Zipcar's business model relies on subscription fees from members and hourly rental fees. The key drivers of Zipcar's economics are the number of subscribers, hourly rental fees, and vehicle utilization rates. While the purchase of vehicles represents a large up-front fixed cost, ongoing costs like parking and maintenance are avoided when vehicles are rented by members. Zipcar's financial success depends on optimizing vehicle usage to cover fixed costs and generate profits. The founders should focus on growing the member base and improving vehicle usage rates through expanded offerings and locations.

1. Financial Models
IT Entrepreneurship
John J. H. Oh
KAIST

2. Financial challenge
• Accounting classes teach you how to analyze already existing financial
statements
• Finance classes teach you how to develop pro forma statements but usually
provide you with the numbers
• Entrepreneurship classes require you to develop the numbers

3. Financial Model
HBSC 9-802-048, Richard G. Hamermesh, Paul W. Marshall and Taslim Pirmohamed, Note on
Business Model Analysis for the Entrepreneur (2003)
• Revenue sources
• Revenue models
• Cost drivers
• Investment size
• Key success factor

4. Revenue Sources
• Single stream
• Multiple streams
• Interdependent: printer+toner
• Loss leader

5. Revenue Models
• Subscription/membership
• Volume or unit-based
• Advertising-based
• License or syndication

6. Cost Drivers
• fixed
• semi-variable
• variable
• non-recurring

7. Investment Size
• How much is required to launch the business model
• How much working capital is required to sustain the business?
• What are the timings of those cash needs?
• Will the cash expended produce viable business entity?

8. Critical Success Factor
• Sensitivity analysis
• Find 3~4 Critical parameters that has greatest impact on profitability, timing
of cash inflow, sustainability
• Measure impact of change of parameters for each, and find the most
important ones.

9. DeathValley
Osawa and Miyazaki (2006)

10. Financials for the business plan
• Assumptions
• Sources and Uses of Funds
• Sales forecast
• Income statement
Additional
• Cash Flow
• Balance Sheets

11. Getting started with the end in mind
• Potential investors want financial statements that:
• Are based on logical reasoning and realize that there are limitations for
start-up businesses because there is no historical basis for projections
• Can be easily modified
• Are well organized and easy to navigate around

12. Responding to investor
• Use separate sheet for
• assumptions
• income statement for 5 years
• optionally balance sheet, cash flow

13. Assumptions
• foundation for your financial calculations
• one number and have it affect all of the other financials
• Be prepared to add to assumptions page frequently
• What should you include:
• Selling price, cost of goods sold, R&D, SG&A, etc.

14. Sales Forecast
• Determine what you can expect to sell during specific periods of time
• Breakdown to day of week, time, month, etc.
• Breakdown to specific product and customer (bottom-up)
• Also include the following:
• Start-up factor
• Seasonality factor
• Worst, Likely, and Best Case Scenarios
• Price drop (Moore’s law)

15. Consider specific scenarios
Worst Case Most Likely Best Case
1.
2.
3.
4.
5.
Total:

16. Jan Feb Mar Apr May Jun July Aug Sept Oct Nov Dec
Sales 5 5 5 5 5 5 5 5 5 5 5 5
Sales ForecastYear 1
What’s wrong?

17. Jan Feb Mar Apr May Jun July Aug Sept Oct Nov Dec
Sales 5 5 5 5 5 5 5 5 5 5 5 5
Start-up .2 .2 .3 .4 .5 .6 .7 .8 .9 1 1 1
Season. .4 .8 .8 .8 .9 1 1 1 .9 .9 .8 .5
Sales .4 .8 1.2 1.6 2.25 3 3.5 4 4.05 4.5 4 2.5
Sales ForecastYear 1
Start-up and Seasonality Factors

18. Income Statements
• Sales figures from your Sales Forecast
• Develop a list of relevant expenses for your specific business
• Examine financial statements for similar companies
• Consider calculating expenses as a percent of sales
• Develop the Income Statement forYear 1 by month
• Income Statements forYear 2-3 or 5 by year by quarter

19. Income Statement
Total Sales
minus
Total Expenses
equals
Profit (Loss)

20. Short Form P&L
Total Sales
RMA(return merchandise authorization)
Less COGS (Cost of Goods Sold)
= Gross Margin
Operating expenses:
Sales related expenses
Marketing related (advertising/PR, exhibition)
Sales related (agent commissions, travel, entertainment, etc)
unsold inventory cost
R&D
Salaries of R&D Staffs
Equipments etc.
SG&A
salaries
space costs (rent, utilities)
Other expenses
=Total Expenses
Net Profit (Loss) pre-tax

