Finance
Warm Up: What are you grateful for? Put it on
the board!
Please get out pen/paper to take notes … we’re going to talk about finance!
Tuesday, November 24th
Finance answers some extremely important
questions: What will it cost to run my business? How much money can I expect to make? Will my business be profitable?
Two Major Components: Revenue Streams Cost Structures
Each aspect will have several components
Finance Introduction
revenue model Pricing customer lifetime values revenue gross margin
Revenue Streams
The amount of money that a company actually
receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income.
DON’T confuse Revenue with Income
Revenue
A revenue model describes how a business
generates revenue from its products and services (FYI, also called “revenue stream”)
It is one of the key components of the business model
There are many kinds of revenue models …. You’ll read an article to determine the one that fits your business best
What is the Revenue Model?
divided the revenue models to nine major
categories: A. Commerce and retail
B. Subscriptions and usage feesC. LicensingD. Auctions and bidsE. AdvertisingF. DataG. Transactions/IntermediationH. FreemiumI. Revenue model types common in financial services industry
Nine Categories of Revenue Models
Read the article about Revenue Models on my
website
Focus ONLY on your revenue model
Create a document in your google drive Title it “finance” Create the following sections: Revenue Streams
revenue model pricing customer lifetime value revenue gross margin
Create a paragraph under “revenue model” that explains your business’ revenue model. ASSUME the reader doesn’t know what a revenue model is and is NOT familiar with your revenue model
Now What?
Warm Up: Mr. Reck just walked into the room.
Explain to him what a revenue model is and why it’s important to be able to explain it for your business.
Today … PRICING
Monday, November 30th
What should I charge for my
products/services? Many factors to consider …
Competition What kind of customers you want DON’T low ball What are your costs? Value of your product
There’s no right or wrong answer (boo!)
How do you determine price?
Read the article on pricing and determine
pricing for your product/service KEEP TRACK OF YOUR calculations, put them
right into the finance document under the pricing section (see next slide)
It’s likely you may go back and adjust your prices
I recognize that you don’t know your costs at this point … that’s one reason you will likely adjust these numbers!
Pricing
Home Cleaning Service Reviewed three competitors and what they charge:
ABC, charges $40/hour, 2 hour minimum DEF, charges flat rate of $120 for first cleaning,
$100/monthly cleaning, $80/every two weeks cleaning, $65/every week cleaning
GHI, charges $45/hour, no minimum Looked at economics for Livingston County I’m going to offer something special for customers: NO
pre-cleaning prior to my professional cleaning! Decided on: $45/hour, no minimum, will estimate for
each cleaning job
Pricing Calculation Example One
New type of insulated cup, competes with Tervis Pricing of Tervis cups: $17.99 small, $24.99 for large Looked at other brands of insulated cups
ABC: $12.99 one size only, small DEC: $18.99 large
There are cheap versions of cups you can customize on websites like Shutterfly. You pay a premium price, $22.99 but get a low quality item.
Need to break into this market as an unknown My unique value proposition is you can put your own
logo/photo on my insulated cup Pricing: one size, large, $22.99
Pricing Calculation Example Two
Warm Up: Check yourself …. You should now
have two sections of your finance document complete: Revenue Model Pricing
FYI: Mrs. H is BEHIND on grading, will be plowing through all your work turned in before break and yesterday this evening ….
Today: customer lifetime value
Tuesday, December 1st
Answers many questions… How much is every customer “worth” to my
business? How much repeat business can I expect? –
which then leads into: How much am I willing to “pay” to gain a
customer? How much will my customers spend on my
product/service each time?
Customer Lifetime Value
Write this down!
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer)
Average Value of a Sale = every time a customer uses your product/service, how much will you PROFIT?
Number of repeat transactions = how OFTEN will your customer use your product/service in a given time frame? (week, month, year)
Average Retention Time = how long will your customer stay with you?
LTV Formula
Read BOTH articles TAKE notes Begin to calculate your LTV
Take very detailed notes for every component Put your THINKING into the LTV section of your
finance document Trust me, you will REVISE this number
Meanwhile, I’m going to come around, see your revenue model and pricing
Your job …
TWO WARM UPS:
Log in and check your grades, they are updated Second, calculate the LTV for the following
scenario:
Donut shop Average customer purchase: $5 Profit: 30% of sales Frequency: twice a month Length I’ll have a customer: 2 years
Wednesday, December 2nd
Write this down!
(Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer)
Average Value of a Sale = every time a customer uses your
product/service, how much will you PROFIT? Number of repeat transactions = how OFTEN will your customer
use your product/service in a given time frame? (week, month, year)
Average Retention Time = how long will your customer stay with you?
LTV Formula Clarification
Complete your Life Time Value calculations,
making notes in your document for EVERY detail
Make sure your Life Time Value notes are up to date as well, expect to be tested on this finance vocabulary!!!
