Join Tom Miller, an experienced financial projections expert and educator, as he dives deep into the art of creating realistic and defensible financial models for startups. In this comprehensive CSUF Startup Incubator workshop, Tom shares his wealth of knowledge gained from decades of experience in both corporate and entrepreneurial settings.
Learn the essentials of gathering reliable data, making sound assumptions, and constructing a bottom-up financial model that investors can trust. Tom also explores different research methods, the importance of third-party data, and common pitfalls in financial forecasting.
Whether you’re preparing to launch your startup or looking to refine your financial planning skills, this workshop provides valuable insights and practical tips to help you succeed. Don’t miss out on this opportunity to enhance your financial acumen with expert guidance from Tom Miller!
Watch now to transform your approach to financial projections and drive your business forward!
Transcript
[This transcript was generated by Word.]
00:00:00 Tom Miller
Sure, that’s fine. I’ve been doing financial projections and business planning. I’ll probably since last century in a variety of contexts, both. Uh, within Fortune 500 Company in startup companies and as a consultant both with other companies. And on my with my own shingle.
00:00:21 Tom Miller
I have also been teaching up at Cal State Fullerton for a number of years and before.
00:00:25 Tom Miller
That taught at.
00:00:28 Tom Miller
Concordia.
00:00:32 Tom Miller
Academic background. I actually have a degree in finance, so I understand some of this stuff.
00:00:37 Tom Miller
But let’s start out. You’ve got the this nice little cartoon here, which is really true. I have seen a lot of business plans and a lot of financial models.
00:00:49 Tom Miller
That don’t make a lot of sense and I want to try and help you make sure that the ones that you put together are believable and defensible.
00:00:59 Tom Miller
So let’s get going. Ohh, and this is the to our sponsors. I didn’t. I didn’t have the start up incubator one, but it’s close.
00:01:11 Tom Miller
So thank you, J and Phillip and Travis.
00:01:15 Tom Miller
So really, three key points at this point in order to make a believable planning to gather data, the data that you can’t get, you need to make some sound assumptions and then you use that data to build a financial model from the bottom up.
00:01:32 Tom Miller
So.
00:01:34 Tom Miller
Let’s see how we can do that.
00:01:40 Tom Miller
And I do have the chat open.
00:01:45 Tom Miller
To make sure I can get it in the right place so it’s not.
00:01:51 Tom Miller
Yes, it’s if I put this over here.
00:01:55 Tom Miller
Does that block the screen?
00:02:00 Tom Miller
And are you seeing just the screen or are you seeing the screen and the?
00:02:04 Tom Miller
Good, you’re good. OK.
00:02:07 Tom Miller
That way I can have more on my screen and I’ll have the yeah, all of the the people here on chat over or on the online over here and that will help me maximize my resources. OK, so let’s let’s start so first thing.
00:02:28 Tom Miller
You can obviously do primary research. Primary research is really.
00:02:34 Tom Miller
It’s useful. It can, but it’s also typically very time consuming.
00:02:39 Tom Miller
It’s things like focus groups, questionnaires.
00:02:45 Tom Miller
Going and asking people who are in trade associations the type of long interview questions that JJ talks about.
00:02:54 Tom Miller
Those are all primary research.
00:02:59 Tom Miller
Secondary research.
00:03:02 Tom Miller
Are things like.
00:03:04 Tom Miller
Census data.
00:03:06 Tom Miller
Google’s competitors.
00:03:10 Tom Miller
Ibis world.
00:03:13 Tom Miller
What is that? RMA studies?
00:03:16 Tom Miller
All of these are things that are external sources that can give you good data on markets, costs and a variety of other things.
00:03:29 Tom Miller
Well, what you want to do is you want to be able to tell your story and the way I like to tell the story.
00:03:35 Tom Miller
Is I will typically start with.
00:03:39 Tom Miller
OK. Why is my OK? It’s just slow. I typically start with the things that are external that I can’t change. Things like, you know, what is the industry look like? What are the market trends? How big is the market? What are the demographics? What are the buying criteria?
00:03:59 Tom Miller
Who’s your competition?
00:04:01 Tom Miller
You know, are they better or worse than you are? What’s your differentiation?
00:04:06 Tom Miller
Do you have IP?
00:04:08 Tom Miller
All of those aspects to the business are important to telling the story.
00:04:15 Tom Miller
And they are all external data, so you should be able to provide.
00:04:20 Tom Miller
Not only the data, but also sources of where you.
