Startup PnL Model

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

Summary

• Business models

• Generic PnL

• Key insights (think KPI!)

Revenue = Price x Qty

x3

R = R1 + R2 + ... = P1 x Q1 + P2 x Q2 + ...

~ ~
let’s simplify with : R = P x Q

~ ~

- are you a VOLUME business ?

~ ~

- are you a VOLUME business ?

- are you a PRICE based business ?

Volume business (usually low margin)

Price-based business (usually high margin)

the famous ‘demand curve’

P

10€

5€

2€

Q
100 200 500


P

10€ R = 10€ x 100 = 1.000€

5€

2€

Q
100 200 500


P

10€ R = 10€ x 100 = 1.000€

R’ = 5€ x 200 = 1.000€
5€

2€

Q
100 200 500


P

10€ R = 10€ x 100 = 1.000€

R’ = 5€ x 200 = 1.000€
5€

R” = 2€ x 500 = 1.000€
2€

Q
100 200 500

can you be a volume + price based business?

shift the ‘demand curve’ - hard, requires a unique
value proposition sustained by heavy marketing

P

10€

5€

2€

Q
100 200 500

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

Read more:

http://www.amazon.com/Microeconomics-7th-Robert-Pindyck/dp/0132080230/ref=sr_1_1?ie=UTF8&qid=1304956318&sr=8-1

Costs = Variable Costs x Qty + Fixed Costs

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

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



• M > 0 only if



can you keep
your fixed
costs low ?



• M > 0 only if



are you a can you keep
price based your fixed
business ? costs low ?



• M > 0 only if



are you a are you a can you keep
price based volume based your fixed
business ? business ? costs low ?

startup finance is like wartime medicine :
ugly but works

http://www.olive-drab.com/od_medical_www.php

Let’s start a T-shirt business !

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, 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

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 + shipping

Gross 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 :

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)

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.

Read more:

http://www.amazon.com/Financial-Modeling-Simon-Benninga/dp/0262026287/ref=sr_1_1?s=books&ie=UTF8&qid=1304957285&sr=1-1

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 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 ?

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

Startup PnL Model

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