PAFI-10 mai-Rodrigo Sepulveda Schulz- Pnl Make Revenue

8/6/2019 PAFI-10 mai-Rodrigo Sepulveda Schulz- Pnl Make Revenue

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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

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http://www.rodrigosepulveda.com/






Summary

• Business models

• Generic PnL

• Key insights (think KPI!)

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1. Business models

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Revenue = Price x Qty

x 3

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

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let’s simplify with : R = P x Q~ ~

- are you a VOLUME business ?

- are you a PRICE based business ?

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Volume business (usually low margin)

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Price-based business (usually high margin)

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P

Q

the famous ‘demand curve’

10 €

100

R = 10 € x 100 = 1.000 €

R’ = 5 € x 200 = 1.000 €

5 €

200 500

2 €

R” = 2 € x 500 = 1.000 €

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can you be a volume + price based business?

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P

Q

shift the ‘demand curve’ - hard, requires a unique

value proposition sustained by heavy marketing

10 €

100

R = 10 € x 500 = 5.000 €

(5x)

5 €

200 500

2 €

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

Read more:

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Costs = Variable Costs x Qty + Fixed Costs

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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

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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...

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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

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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 ?

are you a

price based

business ?

are you a

volume based

business ?

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2. Generic PnL

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startup finance is like wartime medicine :

ugly but works

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

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Let’s start a T-shirt business !

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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.

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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

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let’s first model Revenue - you can play with variables later:

such as discounts, promotions, and fluctuating demand per season

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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?)

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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

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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.

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last, let’s model indirect costs - you can play with variables later :

Sales & marketing, technology, HR, G&A

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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

ps: beware of the last column of a model (doesn’t take into account the next period)

checking per period (quarter, year)

is useful + % sales

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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.

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

Read more:

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3. Key Insights (KPIs)

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Break down analysis as %sales / year (~ per unit)

Helps understand breakdown of

costs, and efficiency potential

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Graphs (and values) show profit >0 ~ month 35...

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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 ?

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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.

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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

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PAFI-10 mai-Rodrigo Sepulveda Schulz- Pnl Make Revenue