- Why do you scream at me?
(upbeat music)
The five elements of a financial model.
In this video I'm going to share with you
how to get clarity into your business,
understand where your money's going, how you make money,
the margins in your business because you know, the truth is
most entrepreneurs don't even look at their numbers.
They might actually get a financial report
at the end of the year, and they look at the,
they pretty much get their statement, they go mer
to the last number to say did I make any profit,
and then they go drink.
They either drink because they had a great year,
or they had a bad year,
and, you know, I really think there's a better way
to test and understand your financial model.
My favorite example is from an entrepreneur named Gagan.
He started a company called Sprig.
I was an investor in his previous company called Udemy,
and then he started Sprig, so I was like,
"I'm in, man, whatever you do, I'm in."
And it was a food delivery company,
still, it's an awesome service.
I use it every time I go to San Francisco,
and what I love is the early days of trying
to understand the financials, the operational model.
The different aspects of the investment model for investors
is he didn't build a whole lot of stuff.
He just tested it on one day using Eventbrite,
and email marketing and I mean it's crazy.
So, just so you understand,
it is a tool to order food, organic food to your house.
Now, he didn't build a mobile app.
He essentially woke up and said
here's how we're going to run the test.
We send an email to a bunch of people.
They subscribe.
They order through Eventbrite,
so not even some fancy like checkout page,
and then on the day they did it,
they would deliver between 5:00 and 9:00.
You could then order it from there.
You'd tell them when you want to schedule it,
and he was sitting there with a dispatcher.
He had to hire drivers.
He had to get the food prepped.
He would sit there with a Google map,
and understood when he dispatched a driver,
he would like put, it wasn't even a Google map.
He physically had a map and said here's where the driver is,
and then he would like dispatch the next one.
Here's where the driver is, like totally manual,
but what happened is that gave him
the economic model, the financial model to then
make a decision to continue and pursue that idea,
eventually raise, I think, over 20 million dollars
in funding so far,
and is really one of the best
entrepreneurs I ever worked with.
So, what I want to walk you through is the way
I think of business and the different financial models.
Number one is the revenue model.
How are you going to get paid?
How much are much are you going to get paid?
When are you going to get paid?
Those are the things that you kind of need to understand.
So if you have a product or service,
you've got to figure out how are you going to price it?
How are customers going to pay for you, or pay for it?
How often are they going to buy?
That is the revenue model, that's number one.
Two is the gross margin model.
Out of the money that you charge the customer in the revenue
how much is going to go towards delivering
on that product or service, and what's left over?
That's the gross margin model.
That's going to tell you if you have money to then support
the business and actually eventually make profit.
The third is the operating model.
What's the cost to actually operate the business?
What does it take from the support
to the marketing cost to your administrative cost
to infrastructure, services, software?
Those are the parts of the business
that a lot of entrepreneurs are like,
man, I can charge, you know, 10,000 for this
and it only cost me 2,000.
Yeah, but there's a whole other $6,000
worth of operating costs that you haven't even considered.
So, that's the operating model.
The fourth to me is the working capital model.
Many entrepreneurs go out there, maybe you've done this,
and you have a good idea for a business, or even a new
line of business inside of your current business,
and you don't realize that it's going to take capital
or money to actually expand into that new line
or even start the business.
There's going to be a point of time where you need
to understand how much revenue do I need
to generate from my customers to eventually,
after you actually pay out the operating model
and the gross margin
to make enough money to support the business?
And that is a time function revenue.
You can put that on a graph and figure out the exact moment
in time if you understand those other financial models.
That is super important, especially if you're starting off,
and it's really important if you have
an existing business that you're trying
to scale into a new line of business
because you're going to have to support that growth
from your existing revenues and profit in your business.
The fifth model you need to understand
is your investment model.
How fast would somebody,
if they put a dollar into the business,
how quick could they get the dollar
back out of the business?
That is your investment model,
and if you're ever going to raise money
or talk to the bank, they're gonna want to know these.
So, just so you understand,
doesn't matter if you're starting from day one
or you've been going for a while,
you need to understand these five.
Number one is revenue model.
Figure out how often you're going to get paid,
how much are you going to get paid,
what are they going to pay, that's the revenue model.
The operating margin model,
so that's figuring out what's the cost of goods sold
to deliver that product or service?
How much is left over after?
Then you've got your operating model,
which is kind of the middle of the financial chassis
that says how much do I have to spend to support
the business from administrative, customer service,
refunds, software you're going to have to invest in.
Then you have your working capital.
If I put money into the business,
life savings, sweat equity, etc,
how quick can I expect to make that money back?
And then investment, if I gave you a dollar
in this business and it went through your system,
when would I get it back
and at what kind of interest can I expect?
Those are the five different operating
financial models for your business.
You want to sketch them out.
You want to have some thoughts around how they all work,
and just as a rule of thumb,
I'm just going to share this, that typically businesses,
and this is different for different entries,
but the typical gross margin is 60%.
So you've got to understand if you sell something for $4,
it should cost you around $1 to deliver the product or good
not including your operating model,
but just the cost of goods sold,
just to give you a ballpark in case you're wondering
because without that you're not going to have enough profit
at the end of the day to actually reinvest in your growth.
Now I want to ask you, what is unique about your business?
Because here's what I've learned.
The entrepreneurs that decide to not
go and get $100,000 loan from the bank
or raise a million dollars of venture capital,
that constraint of not having money
and building up business breeds creativity.
I want to hear from you below in the comments
and let me know what's the most creative
solution to a problem you've ever had in your business
that's impacted the financial model
and how you actually make money in your business?
Leave a comment below if it's not a trade secret.
I'd love to hear from you, and as per usual,
I want to challenge you to live a bigger life
and a bigger business, and I'll see you next Monday.
Yo, yo, yo, what's up?
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Hope you had a great day.
Hope this video finds you well.
Pumped to have you here, and I'll see you next week.