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