How To Create a Simple Financial Model For Your Business

– 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? If you like this video, be sure
and subscribe to my channel where I share other tips on how to start and scale your business. I’d also invite you to join my newsletter where I share exclusive
community contests, invites to private events, as well as other free training videos, and if you’re ready to get going and you want some more Dan Martell, click on one of those
videos and you are all set. Hope you had a great day. Hope this video finds you well. Pumped to have you here,
and I’ll see you next week.

9 thoughts on “How To Create a Simple Financial Model For Your Business

  1. Does business speak sound chinese to you? I get it … growing up I couldn’t understand it all. Now I realized it was the businessmen, not me that didn’t understand. So I want to lay it out for you simply. Here’s how to think of the 5 financial models of your business.

  2. Hmmm, ok well I guess I follow rule 3. But I'm actually not 100% sure on that.
    Tell me Dan, can you use a combination or 1,2 & 3?

    I know you only do short videos, but would love for you to deep dive into these business models more, with finer details.
    Maybe even, do a video on each one and reference back to this video in it, for those that didn't watch it.
    Regards Ben

  3. Love it Dan!

    Here is a video that goes over some the the building blocks. Complete different space, but same core principle.

  4. In terms of providing advice to clients who are already starting up, is this what I think about? Say I need to develop a model myself (as a consultant/partner).

  5. Hey Dan! Like your video(s)! I search for your videos first as a come across an idea, or problem.

    My question is; I need a forecast/budgeting tool. An online version would be ideal. I"d like to move away from Excel, and have a template already built to review month over month, and year over year financial data, and forecast objectives.
    Is there such that you'd recommend?



  6. Hey Dan! Great video.

    I like how you laid out the various categories.

    Just a minor niggle. At 5:28, you mentioned Revenue of $4 and Cost of Goods $1 would yield a gross margin of 60%. In this example, gross margin would be 75%

    – Cost of Goods Sold
    = Gross Revenue

    Gross Revenue/Revenue = Gross Margin%

    = Operating Expense

    Gross Revenue – Operating Expense = Operating Income (Loss)

    Operating Income (Loss)/Revenue = Operating Margin%

    I'm a bit of a finance dork, so I always spot things like this…overall great video. 🙂

    p.s. I did a comparison of historical Dropbox and Box financials a few weeks ago. You can check it out here – How to Build a Startup Financial Model —

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