Tuesday, November th 24 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! Finance Introduction 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 Revenue Streams revenue model Pricing customer lifetime values revenue gross margin Revenue 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 What is the Revenue Model? 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 Nine Categories of Revenue Models divided the revenue models to nine major categories: A. Commerce and retail B. Subscriptions and usage fees C. Licensing D. Auctions and bids E. Advertising F. Data G. Transactions/Intermediation H. Freemium I. Revenue model types common in financial services industry Focus ONLY on your revenue model Now What? 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 Monday, November th 30 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 How do you determine price? 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!) Pricing 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 Calculation Example One 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 Two 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 Tuesday, December st 1 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 Customer Lifetime Value 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? LTV Formula 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? Your job … 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 Wednesday, December nd 2 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 LTV Formula Clarification 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? Today 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!!! Thursday, December rd 3 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 Important Notes Revenue vs Sales vs Income Revenue – Expenses = Income Revenue – expenses directly associated with selling the product/service = GROSS profit Revenue 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. Calculate 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. Example 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 Blank Template Weekly Deliveries: Ideal: _________________________ ___________* .33 = __________ deliveries in one week ______ * $_________ (avg cost/delivery) = $____/week Open 52 weeks a year $______________ * 52 = _______revenue per year Your Job 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!!!!!! Friday, December th 4 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 Monday, December th 7 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 Finance Terms Pop 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 From article: Finance Terms Every Serious Entrepreneur Should Know http://venturebeat.com/2013/06/08/startupsfinancial-terms/ Bottom Line Net Earnings Net Income Overall Profit Gross Margin 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 Example 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 Fixed vs Variable costs Fixed: cost doesn’t vary with volume of goods/services Variable costs: vary depending volume Which is related to Gross Margin? Equity vs Debt 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 Leverage 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 Capital Expenditures 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) Concentration How much of your business comes from any given customer? Costco Example Michigan Rehab example “Are you putting all your eggs in one basket?” Now … Gross Margin 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!!! Wednesday, December th 9 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 Today … 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 … Customer Acquisition Costs 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?
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