Dan Martell - October 31, 2016


How To Create a Simple Financial Model For Your Business


Episode Stats


Length

6 minutes

Words per minute

217.61887

Word count

1,483

Sentence count

74


Summary

Summaries generated with gmurro/bart-large-finetuned-filtered-spotify-podcast-summ .

In this episode, I talk about the 5 elements of a financial model and how to understand where your money is going, how you make money, and the margins you need to make in order to make a profit in your business. Most entrepreneurs don t even look at their numbers at the end of the year, and then they look at the financial report and go, "Did I make any profit?" And then they go drink because they either had a great year or a bad year. And I really think there's a better way to test and understand your financial model.

Transcript

Transcript generated with Whisper (turbo).
00:00:00.000 Why do you scream at me?
00:00:11.060 The five elements of a financial model.
00:00:13.480 In this video, I'm going to share with you
00:00:15.040 how to get clarity into your business,
00:00:17.420 understand where your money's going,
00:00:18.980 how you make money, the margins in your business,
00:00:21.480 because, you know, the truth is,
00:00:22.860 is most entrepreneurs don't even look at their numbers.
00:00:25.280 They might actually get a financial report
00:00:26.940 at the end of the year,
00:00:28.240 and they look at the, they pretty much get their street
00:00:30.620 and they go, to the last number to say,
00:00:32.760 did I make any profit?
00:00:33.980 And then they go drink.
00:00:34.840 They either drink because they had a great year
00:00:36.320 or they had a bad year.
00:00:38.020 And, you know, I really think there's a better way
00:00:40.200 to test and understand your financial model.
00:00:42.980 My favorite example is from an entrepreneur named Goggin.
00:00:46.160 He started a company called Sprig.
00:00:47.620 I was an investor in his previous company called Udemy
00:00:50.100 and then he started Sprig.
00:00:51.820 So I was like, I'm in, man.
00:00:52.680 Whatever you do, I'm in.
00:00:53.920 And it was a food delivery company.
00:00:55.780 Still, it's an awesome service.
00:00:57.220 I use it every time I go to San Francisco.
00:00:59.260 And what I love is the early days of trying to understand
00:01:01.820 the financials, the operational model,
00:01:04.300 the different aspects of the investment model for investors
00:01:07.600 is he didn't build a whole lot of stuff.
00:01:09.800 He just tested it on one day using Eventbrite
00:01:14.440 and email marketing.
00:01:16.200 And I mean, it's crazy.
00:01:17.500 So just so you understand, it is a tool to order food,
00:01:21.780 organic food to your house.
00:01:23.640 Now, he didn't build a mobile app.
00:01:25.180 He essentially woke up and said,
00:01:26.840 here's how we're gonna run the test.
00:01:28.320 We sent an email to a bunch of people.
00:01:30.020 They subscribed, they ordered through Eventbrite,
00:01:32.380 so not even some fancy like checkout page.
00:01:34.720 And then on the day they did it,
00:01:36.700 they would deliver between five and nine.
00:01:38.460 You could then order it from there.
00:01:39.820 You told them when you wanted to schedule it.
00:01:41.760 And he was sitting there with the dispatcher.
00:01:43.560 He had to hire drivers, he had to get the food prep.
00:01:45.940 He would sit there with a Google map
00:01:47.440 and understood when he dispatched a driver,
00:01:49.980 he would like put, it wasn't even a Google map.
00:01:51.980 He like physically had a map and said,
00:01:53.800 here's where the driver is.
00:01:54.740 and then he would like dispatch the next one.
00:01:55.980 Here's where the driver is.
00:01:56.980 Like totally manual.
00:01:58.540 But what happened is that gave him the economic model,
00:02:01.680 the financial model to then make a decision to continue
00:02:04.120 and pursue that idea.
00:02:05.320 Eventually raised I think over $20 million in funding so far
00:02:08.920 and is really one of the best entrepreneurs
00:02:10.960 I've ever worked with.
00:02:11.800 So what I wanna walk you through is the way I think
00:02:13.900 of business and the different financial models.
00:02:15.560 Number one is the revenue model.
00:02:17.000 How are you gonna get paid?
00:02:18.600 How much are you gonna get paid?
00:02:20.160 When are you gonna get paid?
00:02:21.640 Those are the things that you kinda need to understand.
00:02:23.940 So if you have a product or service,
00:02:25.180 you gotta figure out how are you gonna price it?
00:02:26.980 How are customers gonna pay for you or pay for it?
00:02:29.340 How often are they gonna buy?
00:02:30.620 That is the revenue model, that's number one.
00:02:32.720 Two is the gross margin model.
00:02:35.220 Out of the money that you charge the customer
00:02:37.520 and the revenue, how much is gonna go towards
00:02:39.720 delivering on that product or service and what's left over?
00:02:43.520 That's the gross margin model.
00:02:45.700 That's gonna tell you if you have money
00:02:47.360 to then support the business
00:02:48.740 and actually eventually make profit.
00:02:50.540 The third is the operating model.
00:02:52.140 What's the cost to actually operate the business?
00:02:54.780 What does it take from the support to the marketing cost,
00:02:58.540 to your administrative cost, to infrastructure,
00:03:01.320 services, software?
00:03:03.680 Those are the parts of the business that a lot of
00:03:05.480 entrepreneurs are like, man, I could charge, you know,
00:03:07.780 10,000 for this and it only cost me 2,000.
