Description
Make preliminary “back-of-the envelope” calculations to assess the financial prospects of your concept. In this section, answer the following questions and generate three-year financial projection and investment required (adapted from Mullins Chapter 5):
• Does a quick calculation of financial returns for three (3) years suggest that your idea has financial merit? Summarize your findings in two sentences.
• Present the assumptions and calculations for each of the five business model components by answering the following questions, where applicable:
1) Revenue model
a) Who will buy? How often? How soon? Estimate the likely sales volume in
number of customers, pieces, or transactions, etc. Show your assumptions.
b) Determine the price of your product/service. What is your pricing strategy?
Consider how prices are determined in your marketplace (market price, competitors’ prices, cost plus, industry practice, keystone, savings, channel discounts, etc.). Show your assumptions.
c) For each of the three (3) years, how much money does the company make from the product(s)/service(s) you target? Estimate the revenue using a bottom-up approach.
2) Gross margin model
a) Direct Costs of Goods Sold (CGS). Decide whether you will produce the
product/service in-house or subcontract. To project costs:
i. Calculate the direct labor cost. Show your assumptions.
ii. Calculate the material cost. Show your assumptions.
iii. Alternatively, estimate the cost of subcontracting the production or service
by interviewing potential subcontractors. Show your assumptions.
iv. Are direct CGS the same throughout the three (3) years? If not, show
difference.
b) Indirect CGS if they are significant. Show your assumptions.
i. Examples of indirect CGS include facility costs, utilities, energy.
ii. Estimate depreciation expense, if there are large capital expenditures.
iii. Are indirect CGS the same throughout the three (3) years? If not, show the difference.
c) How much of your revenue will be left after paying these direct costs? Show
gross margin both in dollar amount and percentage for three (3) years.
3) Operating model
a) Determine expenses other than CGS that are needed to support the sale of the
product (show your assumptions):
i. Sales & Marketing
ii. Development
iii. General & Administrative
iv. Other recurring expenses
b) Show the operational expenses by category for three (3) years, especially if you expect the numbers to change.
4) Working capital model
a) How long will the company have to wait for the customers to pay? Do you have
to tie up money in lots of inventory waiting for customers to buy? Can you pay your suppliers later, after the customer has paid? Can you pay your employees later? In sum, how much cash will be tied up in working capital (inventory and other) and for how long?
b) Estimate the amount of cash needed to cover the shortfalls due to temporal differences among accounts receivable, inventory, and accounts payable for three (3) years.
5) Investment model
a) Estimate the amount of funding that will be required before enough customers discover your product/service and give you enough business to cover all costs (show your assumptions)
i. Capital Expenditures: describe each major expenditure and the amount ii. Other Major Expenses: customer acquisition costs, web development expenses, product launch expenses, market research, etc.
iii. Non-recurring expenditures: legal, rent deposit, license, etc.
b) Show investments required for three (3) years
Sample Solution