21. NVIDIA Corporation
(NVDA)
unit US$ 1,000
Income Statement
Period Ending Jan 25, 2015 Oct 26, 2014 Jul 27, 2014 Apr 27, 2014
Total Revenue 1,250,514 1,225,382 1,102,824 1,102,787
Cost of Revenue 550,911 548,684 483,850 498,585
Gross Profit 699,603 676,698 618,974 604,202
Opera>ng Expenses
Research Development 348,253 340,085 337,124 334,263
Selling General and
Administra>ve
120,214 123,298 118,671 118,580
Non Recurring - - - -
Others - - - -
Total Opera>ng Expenses - - - -
OperaDng Income 231,136 213,315 163,179 151,359
Income from Con>nuing
Opera>onsTotal Other Income/
Expenses Net
8,317 7,297 2,972 23,394
Earnings Before Interest
And Taxes
239,453 220,612 166,151 174,753
Interest Expense 11,594 11,542 11,526 11,471
Income Before Tax 227,859 209,070 154,625 163,282
Income Tax Expense 34,731 36,103 26,649 26,766
Minority Interest - - - -
Net Income From
Con>nuing Ops
193,128 172,967 127,976 136,516
Non-recurring Events
Other Items - - - -
Net Income 193,128 172,967 127,976 136,516

22. Expense Projections
Salaries, insurance, benefits
Rent & Utilities
Legal & Accounting
Insurance
Postage, Phone etc.
Advertising/Promotion
Travel and Entertainment
Debt service
Office expense
Miscellaneous
Depreciation
Taxes

23. Cash Flow Statements
• Cash flow is the most important financial statement for small businesses
• Actually quite simple to develop
• Use all the accounts found on your income statement but:
• Take out any non-cash items such as depreciation
• Add in any capital expenditures such as buying new equipment at the
business start-up and for growth
• Add in capital received from financing

24. Cash Flow Statements
• Start off withYear 0 to account for the financing you receive and the non-
operating expenditures that you make to get the business started
• Use the cash flow to determine how much additional capital that you need
for the business
• Your cash balance should never go below 0
• Not required to be extremely elaborate at this time but realize that in the
future you would need to account for A/R and A/P cycles and other critical
aspects of a cash flow

25. Managing Cash
Cash comes in:
net from operations
new debt
sale of fixed asset
new investment
Cash goes out:
debt retired
new fixed assets
dividends
stock redemption

26. Cash from Operations
Operations: $$ Collected
Less $$$ paid to
suppliers, labor, taxes etc.
Operations net

27. Balance Sheets
• Balance sheets can be as simple as you want
• Balance sheets are often the most difficult of the financial
statements
• Incorporate data from all of the previously described statements

28. Balance Sheet
Assets and Liabilities & Net Worth are always in balance -- by definition.
Liabilities +
Net Worth
Assets

29. Assets (WhatYou Own)
Current Assets
Highly liquid: cash and near-cash, notes, accounts receivable
Less liquid but current: inventories
Fixed Assets
Illiquid: real estate, equipment
Other Assets
“Good will” and other intangibles

30. Liabilities (WhatYou Owe)
Current Liabilities (come due within one year)
taxes
accounts and notes payable
accrued expenses
current portion of long-term debt
Long Term Liabilities
Mortgages
trust deeds
long-term loans (equipment or other)
net of current portion of LTD

31. Net Worth (“Owner’s Equity”)
Net Worth = Assets minus Liabilities
1. Paid-in or invested capital
2. Retained Earnings
3. Other equity

32. Additional analyses
• Investors want to know key success factor of your new venture
• Break even analysis and other financial ratios will help them determine your
ability to be successful and to meet your financial responsibilities

33. Break-even Analysis
S = FC ÷ GM
Where S = Sales at which you make neither a profit nor a loss
GM = Gross Margin expressed as a percent of Sales
FC = Fixed costs in $$$

34. Break-even plus Profit
S = (FC + P) ÷ GM
S = gross sales to make desired profit
P = desired profit
GM = gross margin expressed as a percentage of sales
FC = Fixed costs in $$$

35. Fixed versusVariable Costs
Fixed Costs
Any cost which is
independent of the sales
level.
Examples:
rent
salaries
insurance
Variable Costs
Any cost which rises or falls
with the level of sales.
Examples:
cost of goods sold
sales commissions
delivery expense

36. Financial Ratios
• Current ratio = current assets/current liability
• Inventory turnover = COGS/average inventory
• Asset turnover = net sales/average assets
• Return on investment = investment profit/investment cost
• Return on assets = net income / (fixed assets + working capital)
• Any others?

37. Advice on Financial Data
1. You provide the ideas and insights. Get your accountant to put the
numbers together.
2. Understand how the financial statements provide operating information.
3. P&L statement shows financial model.
4. If you use only one financial statement, use a MONTHLY CASH FLOW
BUDGET.
5. Investors like facts and hate surprises.

38. Case: Zipcar
• HBSC #9-803-096, Myra M. HartMichael J. RobertsJulia and D. Stevens,
Zipcar: Refining the Business Model (2005)
• Zipcar commercial
https://youtu.be/Uux8uSRDFK0
• Robin Chase Lean Startup Conf. talk
http://www.youtube.com/watch?v=t40f76dMpaI
http://robinchase.org

39. Business Model
Financials
You can analyze, for example,
• revenues and costs per vehicles
• revenues and costs per subscribers
• fixed costs and variable costs
• COGS and gross margin
• # of cars to cover overheads

40. Questions
• What are the key drivers of Zipcar’s economics?
• Is the car cost a variable or a fixed cost?
• What matters - hours billed or hours driven?
• What are the most important drivers?
• How is Zipcar doing compared with its forecast business model?
• What should Chase do?