00:04:23 Tom Miller
Got that data.
00:04:25 Tom Miller
One of my favorite ways in which to use get data is to.
00:04:32 Tom Miller
OK, it is.
00:04:33 Tom Miller
It’s just slow. I’ll need to work on that. Is long search terms in Google.
00:04:39 Tom Miller
Just as an example, if you wanted to open up a retail florist shop.
00:04:45 Tom Miller
In Costa Mesa you could use Google Maps and it would show you where all of the.
00:04:52 Tom Miller
Florist shops were and then if.
00:04:53 Tom Miller
I I did a.
00:04:56 Tom Miller
We’ll search. You can see this was retail florist Costa Mesa, CA. You can see that there within that triangle and maybe down in the lower.
00:05:08 Tom Miller
Right hand or lower? Yeah. Lower left hand corner. You might be able to find some space because again, floor shops tend to be pretty local. You people don’t go very far.
00:05:21
Next.
00:05:22 Tom Miller
So you want to find out a a geographic space that is convenient.
00:05:29 Tom Miller
In-laws will tell you things like ours, what they are, how they different themselves. Some of the ratings. So you can get on the idea again of who your competitors are.
00:05:41 Tom Miller
One of the key things that’s often overlooked is that every Trade and Industry.
00:05:50 Tom Miller
Has both trade associations as well as trade shows.
00:05:56 Tom Miller
So if you’re in the retail florist industry, you go to the Society of American Florists and.
00:06:03 Tom Miller
They and as you can see, they.
00:06:06 Tom Miller
Uh, let’s see.
00:06:07 Tom Miller
About six months ago, they had their annual convention in Phoenix.
00:06:11 Tom Miller
You know, if you’re students, you can go to these pretty cheaply in most cases. If you’re not, the exhibit halls are often low cost or free.
00:06:20 Tom Miller
And go in there and it’s a wonderful way to get information about the industry, especially if you don’t know a lot about the industry.
00:06:29 Tom Miller
The other thing is that many of these.
00:06:34 Tom Miller
These associations have local affiliates.
00:06:41 Tom Miller
So just like there’s a Society of a national group.
00:06:44 Tom Miller
There may be a California group and maybe even a a county or Citigroup.
00:06:49 Tom Miller
And you have to realize that the people who are involved in these groups, the executive director, gets paid.
00:06:55 Tom Miller
Do it the President and the other officers are in it because they love the industry and they want to give back so that you can get a lot of information from these people by just being kind to them, taking and taking them out to lunch and letting them tell you about their favorite subject, which is the industry that they work in.
00:07:16 Tom Miller
So again, it’s a way of.
00:07:19 Tom Miller
Ramping up your knowledge about an industry very quickly.
00:07:25 Tom Miller
One of the other ways in which you can get lots of data is to go to the government.
00:07:32 Tom Miller
Government and also RMA Risk Management Association.
00:07:38 Tom Miller
Most of the businesses are in fact, all other businesses in the US have a code and NIC’s code.
00:07:45 Tom Miller
And if I were doing this in class, I’d say. Does anybody know what that is? But I’ll go ahead and just tell you it’s the North American industrial classification system.
00:07:55 Tom Miller
And it turns out that the government and a number of other people keep statistics.
00:08:01 Tom Miller
You can see Ibis world. There’s also the economic survey.
00:08:06 Tom Miller
They have information that is available for this industry.
00:08:11 Tom Miller
So again, if you’re looking at at is this a fragmented industry growing shrinking?
00:08:19 Tom Miller
And we’re the big players. All of that is available and you should have that information as you begin to tell your story.
00:08:30 Tom Miller
I will say that let’s do this if if anybody has any questions, I will try and watch the chat. Or if you just want to go ahead and and unmute and interrupt that will be fine as well.
00:08:44 Tom Miller
So what’s the bottom line of data? The bottom line of data is.
00:08:50 Tom Miller
Yet third party verifiable data, because what does that do?
00:08:55 Tom Miller
It what it does is it it?
00:08:58 Tom Miller
When you’re dealing with an investor or a banker.
00:09:02 Tom Miller
And you know, either debt or equity source of funding, if you can provide third party verifiable data then it is not your opinion or versus their opinion as to what’s good, bad or indifferent. But if you can agree that yes, this is a credible source and we can agree that this is good data.
00:09:22 Tom Miller
We can then move on from there.
00:09:26 Tom Miller
Some.
