Money

...

[pic 6]

YOUR INCOME STATEMENT (COMPLETE)

11. To wrap up, we’ll ush out a few speci c numbers (Key Performance Indicators) that you and your investors will want to know and understand before making any nal decisions about your business—though your ve-year Income Statement is ready to be lled out.

With these numbers and the evidence to back them up—you’re 90% of the way there already.

Use the answers to ques on 8, 9, and 10 to ll out the yellow cells in the following chart (Need help? Check out the Video!):

[pic 7]

[pic 8]

KPI: KEY PERFORMANCE INDICATORS

12. The long-term health of your company is going to be associated with Key Performance Indicators. These are numbers or percentages that will give you a good sense for how your company’s revenue model stacks up against the standards for your industry.

There are many Key Performance Indicators that you’ll eventually want to go over with an accountant, but for our purposes (to see if it’s worth it for you even to start the process), we’ll only go over one cri cal number.

To begin, you must calculate your Gross Margin. You calculate this with the following equa on—

(Price of widget - Cost of widget)/ Price of widget =

Example: ($5 per cup of co ee – $3.5 per cup of co ee)/ $5 cup of co ee = 30%

Now do a li le research—what is a normal Gross Margin for your industry?

Example: In 2012 the average Gross Margin for co ee shops was 65%

How does your Gross Margin stack up to the average?

Note: If it’s much lower than the average, you’ll have to either raise your prices or gure out a way to cut costs. Example: My Gross Margin is signi cantly lower than the average. But I also know that my overall overhead costs will be much lower than a normal co ee shop, which in the long run, will allow me to stay pro table...

[pic 9]

BREAK EVEN POINT

13. As we already discussed (and you probably no ced while lling out your Income Statement) it’s very likely that you’ll be running at a loss for the rst year or two. But the good news is that this is rather common. Professor Zafar explains that in the rst two years you can hardly even call yourself a real business yet!

But you will need to know the general point where your net income turns posi ve. From there on out, if your models are correct and nothing dras c changes in the market, you should have a pro table business into the foreseeable future.

But if your numbers never turn posi ve—then it is probably worth considering a di erent business altogether.

At what year does your Net Income turn from a loss to a posi ve? Note: The sooner, the be er!

Example: A er running the numbers I should break even midway through the third year.

Note: On your own me you should also calculate your 1) Annual Revenue per employee, 2) Net Pro t Margins, 3) R&D expenses as a percentage of Revenue, and 4) Sales/Marke ng as a percentage of Revenue.

[pic 10]

EXPECTING CHANGE (SENSITIVITY ANALYSIS)

14. If your business model looks healthy (you can tell by your Income Statement and Key Performance Indicators), you’re moving in the right direc on. Though your investors will s ll want to know more.

You need to conduct a “Sensi vity Analysis”.

This “more” will take the form of ques ons about your stopgap plans in case reality di ers from your forecasts. Professor Zafar suggests answering the following ques ons ahead of me so that you’re prepared for them when they inevitably arise:

What will happen if your product launch is delayed by six months?

Example: If my launch is six months later, nothing too dras c should be e ected. I will not start un l I have all the money to buy the star ng equipment and licensing. For me, this is a non-issue.

What if customers will only pay 50% of what you expect them to pay?

Example: I doubt that this will ever be a real issue. According to my research, my product is at a reasonable price point for its quality. Though if I nd that customers will only pay $2.50 for an ar sanal cup of co ee, I will need to nd a much cheaper product and rebrand myself to account for the change in price. Even so, the core business model of selling co ee is sound.

What if your costs are 30% higher than you expect?

Example: If costs to run the business are much higher than I expect, I will need to either raise the price of the cup of co ee or extend out my breakeven point—knowing that it will take an addi onal year or two before I will run in the black. Or I be er start coun ng on really cool T-Shirts and mugs sales to accelerate the revenue growth.

What will you do if you only raise half the money you need?

Example: If I only raise half the money I need I will not be able to start the company. My upfront costs are very necessary—I need to buy the truck, equipment, and licenses to begin. If I don’t have enough for all of the above, there will be no risk of loss because I will not have spent any of the money.

[pic 11]

FUNDING MILESTONES

15. Now you’re prepared to actually go out and get that money! Depending upon your speci c business, you may need millions, or you may need only a few thousand (or less!)? Though either way—you’ll need to understand the basic concept of a Funding Milestone before asking for too much or too li le right o the bat.

These are the standard Milestones:

- In the beginning—no one will give you money except maybe close rela ves. This is the planning stage. You can test the idea. Have conversa ons. Mock concepts on the computer. Run the numbers. Finish a business plan. Basically,