In part two, we will add in the remaining indirect costs and thereby be able to best judge the viability
of your business.
In part one, we focused on the product level only.
We tested the model based on the revenue we think we can earn over a period of time and the costs associated
in developing the product or service.
The unit margin told us whether or not we're making enough margin or fat, if you will, on the product
alone.
If you recall, the direct costs, are all the costs involved in making the product or the indirect
costs?
Are all the costs involved to run the business.
Thus rent research and development and all the business activities such as marketing, sales, human
resources, etc..
We will now add these to the financial model so that you can get a better sense of the profitability
as we add in the indirect costs, which are also referred to as selling general and admin expenses,
or Aschiana.
It also allows us to see whether we can be profitable based on the whole business.
This essentially completes the financial model to create and will therefore be able to show you if your
business is making money.
Also, if you make one for each revenue stream and business model, you can compare and then decide
on the most profit making business model.
As a startup, you have limited resources and therefore doing a financial analysis upfront will make
sure that you allocate your resources to the method that is potentially best and also makes you the
most money.
Again, there are certain questions and red flags that investors may look at.
Always keep in mind that the numbers must tell a reliable and viable story.
So let's take the example of R&D.
You may have noticed that the R&D costs jump in.
Your five year investor will ask questions.
Now, you may expect competitors to catch up with you or that the world would change considerably and
that requires newer technologies.
5G is a perfect example of that.
So make sure that for each of the indirect cost are able to explain your assumptions and reasons for
direct costs.
The increases are easier to understand as they are related to the quantity of output.
However, for indirect cost, you have to tell the story.
There's one more expense to adding that is a little bit more of a category and so on.
These are the capital expenditures or large investments required in, for example, machinery or the
building that you need before you can start your production.
Capital expenditures deal with depreciation, but we will ignore these for now.
However, you must plan on your capital expenditures and be able to explain.
Then we can add in the capital expenditures.
Blady a bit that again, do your planning and have your story ready.
And this example, we may project requiring upfront equipment in year one and perhaps a second machine
in year two.
And then in year five, we may have to replace the machines completely.
Depending on your development plan, you can fill in your capital expenditures.
We're almost ready to complete the story.
So using the financial model, you can also calculate how much upfront money you will need to raise
to get started.
You find out the total funding required by adding the absolute value of the EBITA for the year and the
capital expenditure.
So for year one, in our example, that's seventy seven thousand nine hundred and three hundred thousand
for three hundred and seventy seven thousand nine hundred.
You do the same for all the year, so you have a negative EBITA and add the first year that you will
be positive in our example, year three with thirty three thousand.
The total amount of funding to raise is just six hundred and ninety seven thousand four hundred, essentially
this amount to allow us to operate for three years and cover all the up front and also running costs.
You may need additional rounds of funding as you progress.
This example here does not incorporate the additional rounds, but it is essentially the same practice
now.
But looking at this financial overview, you can now evaluate whether the upfront investment capital
is a realistic and realistic enough to propose to an investor and start your journey.
And that is potentially the last red flag.
How realistic is this figure and do you think that investors will literally buy your idea, your vision
and also your assumptions?
For six hundred and ninety seven thousand four hundred raising funds is another topic and beyond my
intentions for this course.
But realize that you now have all the pieces to put together a compelling business fund.
You're able to demonstrate the customers viability and the business viability of your business model.
You are now able to build the right it before you build it right.