00:09:27 Tom Miller
Number one, get good data. Don’t estimate if you can help it, and I will say though, there are times when you sometimes maybe have to use a proxy.
00:09:38 Tom Miller
And that’s OK, so long as it as it is something that’s reasonable. You know if you wanted to make an app say.
00:09:46 Tom Miller
And needed to know how many apps could I sell? Well, a good proxy is that. Yeah. How many phones are there?
00:09:54 Tom Miller
And that would be the maximum number of apps you could sell if you were to have your app on every phone.
00:10:00 Tom Miller
But let’s go to .2, which is the financial model itself.
00:10:05 Tom Miller
And I apologize if some of you have.
00:10:09 Tom Miller
Are experienced in accounting, but this assumes basically not a whole lot of prior knowledge.
00:10:17 Tom Miller
So we’re going to look at the the financial model.
00:10:21 Tom Miller
I typically like to do a bottom up financial model where I can add the numbers together as opposed to top down.
00:10:29 Tom Miller
I typically like to do it month by month because if you try and do it annually or quarterly, sometimes there are significant cash flow issues that you have to deal with.
00:10:40 Tom Miller
And again.
00:10:42 Tom Miller
If you know anything about financial statements, these statement these three statements linked together.
00:10:45 Tom Miller
Yeah.
00:10:50 Tom Miller
And I typically will use a a spreadsheet that is have that has them linked together because unless you are really an expert at spreadsheets.
00:11:01 Tom Miller
It’s very difficult to link these three together and make sure that they are all In Sync.
00:11:06 Tom Miller
So there are some very good ones out there. I’ve got good ones. Score has a really one that’s about, I’ll say 80 to 90% out there. So that’s very good.
00:11:19 Tom Miller
So.
00:11:21 Tom Miller
Again, we start typically with the income statement.
00:11:24 Tom Miller
This is a your pretty typical income statement. Sales minus cost of goods sold is the gross profit.
00:11:33 Tom Miller
Gross profit is a good indication.
00:11:37 Tom Miller
Whether you’re going to make money or not.
00:11:39 Tom Miller
Various industries have different levels of gross profit that are standard. Again, you can go to things like the RMA studies or industry studies to say what the typical gross profit is. And as an example, in a retail store, the typical gross profit is $1.00 for every $2.00 in sales.
00:12:01 Tom Miller
So you buy it for a dollar, which is your cost of goods sold. You sell it for $2.00, so your gross profit is a dollar and it has to cover all of your expenses, rent, salaries, etcetera.
00:12:18 Tom Miller
Let’s see.
00:12:22 Tom Miller
So.
00:12:23 Tom Miller
In a believable financial plan sales forecasting.
00:12:28 Tom Miller
Obviously is where you.
00:12:29 Tom Miller
Start up at the top line.
00:12:32 Tom Miller
But it’s one. It’s simply one of the most difficult areas, because how do you forecast sales for a business that isn’t up and running?
00:12:41 Tom Miller
You know, if you’re in business, you can look at historicals and say how much am I going to grow.
00:12:48 Tom Miller
But if you’ve got nothing, no history, how do you do it? Well, that’s one of the things we want to talk to you about today is how to do.
00:12:58 Tom Miller
Forecasting when you don’t have any prior history.
00:13:04 Tom Miller
So this is an example that I use from a student of mine.
00:13:09 Tom Miller
They said what they wanted to do was repair.
00:13:14 Tom Miller
A certain type of car in the Middle East.
00:13:17 Tom Miller
And they said, OK, you know, get data that’s at 84% of the cars, got good data, verifiable. That said 24% were imports that gave them sort of a.
00:13:30 Tom Miller
Total addressable market of a little over 20,000 cars.
00:13:35 Tom Miller
And they said, OK, well, the average repair bill again from a third party source is just under $500.
00:13:43 Tom Miller
So what’s our total market? Well, we could make $9 million and you know if we only.
00:13:49 Tom Miller
But.
00:13:50 Tom Miller
What 10% of that market we’d be doing a little really well. We’d have $1,000,000 business.
00:13:57 Tom Miller
Now, does anybody know?
00:13:59 Tom Miller
I mean, is that a reasonable way to do it or are there flaws that you could point?
00:14:03 Tom Miller
Out with this?
00:14:06 Tom Miller
And if you see any, go ahead and unmute and let us know.
00:14:23 Tom Miller
One of the hazards of of teaching in zoom land. You can’t.
