Business models and financial modeling for startups.
Class material for the Founder Institute.
(cc) BY NC SA, Rodrigo SEPULVEDA SCHULZ
www.rodrigosepulveda.com
Green Aesthetic Ripped Paper Thesis Defense Presentation_20240311_111012_0000...
Financial modeling for startups
1. Business models, PnLs - for startups
http://www.flickr.com/photos/kidswithcourage/4588175282/sizes/o/
(cc) BY NC SA, Rodrigo SEPULVEDA SCHULZ - www.rodrigosepulveda.com - May 2011
18. shift the ‘demand curve’ - hard, requires a unique
value proposition sustained by heavy marketing
P
10€
5€
2€
Q
100 200 500
19. shift the ‘demand curve’ - hard, requires a unique
value proposition sustained by heavy marketing
P
10€
5€
2€
Q
100 200 500
20. shift the ‘demand curve’ - hard, requires a unique
value proposition sustained by heavy marketing
P
R = 10€ x 500 = 5.000€
10€
(5x)
5€
2€
Q
100 200 500
23. Variable Costs : anything that can be directly
correlated with ONE extra sale 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
24. 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...
25. 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
26. 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
27. 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 ?
28. 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 keep
price based your fixed
business ? costs low ?
29. 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 keep
price based volume based your fixed
business ? business ? costs low ?
38. 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.
39. Sales : let’s assume I sell a few first per day, then
start 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
40. let’s first model Revenue - you can play with variables later:
such as discounts, promotions, and fluctuating demand per season
41. 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?)
42. let’s now model direct costs - you can play with variables later :
white T-shirts + stickers + shipping
Gross margin has
to quickly
become >0,
>50% is best
43. 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.
44. last, let’s model indirect costs - you can play with variables
later :
45. 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 + % sales
ps: beware of the last column of a model (doesn’t take into account the next period)
46. 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.
51. 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 to
10/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 ?
52. 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.
53. 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