  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 24 th

  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 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 Nine Categories of Revenue Models

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 30 th

  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 1 st

  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 2 nd

  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 3 rd

  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 4 th

  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 7 th

 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  financial-terms/ financial-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 9 th

  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