“Revenues, Costs and Proﬁts” Business models, PnLs - for startups http://www.ﬂickr.com/photos/kidswithcourage/4588175282/sizes/o/(cc) BY NC SA, Rodrigo SEPÚLVEDA SCHULZ - www.rodrigosepulveda.com - November 2011
“how do you plan to make money?” “how do you build a ﬁnancial model ?”“what are the types of expenses, such as ﬁxed expenses, and costs of good sold, and how to they scale ?” “How do you know if your model is right ? What do angel investors and venture capitalists expect from your ﬁnancial model? How do you identify the key metrics for your success ?
Summary• Business models• Generic PnL• Key insights (think KPI!)
Variable Costs : anything that can be directlycorrelated with ONE unit sold of product/service• COGS : Cost of Good Sold = Cost of Revenue• usually the cost of raw materials necessary to produce a new product, or the cost of original item if re-selling• add to that anything that can be linked directly: • commission on each sale; % fee on bank; average shipping & handling cost (if not added)...• remember to think in AVERAGE terms
Fixed Costs (standardized) -main goal is to make them variable• Sales & marketing (S&M)• Product / R&D / Technology• HR : can be factored almost into Product, S&M, G&A• General & Administration (G&A) : rent, lawyers, travel & expenses...
Margin = Revenue - Costs•M=R-C• M = ( average Price x Q ) - ( ﬁxed costs + variable cost x Q)• M = (average price - variable cost) x Q - ﬁxed costs• M = (Unit margin) x Q - FC
focusing on unit margin gives you great insights• M = (Unit margin) x Q - FC means • M > 0 only if • unit margin is > 0 • (Unit margin x Q) > ﬁxed costs
focusing on unit margin gives you great insights• M = (Unit margin) x Q - FC means • M > 0 only if • unit margin is > 0 • (Unit margin x Q) > ﬁxed costs can you keep your ﬁxed costs low ?
focusing on unit margin gives you great insights• M = (Unit margin) x Q - FC means • M > 0 only if • unit margin is > 0 • (Unit margin x Q) > ﬁxed costs are you a can you keepprice based your ﬁxed business ? costs low ?
focusing on unit margin gives you great insights• M = (Unit margin) x Q - FC means • M > 0 only if • unit margin is > 0 • (Unit margin x Q) > ﬁxed costs are you a are you a can you keepprice based volume based your ﬁxed business ? business ? costs low ?
Sales: remember to focus on UNITS• let’s be competitive, and check prices from competition (sales-minus approach, vs. cost-plus approach).• Let’s build a business plan on a 14,99€ average price point for T-shirts• We can expand into segmentation of products, of prices, etc. later.
Sales : let’s assume I sell a few ﬁrst per day, thenstart increasing sales• Assumptions : • 4 T-shirts sold per day • biz open online 24/7 = 30 days /month => 120 T-shirts/month • 5% growth / month, but decreasing slowly to adjust for linear growth • average price: 14,99€ (incl. VAT !) (19.6% in France means 12,53€ excl. VAT) - checked with market price/competition
let’s ﬁrst model Revenue - you can play with variables later:such as discounts, promotions, and ﬂuctuating demand per season
2. COGS (direct costs)• let’s assume a white T-shirt bought online from a supplier• look for economies of scale• don’t forget S&H (incl. here)• your business plan should be VAT-free. Don’t add it, only for Cash-Flow statements• Make sure you order with enough lead-time (1 month?)
let’s now model direct costs - you can play with variables later : white T-shirts + stickers + shippingGross margin has to quickly become >0, >50% is best
3. Indirect costs• assumptions (t0 = launch of site, add as much HR+G&A for research before) • sales & marketing : only Google Adwords SEM (assuming cost based on conversion rates) + a launch budget for display (3 months). • technology : using a hosted solution to start with :12€/month http://commander.1and1.fr/xml/order/Eshops • HR : based on number of people to prepare and ship T-shirts + founder (ﬁnance, marketing, etc.) - everything else outsourced (incl. as costs) • G&A : rent, insurance, pro services, etc. assuming a ﬁxed cost : rent as soon as a hire (300€/person), accountants, phone bills, etc.
last, let’s model indirect costs - you can play with variables later :Sales & marketing, technology, HR, G&A
Now that your model is built : check for errors use ‘track depencies’ to check formulas I always use YELLOW for variables - check them for likeliness often use italic to indicate a result of a formula graphing an excel row (variable or result) makes it easier to check validity checking per period (quarter, year) is useful + % salesps: beware of the last column of a model (doesn’t take into account the next period)
good practices• Put the hypothesis on each month (eg. growth) : it’s then very easy to adjust for seasonal ﬂuctuation, or acceleration of growth rate• Always good to put reality checks in the excel sheet. you can always hide them later. I put them in italic.• always good to number each sections item, makes it very readable• make sure you document every important cell or formula• it’s best to put assumptions in a separate sheet afterwards.
Break down analysis as %sales / year (~ per unit) Helps understand breakdown of costs, and efﬁciency potential
Graphs (and values) show proﬁt >0 ~ month 35...
Changing variables allows to tweak & adjust business model Just changing price from 14,99€ to 18,99€ brings proﬁtability at ~month 24 (1 year ahead). Volume to be adjusted. will the offer be competitive and attractive? Changing sales volume from 4/day to10/day brings proﬁtability at ~month 23 (1 year ahead). Price to be adjusted + marketing expenditure. Can you validate conversion rates early enough, hence marketing expenses and traction of offer ?
Summary 1 : building a business model• Build a model of your business : the algorithm ﬁrst, with all relevant variables• Make your spreadsheet easily readable, commented, well formatted : you’ll use it to ﬁne-tune your business, and to share with investors later on• Don’t forget to double-check in all possible ways for errors• Then, check that your variables are in a realistic range• Finally, and only then, start testing different scenarios by just changing one or two variables.
Summary 2: key insights• Breakdown in 100% of revenue of ONE unit of sales• When are you proﬁtable ? (in months?)• How many units do you need to sell to be proﬁtable ?• Elasticity of variables (impact of each on target objective; examples = proﬁtability, market share, revenue milestone, etc.)• In upcoming class on fundraising : helps assess how much money you need to raise