Finance for Geeks (Fri Nov 8, lect 18) | previous | next | slides |

Logistics

• Small change in weekly status report: put students’ names in!
• You are not to scan the qr code if you are not physically present in the classroom

Financial Planning and Modeling

• Life blood of a business are resources
• You consume resources and you generate value
• Remember Gazintas > Gazoutas
• Quick review of very basic financial modeling
• Recall Marketing vs. Sales

Why do we do this?

• To understand where we are spending our money
• To match our spending with our objectives
• To make sure we don’t ‘run out of gas’
• Or, to start looking for a gas station before its too late
• Examples of what the CFO does

Basic terms and Metrics

• Unit
  • Unit Sales Price
  • Unit Product Cost
  • Units sold
• Revenue related
  • Revenue (what you actually have taken in)
  • Bookings (what you have sold)
• COGS related
  • Cost of Goods Sold (What can be ascribed to a specific unit sold)
  • Other Variable Expenses
• Margin (profits, earnings)
  • Operating Margin (profits)
  • Gross Margin (Revenue - COGS)
• OPEX Related (All the other operating expenses)
  • Marketing Expense
  • Salaries and Benefits
  • Fixed Costs
• Cash
  • Financing (Money that investors put in)
  • Cash Balance
• Profit Related
  • Financing (Money that investors put in)
  • Net Income (Profit)
  • Cash Balance

Units

• How many x for every y time
• Number of diners
• Number of cars
• Number of subscriptions

Revenue Related

• Revenue vs. Bookings
• Revenue: actual money collected
• Bookings: contractually obligated, but not collected
• Computed as units x price

Costs

• Fixed – Cost you have to get to the first ‘thing’
• Variable – Relative to some independent variable
• Division is not always clear cut, it depends

Fixed Costs

• People/Salaries are often the top costs in our world
• Rent, Utilities, Insurance, etc. are also fixed costs
• Legal, Accounting, etc. are also fixed costs
• Equipment/Services etc

Variable Costs

• Relative to what independent variable?
• Sales Expense (salaries)
• Raw Materials
• Marketing expenses?

COGS

• Any costs that can reasoably be tied to the number of units sold
• Sometimes crystal clear, sometimes not

Margin

• Margin aka profit, earnings
• Usually profit = sales - costs
• Gross Profit Margin and Operating Profit Margin are two metrics used to measure a company’s profitability.
• Gross profit margin only figures in the direct costs involved in production
• Operating profit margin includes operating expenses like overhead.

OPEX

• Operating expenses
• Overhead
• Not directly related to units sold
• Rent, HR staff, Legal staff, etc.

Cash

• Incoming cash: invesstments, accounts receivables
• Outgoing cash: accounts payables, interest payments etc
• Cash Balance: actual cash on hand
• Cash is king

Milestone Based planning

• Investors want to see milestones
• “How far will this money take us?”
• Milestones also focus the team on what’s important
• Milestones are a way to communicate progress

Typical Milestones

• Product/Market fit
  • How do you know you have it?
  • What’s the metric you will use?
  • e.g. of 50 customers I talked to 20 of them are
• Trial/Beta phase
  • 10 customers using the product in free or beta mode
  • Asking for features
  • Giving feedback
• Revenue Traction
  • 10 paying customers

Each Milestone may have separate variables

• Marketing expenses (and people)
• Development expenses (and people)
• Support expenses (and people)
• Sales expenses (and people)

Thank you. Questions?  (random Image from picsum.photos)