00:03:10.060 Yeah, but there's a whole another $6,000 worth of
00:03:13.900 operating costs that you haven't even considered.
00:03:16.740 So that's the operating model.
00:03:18.700 The fourth to me is the working capital model.
00:03:21.940 Many entrepreneurs go out there, maybe you've done this,
00:03:24.440 and you have a good idea for a business,
00:03:25.940 or even a new line of business inside
00:03:27.840 of your current business, and you don't realize
00:03:29.580 that it's going to take capital or money
00:03:31.360 to actually expand into that new line
00:03:33.280 or even start the business.
00:03:34.640 There's going to be a point of time
00:03:36.340 where you need to understand how much revenue
00:03:38.820 do I need to generate from my customers to eventually,
00:03:41.440 after you actually pay out the operating
00:03:43.180 model and the gross margin, to make enough money
00:03:45.420 to support the business.
00:03:47.180 And that is a time function revenue.
00:03:49.520 You can put that on a graph and figure out
00:03:51.420 the exact moment in time if you understand
00:03:53.780 those other financial models.
00:03:55.100 That is super important, especially if you're starting off
00:03:57.520 and it's really important if you have an existing business
00:04:00.060 that you're trying to scale into a new line of business
00:04:02.560 because you're gonna have to support that growth
00:04:04.500 from your existing revenues and profit in your business.
00:04:07.440 The fifth model you need to understand
00:04:08.880 is your investment model.
00:04:10.000 How fast would somebody, if they put a dollar
00:04:13.840 into the business, how quick could they get the dollar
00:04:16.280 back out of the business?
00:04:17.280 That is your investment model and if you're ever gonna raise
00:04:20.280 money or talk to the bank, they're gonna wanna know these.
00:04:23.520 So just so you understand, it doesn't matter if you're
00:04:25.980 starting from day one or you've been going for a while,
00:04:29.020 you need to understand these five.
00:04:30.500 Number one is revenue model, figure out how often you're
00:04:32.920 gonna get paid, how much you're gonna get paid,
00:04:34.620 what are they gonna pay, that's the revenue model.
00:04:36.860 The operating margin model, so that's figuring out what's
00:04:39.360 the cost of goods sold to deliver that product or service,
00:04:42.300 how much is left over after.
00:04:43.840 Then you've got your operating model which is kind of the
00:04:45.740 middle of the financial chassis that says how much do I have
00:04:48.940 to spend to support the business from an administrative,
00:04:52.080 customer service, refunds, software you're gonna have
00:04:54.980 to invest in, then you have your working capital.
00:04:57.780 If I put money into the business, life savings,
00:05:00.760 sweat equity, et cetera, how quick can I expect
00:05:03.960 to make that money back?
00:05:05.320 And then investment, if I gave you a dollar in this business
00:05:08.520 and it went through your system, when would I get it back
00:05:11.200 and at what kind of interest can I expect?
00:05:13.900 Those are the five different operating financial models
00:05:16.500 for your business, you wanna sketch them out,
00:05:17.860 You wanna have some thoughts around how they all work.
00:05:20.120 And just as a rule of thumb, I'm just gonna share this,
00:05:22.260 that typically businesses,
00:05:23.940 and this is different for different industries,
00:05:25.400 but the typical gross margin is 60%.
00:05:28.300 So you gotta understand, if you sell something for $4,
00:05:31.000 it should cost you around a dollar
00:05:32.440 to deliver the product or good,
00:05:34.200 not including your operating model,
00:05:35.620 but just the cost of goods sold.
00:05:37.220 Just to give you a ballpark in case you're wondering
00:05:39.380 because without that, you're not gonna have enough profit
00:05:41.660 at the end of the day to actually reinvest in your growth.
00:05:44.720 Now I wanna ask you, what is unique about your business?
00:05:47.120 Because here's what I've learned.
00:05:48.980 The entrepreneurs that decide to not go and get $100,000 loan
00:05:52.060 from the bank or raise a million dollars of venture capital,
00:05:54.940 that constraint of not having money and building that business
00:05:58.120 breeds creativity.
00:05:59.480 I want to hear from you below in the comments
00:06:01.120 and let me know what's the most creative solution to a problem
00:06:04.360 you've ever had in your business that's impacted
00:06:06.800 the financial model and how you actually
00:06:08.780 make money in your business.
00:06:10.180 Leave a comment below if it's not a trade secret.
00:06:12.560 I'd love to hear from you.
00:06:13.600 And as per usual, I want to challenge
00:06:14.940 you to live a bigger life and a bigger business.
00:06:16.880 and I'll see you next Monday.
00:06:18.420 Yo, yo, yo, what's up?
00:06:19.660 If you like this video, be sure to subscribe to my channel
00:06:22.300 where I share other tips on how to start and scale
00:06:25.080 your business.
00:06:26.080 I'd also invite you to join my newsletter
00:06:28.600 where I share exclusive community contests,
00:06:31.640 invites to private events, as well as other free training
00:06:34.080 videos.
00:06:34.880 And if you're ready to get going, you want some more Dan Martell,
00:06:37.080 click on one of those videos, and you are all set.
00:06:39.500 Hope you had a great day.
00:06:40.580 Hope this video finds you well.
00:06:42.020 Pumped to have you here, and I'll see you next week.
00:06:46.880 You