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Example FDD Project

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Questions to answer
Our Scope
Points to raise
Historic data
Can we be comfortable that the historic data presented in the financial model is a fair representation of the company’s revenue growth, cost base and margin structure?
Compare historic data in model to financial system
Review manual journals in financial system
historic data could only be confirmed to mgmt accounts and not underlying financial information
manual journals could not be reviewed without access to the accounting system
historic data is broadly in line with that in the financial model with variances due to higher than forecast cost of deliveries
Completeness of liabilities
Are we comfortable that there are no material liabilities we should be aware of? In particular relating to the treatment of tax and working capital which was not accurately reflected in the investment model.
Interview management / external accountants.
Compare current process to our process library for organisations with similar growth aspirations
limited access to their accounting software to understand how this is done in detail
liabilities are captured and included in management accounts produced by X (outsourced accountants)
legal and accounting costs averaged £56k pm in last 5mths (expansion, contracts and financing round)
Current processes
Does the company have appropriate processes in place to:
calculate payments due to suppliers,
calculate work undertaken for clients and bill accordingly, and
manage both in an automated / scalable way?
Form an assessment based on our experience

low risk approach whereby invoice is settled with the courier only once compared to detail on X system
negotiation/ discussion can take up to 3/4 weeks to true up
this delays demand-side invoicing and cash collection
Future processes
What changes in people, systems and processes would be needed for the company to handle 5x the volume it does today?
Form an assessment based on our experience

automation of billing and invoicing on is needed to ensure the marketplace can scale
X expect a more than doubling in headcount to support the product
Forward Looking
Underlying assumptions
Are the core underlying assumptions in the financial model and operational budget sound?
Review model and highlight any assumptions that we believe are particularly aggressive / judgemental

forecast is based on growth in GR which is estimated by management
growth is particularly aggressive in the first 6mths of US expansion
no churn is built into the model
client pipeline is strong with 16 new clients being onboarded and awaiting start dates
Forward looking
How do overheads increase with scale?
Compare forecast cost ratios to historic cost ratios
Compare overhead ratios to industry average
historic cost ratios are generally in line with the financial model, however, staff cost as a % of GR drops significantly over time
ratio of cost are in line with those expected for a software company
Forward Looking
Cash runway
Comment on the cash runway the company has on completion both in an upside case where growth comes through and the team is grown accordingly and in a downside case where the company has to reduce increased spend in line with slower growth. When will additional investment be needed?
Produce some relatively simple calculations and draw conclusions as appropriate
Comment on historic working capital cycle and how it compares to forecast assumptions
burn is high but management expects fast growth from its customer base (onboarding 16 new clients)
status quo revenue and costs gives X a 2 year runway with £7m raise
historic NWC profile appears positive
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