or statement of operations) is a financial document that reflects your operations over a specific period. It tracks all the revenue generated from the sales of your games or services and deducts the associated costs. Additionally, it subtracts other expenses that you incur, like general and administrative costs, utilities, and rent. By subtracting all these expenses from the revenue, you arrive at your profit, which is the amount of money you’ve made over that period.

Balance Sheet

The balance sheet represents a specific point in time, unlike the income statement, which covers a period of time. You can create a balance sheet or statement of financial position for the end of a fiscal year or any other important date. The standard way to set up a balance sheet is by using the formula: assets = liabilities + equity. (Not-for-profit organizations use net assets instead of equity.)

The three categories on the balance sheet are assets, liabilities, and equity (or net assets).

• Assets: Assets are tangible items that you own.
  • Short-term assets include cash and accounts receivable.
  • Long-term assets include equipment and property.
  • Investors in traditional businesses prefer you have assets in case of bankruptcy.
  • Assets on the books don’t determine whether a studio is good or bad! But they can increase investor confidence.
• Liabilities: This is what you owe to others.
  • Short-term liabilities include credit cards, accounts payable, and lines of credit.
  • Long-term liabilities include debt that takes longer than a year to pay off, like bank loans or mortgages.
  • If you have a significant amount of debt, creditors with priority have the right to your assets before others. This makes it riskier for investors or lenders who are subordinate to senior creditors, who will receive what is left over after they have been paid.
• Equity (or net assets): Equity balances the balance sheet and represents the amount available for an organization to use in the future.
  • This amount depends on how you capitalize revenues and includes accumulated retained earnings.
  • The yearly profit or loss and any decision to use these funds for future operations can change the net asset account balance.

Cash Flow Statement

The cash flow statement is a core document for investors. It focuses exclusively on cash and shows how it is generated and spent.

If you’re paying cash for all your expenses but not seeing revenue immediately (e.g., deferred payments from distributors or platforms or milestone payments from a publisher or investor), you will quickly run out of funds to keep the studio running and pay wages. You should always know whether there’s enough to make it through to the next period.

The cash flow statement points out exactly when additional capital will be needed. Identifying when and where the cash gap will exist will help you talk to investors about how much cash is required. For example, saying that $50,000 will be needed in one year and $100,000 in two years will help investors understand how they can help fill that $150,000 gap.

What is a Financial Model?

A financial model is your best guess at how much money you’ll make or need in the next three years.

A good financial model shows the following:

• Your business model
• The cost to deliver your games and/or services
• The cost to run your studio
• How many people you need
• How you plan to finance your studio
• How much money you need to raise

If you’ve applied for arts council or other government grants, you’ll notice that applications and investor requests are similar.