00:14:27 Tom Miller
Stare at someone and and look, you know, and make them answer. But what? What do you the problem that I see with this is that this is all really good data, but this this one here.
00:14:40 Tom Miller
This estimated market.
00:14:43 Tom Miller
That we can get 10%.
00:14:46 Tom Miller
Is really the killer to this whole deal because.
00:14:49 Tom Miller
I don’t know how I’m they don’t explain how they’re gonna get that 10% market.
00:14:55 Tom Miller
That’s a swag.
00:14:58 Tom Miller
Without any basis, and therefore it’s not terribly believable someone could punch a hole in it really easily and we want to avoid that.
00:15:08 Tom Miller
So I’ll put I’ll say there’s about five or six different.
00:15:13 Tom Miller
Scenarios where you can forecast your your sales. Let’s go through them one by one.
00:15:22 Tom Miller
One is where you have capacity utilization.
00:15:26 Tom Miller
And this can be, you know, I’ve got a restaurant that has a certain number of seats. I have an education building that has a a school that has a certain number of seats. I have an airplane, a bus.
00:15:41 Tom Miller
I have, yeah.
00:15:45 Tom Miller
A certain number of uh, you know my uh, I can only produce so.
00:15:48 Tom Miller
Many kilowatt hours.
00:15:50 Tom Miller
Anything that has a capacity you can forecast using a capacity utilization model and in this case, we’ll look at a restaurant.
00:16:00 Tom Miller
The restaurant in this case and again.
00:16:04 Tom Miller
Philip asked me about these because these these slides actually contain links to live spreadsheets that are embedded, and if people want to play around with them, they can.
00:16:16 Tom Miller
But if you’ve got a a restaurant.
00:16:21 Tom Miller
You can make some assumptions that are reasonable about.
00:16:27 Tom Miller
You know what you’re planning? You know, it’s management’s decision as to what the hours are.
00:16:34 Tom Miller
It’s management’s decision as to what the actual physical seating capacity is in this case 40.
00:16:42 Tom Miller
You can make an assumption a reasonable one based on the industry as to how quickly your tables will turn. Meaning in this case that the average guest will stay at at a given table for an hour and a half.
00:16:57 Tom Miller
And again, based upon the type of business, you can make an estimate as to what percentage might.
00:17:04 Tom Miller
Be take out.
00:17:06 Tom Miller
And again, industry averages in your menu.
00:17:10 Tom Miller
What your average check is.
00:17:12 Tom Miller
So these are all pretty good numbers.
00:17:15 Tom Miller
And then what you do is you go through and say.
00:17:16 Tom Miller
OK.
00:17:18 Tom Miller
For any given time slot.
00:17:21 Tom Miller
How much am I sitting is going to be taken up?
00:17:25 Tom Miller
This is a little bit less.
00:17:31 Tom Miller
You don’t have exactly the same level of data precision.
00:17:35 Tom Miller
But you can make some pretty good assumptions here. Reasonable ones. We know that in this case dinner is going to be busier than lunch, and there’s a lull in the afternoon from 1:00 to 5:00. People typically don’t go into the restaurant and eat.
00:17:52 Tom Miller
You could also, if you really wanted to, you could go do some field research and and go to a similar restaurant and see what percentage of their seats are empty at given hours and use that as your source. That do some again, again, going back to that first source of data, the the field research.
00:18:12 Tom Miller
And go and count it. I mean, if you think about it.
00:18:16 Tom Miller
Most fast food restaurants are empty, probably 90% of the time because they are set up to handle.
00:18:24 Tom Miller
You know, a large influx of people at one time.
00:18:27 Tom Miller
So they have lots of excess capacity.
00:18:31 Tom Miller
And if we do the math here to say, OK, how much is?
00:18:35 Tom Miller
How much of are we utilizing? What’s our effective capacity?
00:18:38 Tom Miller
The.
00:18:39 Tom Miller
We can do the math and come out with annual sales. What I would then do typically is there are sites on the the, the Internet that says OK for a given type of restaurant, this is a a, a typical sales volume.
00:18:55 Tom Miller
So I think the typical McDonald’s franchise, say, does a million million in half these days.
00:19:01 Tom Miller
So this might be a reasonable for sort of a mom and pop type of of store to do 750,000 a year.
00:19:14 Tom Miller
Uh, Phil, if you had a question estimated, oh.
