1. Finance

2. Tuesday, November 15th PARKING TICKETS FOURTH HOUR DECA t-shirt orders
Warm Up: MAKE SURE your cost documents are complete:
Google doc called “COSTS”:
Customer Acquisition Costs
–Distribution Costs
–Human Resources  
–Total start up costs are listed –
Total Operating Expenses for one year are listed
Google Sheet with start up costs and operating expenses complete

3. 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 – we just completed
Each aspect will have several components

4. Revenue Streams revenue model Pricing customer lifetime values revenue
gross margin

5. Now What? Create a document in your google drive
Title it “REVENUE STREAMS”
Create the following sections:
revenue model
pricing
customer lifetime value
revenue
gross margin
Take notes today in this document and use it to record your revenue streams

6. 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

7. What is the Revenue Model?
A revenue model describes how a business generates revenue from its products and services
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

8. Nine Categories of Revenue Models
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

9. Revenue Model Read the article about Revenue Models on my website
Focus ONLY on your revenue model
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

10. Sample Commerce & Retail
Revenue Model:
Commerce & Retail
     Revenue will be generated through the purchasing of
Succulents & Plants
Succulent/Cactus Collections
Online Ads
Customer Referrals to other Succulent care/advice sites included in  the Flora & Fauna online store

11. 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!)

12. 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!

13. 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

14. 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

15. Wednesday, November 16th
Warm Up: I am going to open a nail salon in Hartland. What revenue model is this? How should I determine pricing?

16. 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?

17. 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?

18. 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

19. Thursday, November 17th
Warm Up: How would you Explain life time value to someone who has no idea what that means?

20. LTV Formula REMINDER
(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?

21. Revenue
Find an article about revenue for YOUR SPECIFIC TYPE OF BUSINESS
Take notes in your Revenue Streams document under Revenue
If there are two of you, BOTH OF YOU must read and document an article

22. Important Notes Revenue vs Sales vs Income Revenue – Expenses = Income
Revenue – expenses directly associated with selling the product/service = GROSS profit

23. Friday, November 18th
Warm Up: log in to my website, open my finance ppt slide show and go to the revenue section (starts at slide 24)
Open up your revenue streams document

24. 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.

25. 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.

26. Example 1 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

27. Example 2 - seasonal Weekly Revenue during summer :
Ideal # of transactions a week: 200 lawns
200 * .33 = 66 realistic lawns in one week
66 * $30 (avg sale/transaction) = $1980/week
Busy season is 20 weeks
$1980 * 20 = $39,600
Weekly Revenue during winter:
Ideal # of transactions a week: 100 snow plowings
100 * .33 = 33 realistic snow plowings in one week
33 * $30 (avg sale/transaction) = $990/week
Busy season is 10 weeks
$ 990 * 10 = $9900
Total Revenue = $39,600 + $9900 = $49,500

28. Blank Template Weekly Revenue:
Ideal # of transactions a week: _________________
___________* .33 = __________ realistic transactions in one week
______ (# transactions * $_________ (avg sale/transaction) = $____/week
Open 52 weeks a year
$______________ * 52 = _______revenue per year
NOTE: If your business is seasonal, you need to account for that

29. 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!!!!!!

30. Gross Margin
Answers the business question: How much money will I make on my goods/services if I DIDN’T HAVE operating expenses?
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)

31. 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%
My gross margin is 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

32. Gross Margin You need your revenue
You need to calculate how much it COSTS you DIRECTLY to build/buy that item (called COST OF GOODS SOLD OR COGS)
EXAMPLES of COGS:
How much will it cost to make the sled suit?
How much will it cost to buy the raw ingredients for the food?
Here are some examples of businesses without a COGS: Apps, services like doctor, massage, nail salon, workout facility

33. Finance Terms
From article: Finance Terms Every Serious Entrepreneur Should Know

34. Bottom Line
Net Earnings
Net Income
Overall Profit

35. 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)

36. 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?

37. 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

38. 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

39. 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)

40. 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?”