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Financial Models
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.
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Financial Models
- 1. Financial Models IT Entrepreneurship JohnJ. H. Oh KAIST
- 2. Financial challenge • Accountingclasses 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 • Singlestream • 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 • Howmuch 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.
- 10. Financials for thebusiness plan • Assumptions • Sources and Uses of Funds • Sales forecast • Income statement Additional • Cash Flow • Balance Sheets
- 11. Getting started withthe 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 foryour 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 • Determinewhat 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 WorstCase Most Likely Best Case 1. 2. 3. 4. 5. Total:
- 16. Jan Feb MarApr 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 MarApr 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 • Salesfigures 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 TotalExpenses equals Profit (Loss)
- 20. Short Form P&L TotalSales 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 comesin: 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 • Balancesheets 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 andLiabilities & Net Worth are always in balance -- by definition. Liabilities + Net Worth Assets
- 29. Assets (WhatYou Own) CurrentAssets 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) CurrentLiabilities (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’sEquity”) Net Worth = Assets minus Liabilities 1. Paid-in or invested capital 2. Retained Earnings 3. Other equity
- 32. Additional analyses • Investorswant 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 FixedCosts 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 • Currentratio = 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 FinancialData 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 cananalyze, 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 arethe 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?