Create The Financial Model

Do you want to succeed in business? Then you must make the business work financially. Generally, that means you need to charge your customers enough to have more money coming in each month than you spend each month to operate the business. That's pretty simple... until you start thinking about it and thinking about it. Before long, you will have made it complicated with variations, complexities and uncertainties! (Oh My!)

I'm here to tell you, and to convince you, that it can be kept simple. With a pencil and paper, or a computer and spreadsheet if you like, you can try out your Business Model with no risk and have a high likelihood of accurately predicting if it will work (plus or minus 10%) before you actually do it.

You need estimates (aka guesses, educated guesses, wild predictions or numbers) for the following:

• A time period, aka monthly at first
• Customer Demand aka Quantity
• A typical Selling Price (or averages) aka Sales Revenue when applied to Customer Demand
• Total Revenue (SP x Q of Demand)
• Cost to make or buy your product, or create your service aka Cost of Goods Sold
• Key Monthly Expenses (there are only a few) aka Overhead
• Profit Goal aka salary each month (to pay for your personal lifestyle)
• Any Debt Service aka monthly payments for loans taken out to start your business or run it (a generally bad idea)

That's it!

Put it on paper and you have a scorecard aka Income Statement.

  Sales Revenue (SP x Q)

- Expenses       (Overhead and CGS)

= Profit            (Salary and Debt Service)

The Scorecard - Understanding the Income Statement

Assumptions:

• Total Revenue
• SP
• Q of Demand
• CGS per unit
• TFC or OH
• Profit Goal
• Debt Service
  

Examples:

• 56,000
• 28
• 2000
• 10
• 30,000
• 6,000
• ??? Monthly Payment

As noted: With a pencil and paper, or a computer and spreadsheet if you like, you can try out your Business Model with no risk.

I'll demonstrate with a simple business example. Then you do it for Your Business.

The other part of your Financial Model is to determine your Startup Costs. Generally, Startup Cost will include the following:

• Cost to acquire the location and get it ready for use
• Inventory costs
• Pre-opening Marketing/Advertising
• Obtaining permits and licenses
• Personnel costs
• Set aside funds
• Others