need a killer business model? these tips will get you going
TRANSCRIPT
Business Model Workshop
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Today’s Focus 2
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Cash is KING, especially for small businesses!
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Key Questions 3
Why do I need to measure financial performance?
How do I measure performance?
How much volume do I need to break-even?
How much do I need to invest?
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4
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Why Do I Need to Run the Numbers? 4
Passion In An Idea Can Blind You
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What Numbers Should I Care About? 5
Revenue
Variable Costs
Gross Margin
Fixed Costs
Profit
(-)
(-)
The magic to making money is understanding the relationship between these numbers
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Revenue 6
Revenue = (Price – Discounts) * Unit
Start-Ups Growing Business Maturing Business
• What is the mark-up to the cost?
• How much are people willing to pay?
• How many units do I need to sell to break-even?
• How do my sales compare against last year?
• What is my market share?
• What are other ways I can make money?
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Variable Costs 7
Variable Costs = Production Costs + Inventory
Examples • Labor costs • Raw materials • Inventory warehousing costs • Sale commissions Understanding your variable costs is the key to being profitable • Variable costs often dictate price (price is a % markup)
Ways to keep variable costs low to avoid price increases • Favorable payments terms will allow you to get a discount from
suppliers • Standardize your production • Invest in equipment to reduce direct labor and reduce cost variances
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Fixed Costs 8
Fixed Costs = Various operating expenses How much does it
cost to keep the lights on?
Examples: • Rent and other store expenses • Management and administrative staff • Taxes and licensing costs
Insights on Fixed Costs: • The higher your fixed costs the higher the
sales you need to break-even • Evaluate how scalable your fixed expenses
are. For instance, can you grow sales without growing fixed costs? • Highly scalable: technology companies • Not very scalable: transportation
companies
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How Should I Measure Performance? 9
Revenue per Unit
Variable Costs per Unit
Gross Margin per Unit
# of Units
(-)
Gross Margin
How many units do you need to sell so that your Gross Margin = Fixed Costs?
This is the break-even point
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How Much Volume Do I Need to Break-Even? 10 ($
in t
ho
usa
nd
s)
(Units / Month)
5k 10k 15k 15k 20k 30k
Annual Fixed Costs: ~$22.7k
$13k
$25k
$38k
$50k Gross Margin per Unit: $2
Breakeven: 11.35k Units/Month
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Guesstimate the Unit Economics of Your Business 11
Revenue per Unit
Variable Costs per Unit
# of Units
Restaurant Example
• Price of a Big Mac (less applied discount)
• Big Mac ingredients • Big Mac package • Labor time to
process order and make a Big Mac
• # of Big Macs sold per week
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How Much Do I Need to Invest? 12
It Takes Money to Make Money!!!
Start-Up Cash Considerations
• Time is money: Operating expenses until break-
even
• Company setup costs (licenses, security deposits)
• Equipment purchases
• Sales and marketing to ramp up sales
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Cash Flow Curve 13
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10
20
30
40
50
60
70
80
90
(400)
(300)
(200)
(100)
–
100
200
300
Jan-
16
Feb
-16
Mar
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Apr
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May
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Jun-
16
Jul-
16
Aug
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Sep
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Oct
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Nov
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Dec
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Jan-
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Feb
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Mar
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Apr
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May
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Jun-
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Un
its
per
Mo
nth
(000
s)
Cu
m. C
ash
Flo
w (0
00s)
Cum. Cash Flow Units/Month
Total Investment
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Resources to Measure Performance 14
• Trade Associations
o Identify resources that are customized for your industry
• Accounting software (QuickBooks or Zero)
• Accountants (not only tax preparers)
Thank You
Together Moving Forward | Juntos Adelante
Kenneth Salas [email protected]
(510) 734 - 9018