Startup Financial Modeling: Revenue and Expenses
8/23/2018 | By Kyle Edriel Tomagan
Financing can be the most gruelling part of setting up a business due to the risks associated with allocating capital for expenses, and the numerous considerations that accompany revenue generation and growth. Today, we will outline how you should approach expenses and revenue through a straightforward financial model.
Expenses First
As a rule of thumb, you’ll need to map out and forecast your expenses first before predicting the amount of revenue you’ll receive. Begin with reasonable estimates for the most common categories of expenses, listed below:
Fixed Costs/Overhead- Land, Office Space, Factory, Salaries, Mortgage
Variable Costs- Cost of Goods Sold (Materials, supplies, packaging), Direct Labor Costs (Customer service, direct sales, direct marketing), Utility bills, phone bills/communication costs, accounting/bookkeeping, legal/insurance/licensing fees, Technology, Postage, Advertising & Marketing, Rent
Building your brand sells your products/services, so another golden rule in plotting out expenses is to double your estimates for marketing and sales, as the costs for these business functions often exceed expectations.
On the other hand, you must triple your estimates for legal, insurance, and licensing fees as these are costly, and predicting your expenses for these activities is difficult if you’re not familiar with these fields.
Another rule to note is to keep track of direct sales and customer service time as a direct labor expense. Even if you’re in charge of these activities during the first stages of the startup lifecycle, monitoring these functions early will allow you to forecast these expenses later on when you’re scaling up.
Expense Per Business Function
Mapping out your expenses begins when you consider the costs for each aspect of your operations. At this point in your business lifecycle, focus on allocating your budget toward staffing solutions, sales/marketing/pr, technology, and miscellaneous expenses.
Staffing
- When do you pay yourself?
- What’s a reasonable rate for your employees, and when do you pay them?
- How many people do you need?
Sales/Marketing/PR
- Consider interrelationships/community. Developing an expansive network of connections can help you grow organically, and is often mutually beneficial.
- As you scale, consider separating marketing from community management by having a PR agency handle community-related activities.
- While SEO, SEM, and digital marketing are vital in today’s business landscape, make sure to budget for offline marketing as well.
Tech
- Get in touch with peers to get quotes (referrals) on hardware and software to ensure that your budget is sufficient.
- Spend what you need, not what you want.
- Don’t opt for SR&ED when you’re only starting operations
Miscellaneous
- Secure your Intellectual Property (copyright and trademarks)
- Check the cost of inventory
- Keep an eye on monthly billing for your subscriptions (CMS, paid newsletters, etc.)
Concerns With Revenue
Streamlining your expenses will lead to a clearer picture when it comes to revenue, but there are still a few issues to sort out. Specifically, the following questions are common when talking about generating profit:
- When will revenue start?
- Do you have a Plan A, B, C?
- What assumptions drive those revenue numbers?
- How will you learn?
Generally, you can follow a five-step process to address these questions with revenue.
- Pick a starting point
- Decide on a revenue model
- Measure with different kinds of metrics (daily/weekly/monthly)
- Keep track of your competitors
- Focus on one revenue stream to start
Aside from revenue and expenses, understanding debt management and taxes can also impact how fast you make it to the next stage of the business lifecycle. For more information on these factors, click on the link below to download our ebook.