Today
Warm Up: Get an income statement from the
table for “Company A”. Read it an answer these questions: What’s the difference between revenue and
income? Is this company profitable? How do you know?
Today: Calculating revenue
Thursday, December 3rd
Revenue vs Sales vs Income
Revenue – Expenses = Income
Revenue – expenses directly associated with selling the product/service = GROSS profit
Important Notes
You already have pricing, now we need VOLUME Start by calculating for a given period of time – a
day, a week, a month … whatever makes sense
Conservatively estimate sales For example, if the hot dog vendor across the
street sells 100 hot dogs per day, it would be unreasonable to project sales of 1,000 hot dogs per day on your side of the street.
Revenue
Determine what the best-case scenario is and
calculate your sales to be a percentage of that figure.
Professionals generally use approximately 33 percent of the best-case scenario.
Calculate
Donut shop Daily Sales:
Ideal: 50 dozen (600 donuts) 600* .33 = 200 donuts sold in one day
200 * $1.50 (avg price for 1 donut) = $300/day Open 6 days a week $300 * 6 = $1800 revenue per week Open 52 weeks a year $1800 * 52 = $93600 revenue per year
Example
Weekly Deliveries:
Ideal: _________________________ ___________* .33 = __________ deliveries in one
week ______ * $_________ (avg cost/delivery) =
$____/week Open 52 weeks a year $______________ * 52 = _______revenue per
year
Blank Template
First, find an article online that talks about
calculating revenue for your type of business Read it Cite it in the Revenue section of your finance
document Take a few notes, summarize what you learned
Second, calculate your revenue for one year Show your work!!!!!!
Your Job
Warm Up: Go to my website, read the finance article
for today. Take notes on the seven definitions. NOTE: Even DECA district students should do this,
great terms to know. When done, work on your practice test for DECA
Today: DECA test day information Complete your revenue for one year and document
the article related to your specific revenue model in your finance document
Friday, December 4th
Warm Ups: First, check your grades. They are all updated!!! Second, open your notes from Friday’s article about
the seven definitions. ONLY have your notes in front of you, a piece of paper and a pen or pencil.
Today: POP formative quiz Discuss finance terms Gross margin
Monday, December 7th
1. What’s the “bottom line”?2. What’s the difference between fixed and
variable costs?3. What does it mean if my business is highly
leveraged?4. Give three examples of capital expenditures.
Finance Terms Pop
From article: Finance Terms Every Serious
Entrepreneur Should Know http://venturebeat.com/2013/06/08/startups-fi
nancial-terms/
Finance Terms
Net Earnings Net Income Overall Profit
Bottom Line
Sales Revenue – Cost of producing
goods/services Expressed as a percentage Gross Margin / Sales Revenue How much of every dollar will the company
keep to pay it’s operating expenses (and for profit)
Gross Margin
Pencil Sales Revenue: $100 Cost $40 Revenue – Cost of goods sold= Gross Profit 100 – 40 = $60 Gross Margin: Gross Profit/Revenue = Gross Margin 60/100 = .60 or 60% Which means, for every dollar in sales, 40 cents
goes to pay for the item you sold and 60 cents is available to pay your other expenses and for profit
Gross Margin Example
Fixed: cost doesn’t vary with volume of
goods/services
Variable costs: vary depending volume
Which is related to Gross Margin?
Fixed vs Variable costs
Equity: money you have received from
investors (including yourself) to run your business Investors get a piece of ownership for this
Debt: money you borrow from a lender that must be repaid
Accounting equation: Assets = liabilities + (Owners) Equity
Equity vs Debt
Amount of money you borrowed to start your
business. If you have more debt than equity, you’re
considered “highly leveraged” – and that means very risky
Leverage
Items your business purchases that create
future benefits PHYSICAL goods and services Machinery Computers Office furniture It’s unfortunately NOT IT costs (so NOT the
cost of creating your app, for example)
Capital Expenditures
How much of your business comes from any
given customer? Costco Example Michigan Rehab example “Are you putting all your eggs in one basket?”
Concentration
How much does it cost me to provide these
goods/services for you to sell? Think VARIABLE costs
As you research, take excellent, detailed notes!!!
Now … Gross Margin
Warm Up: Check your finance document. You
should have five complete sections: revenue model Pricing customer lifetime values revenue gross margin
Make sure they are all present, the document is in your shared folder. You’re turning in a draft version of the Revenue Model today
Wednesday, December 9th
Finalize Revenue Model Review practice finance terms quiz Next practice quiz tomorrow Quiz Tuesday
revenue model Pricing customer lifetime values revenue gross margin All seven finance terms
See next page …
Today …
Read article on CAC on my website Answer, in writing, these three questions:
What is CAC ? How you can measure CAC? What steps can you take to improve CAC?
Customer Acquisition Costs