00:19:18 Tom Miller
Ohh OK you this one must have been from a while ago. Estimated market share. Yeah, you’re right. That was indeed the the the killer in that, that one.
00:19:30 Tom Miller
So this is capacity utilization?
00:19:34 Tom Miller
If you are.
00:19:37 Tom Miller
Manufacturer of something that you are selling.
00:19:40 Tom Miller
Let’s say in this case we are.
00:19:45 Tom Miller
We are selling.
00:19:48 Tom Miller
Candles or making candles for distribution.
00:19:51 Tom Miller
What we can do is this. We can say, OK.
00:19:56 Tom Miller
We’re going to we sell 1 candle at a time. The retail price is 250. We know that the retail markup is 100%.
00:20:05 Tom Miller
We’re going to sell these in cases of 12.
00:20:08 Tom Miller
So.
00:20:10 Tom Miller
The wholesale price is 12 * A buck and 1/4.
00:20:18 Tom Miller
So.
00:20:20 Tom Miller
Or is that right?
00:20:23 Tom Miller
Is that right? Yeah, about in 1/4.
00:20:26 Tom Miller
So.
00:20:28 Tom Miller
That’s 15 bucks a case.
00:20:31 Tom Miller
The wholesaler, maybe this may be a little high, maybe not. But it basically says that as a manufacturer, we’re going to be getting $12.50.
00:20:41 Tom Miller
Or a dollar per candle.
00:20:46 Tom Miller
So that’s our our revenue is at dollar per candle.
00:20:50 Tom Miller
But what we’re going to do is we’re say, OK.
00:20:54 Tom Miller
How wide is our distribution network?
00:20:57 Tom Miller
And while this is a a static dis static model, if I were modeling this in Excel.
00:21:05 Tom Miller
I would have these 3 numbers.
00:21:07 Tom Miller
You know, very on a monthly basis, meaning OK, what’s the average sale per store?
00:21:16 Tom Miller
And then.
00:21:17 Tom Miller
Either a unified number of how many number of stores or for going through a chain or other distributor, which is what this says is that OK, we’ve got 12 retailers, each retailer has five stores and we’re selling 7 candles.
00:21:35 Tom Miller
A week or one a day in each of those stores, and again, if we do the math, we’ll come up with our annual revenue is 270,000.
00:21:46 Tom Miller
Based on a dollar per camp.
00:21:51 Tom Miller
Again, most of this is.
00:21:53 Tom Miller
You can get externally the sales forecast.
00:21:58 Tom Miller
You know, this is a little bit.
00:22:01 Tom Miller
More.
00:22:05 Tom Miller
From your management view.
00:22:06 Tom Miller
Right.
00:22:07 Tom Miller
But one of the nice things is that if you can identify these numbers, the number of of stores, the number of retailers and the average sales, you can actually track that number.
00:22:20 Tom Miller
And once you begin selling, you can get feedback on your estimates and say how close did we come.
00:22:29 Tom Miller
And therefore you can refine your forecasting model, because you’ve done it right from the bottom up to begin with.
00:22:36 Tom Miller
It’s not. We’re going to pick a number at random. We’ve got a baseline. And are we going to are we?
00:22:43 Tom Miller
Above below are at that baseline number of. In this case one candle a day for each of 60 stores.
00:22:53 Tom Miller
Now, on the other hand.
00:22:55 Tom Miller
What if we’re the store that’s that’s selling the candles?
00:23:00 Tom Miller
Well, I didn’t. I wanted to vary it a little bit.
00:23:04 Tom Miller
In this case, so sort of a combination of.
00:23:08 Tom Miller
The OR variation, if you will, on the retail capacity.
00:23:13 Tom Miller
Because one of the things that well again, if I were asking I I will so indicate how many of you have ever walked into a store and not bought anything.
00:23:29 Tom Miller
Definitely you can use your hands. Say hello. Something like that. Yeah, OK, most of us.
00:23:35 Tom Miller
So.
00:23:38 Tom Miller
For if we are in retail sales it’s you know, we have to be open in order to somebody to buy the product.
00:23:48 Tom Miller
And in this case we’re looking.
00:23:49 Tom Miller
At just a A.
00:23:52 Tom Miller
We’re saying that 25% of the people who come in the door actually buy something.
00:23:58 Tom Miller
Their average purchase price is $75.
00:24:03 Tom Miller
And this is a count of how many people come.
00:24:05 Tom Miller
In the door.
