Video: Creating cost models with vetted assumptionsCopy

Transcript

So, beyond that, we’ve really modelled out the revenue side of the house we’ve miled out the cost side and now we’re going to turn all that those spreadsheets and those numbers into something that’s really useful, and you know one of the things that really is critical to make sure that you do as you think about you know making sure that you have really good numbers and all that math is working is really think about those assumptions. I can’t emphasize this enough. It’s building out good assumptions is really the most critical part of your process; and one part of that is really thinking about your market size. You think about the number of units sold, for example, you know, if there are only, you know, 30 people in your country that eat you know chocolate frosting made out of coconut and there’s no demand for healthy food healthy frosting well then your market size is going to be really small; so you’re never going to sell 1400 units of frosting if there are only 30 people who want to buy frosting.

So, you really need to think about, you know, what we’re really talking about in terms of market size and make sure that the market size and your revenue assumptions are not off kilter. You know, sometimes people will say well we can get like you know, 80 of the market and there are not companies that do that. I mean, even like a Google which is ubiquitous still only has something like a 40 market share or something; I can’t remember what the actual number is but my point being that even companies that are really big and amazing you often have you know still not 100 of the market so you just want to be really careful as you think about u201ccan you get a half of a percent or one percent of the market?u201d

If you are of a really small market, maybe you can penetrate it really deeply; but it’s going to mean you really have to go sort of really deep in that particular market. So, think a little bit about marketing side, market size, and how that matches up to your revenue assumptions anytime you can use actual sources. You saw this in much of what I kind of was talking through, you know, can you look at actual sales that you have? or thinking about, you know, companies that are similar to yours and find out with but not direct competitors and find out a little bit about what their actual sales are.

But certainly, your own actual sales is going to be a really helpful benchmark as you think about what growth might look like and then your own marketing tactics. I often recommend that you test out some marketing tactics. Try some Google ad words spend; 100 150 200 bucks. One of the great things about impact toolbox is it’s part of what it’s trying to do is help you access capital and use some of that capital to um you know to spend a little bit on marketing to try to sort of see what works; spend a little bit you sort of see if it works. That will help you know you build out your assumptions about what it’s going to look like when it’s really big and when you can’t use actuals look for analogs and analogs can be really truly the most likely source.

There are a number of platforms that you can use; I mean even just googling; there are lots of companies like just sort of googling around looking for how much does something cost how much does a salesperson cost, like, you know, googling around but oftentimes the best place to look for information is to ask founders and friends, other founders of other companies, your friends, people in your network, company advisors. Those are going to be your richest sources of data, and if they don’t know they might be able to find out for you.

I think that those last two bullets are really going to be probably your best bet for where you get some of your best information, so don’t be afraid to ask. People are often more happy to share information like this with you to help you along because somebody did it for them. But, you having to ask builds on our assumptions.

We started to build a spreadsheet, we’ve got revenue; we’ve got cross; we’re really coming up on something that’s really the basis for how we’re going to tell our financial story. Now is the part where you take a timeout and you do a little gut checking. What does that mean? One of the things you can do is create a visualization so you know that back to that like the costs go up and the revenue goes up and like at some point in time you get hockey stick and you know whatever you got that that’s sort of like the charts. u00a0Prepare the charts but don’t put it in your presentation. Don’t worry about that, but actually, what that chart will tell you is are you crazy? Is your model crazy? So, for example, you know you should look and see what similar companies in your industry have as typical for margins for operating margins so in other words you know the difference between what they sell their product for and what it costs them to make that product. We call that an operating margin.

You should look and see if you if you are showing operating margins of 70, and a typical operating margin in your industry is 30, then something is wrong. You are not that bit that great of a genius. Iu2019m sure you’re very smart but you are not that that big of a genius; something is off on your model, so you should look and say do your assumptions make sense relative to some of the peer companies? Like, look at growth rates, are your growth rates just so off the charts and what do you know about growth rates of similar companies in the first five years of their growth? How do you think about the sort of revenues and costs relative to competition, and how much of the market you can really capture? Look at those industry standards.

So, there’s lots of ways you can you can also just put your assumptions; your model in front of a company advisor and say like to poke holes in this. Tell me, is this what looks off? What am I missing etc. Sorry, you have to do this step before you go forward you really need to make sure even though we’re not going to be putting a whole bunch of numbers into the deck that you’re going to maybe present to investors. What you do put into that deck is going to have to be based on something you feel really good about. Oftentimes we talk about how you want to be optimistic about your business because if you’re not optimistic nobody else will; but you want to be reasonable you can’t be so optimistic that people think you’re crazy but you also don’t want to be super conservative.

I hate I hate when people put models together and they say well it’s really conservative, Iu2019m like, that means you don’t actually believe in your business. You got to believe in your business. You got to show me that your business can grow and that if I invest in your business I can make money; but the only way that that works is if you have optimistic, but realistic, reasonable, well-researched assumptions that underlie and you spend the time rolling gut checking.u00a0