00:24:08 Tom Miller
Again, if you want to do some field research, you can go to a similar store at your neighborhood mall and count the people coming in and out of the store for a couple of.
00:24:17 Tom Miller
Hours.
00:24:19 Tom Miller
Maybe if you count it for a day one day on a weekday, one day on a weekend, you then have.
00:24:26 Tom Miller
Well, not a large data set. You have A at least one.
00:24:31 Tom Miller
Set of data points that say OK.
00:24:34 Tom Miller
This is the sort of traffic I would expect in my store because it’s similar to store XYZ and I sat there for 8 hours counting people going in out the door.
00:24:46 Tom Miller
Which in in most cases will at least get you props.
00:24:48 Tom Miller
For doing that level of research.
00:24:51 Tom Miller
So again, we do the math.
00:24:55 Tom Miller
Of how many people are are coming in and out the door?
00:25:01 Tom Miller
We have a 25% conversion rate and a $75 purchase. So we can look at the weekly sales and the annual sales and 2,000,000 for a a business that has an average ticket. This is maybe a clothing store or shoe store or something like that. An average purchase price of 75.
00:25:22 Tom Miller
It doesn’t seem bad.
00:25:24 Tom Miller
Hey, Tom, you got a question from Jacob, it looks like.
00:25:27 Tom Miller
OK.
00:25:31 Tom Miller
OK, go. If you want to go ahead and unmute or are you just saying that? Yeah.
00:25:35 Tom Miller
Unmute and ask.
00:25:41 Tom Miller
Jacob.
00:25:42 Tom Miller
Are you is this is?
00:25:42
Oh, sorry. No, I don’t. I don’t have a question. I just put a thumbs.
00:25:45 Tom Miller
That, that, that, that, that said thumbs up for. Yes, you had. OK got it.
00:25:49 Tom Miller
Yes, I had for the previous question.
00:25:52 Tom Miller
Thank you, Sir.
00:25:54 Tom Miller
OK.
00:25:57 Tom Miller
So.
00:25:58 Tom Miller
But you know brick and mortar is not the the greatest thing these days. A lot of us will do.
00:26:04 Tom Miller
E-commerce.
00:26:06 Tom Miller
Well, how do you do e-commerce?
00:26:09 Tom Miller
Again, it’s a matter of of tracking.
00:26:14 Tom Miller
How do you get people there?
00:26:17 Tom Miller
In this case, you know there are two ways to get people to your site.
00:26:22 Tom Miller
One is by.
00:26:24 Tom Miller
Paid advertising and the others by organic advertising.
00:26:29 Tom Miller
This again is a pretty simple model if you could also put in here SEO costs.
00:26:34 Tom Miller
But we’ll assume that you will have a.
00:26:38 Tom Miller
A Google Adword budget of $100 a day.
00:26:42 Tom Miller
And you’re going to pay $0.15 per click for every click through.
00:26:46 Tom Miller
And we’re going to save 40% of your visitors are paid. The other sixty are organic. Again, you can vary these numbers and the model will do the math for you.
00:27:03 Tom Miller
I haven’t looked at the data recently. This was I it. It may be a little bit more higher these days.
00:27:10 Tom Miller
But I was going off the the assumption that the number of people actually.
00:27:14 Tom Miller
We’ll start something on your site.
00:27:17 Tom Miller
Is about two and 100.
00:27:20 Tom Miller
Because that’s about the same rate that you will get from a direct mail advertiser.
00:27:26 Tom Miller
Now and and I should actually look at that and verify that the one of the key things that sort of the hidden secret of of e-commerce.
00:27:36 Tom Miller
Is this 70% transaction or abandonment has been pretty consistent for a number of years. I won’t ask you because I think I know the answer. How?
00:27:47 Tom Miller
Many of you have.
00:27:48 Tom Miller
Ever, ever abandoned the shopping cart?
00:27:51 Tom Miller
And then, of course, been retargeted by that company because now they want you to just complete the card. Yes, I think most of us have.
00:27:59 Tom Miller
So we’ll assume that of the people that start a cart, 70% abandon it.
00:28:04 Tom Miller
Well, we’ve got, you know, we’ve got a good site where we charge $80.00 for whatever we’re selling on the site.
00:28:11 Tom Miller
So if it’s costing us.
00:28:13 Tom Miller
You know, $100 a day.
00:28:17 Tom Miller
We’ll get.
00:28:19 Tom Miller
600 paid paid visitors. That means we’ll get about 200 about time and ah.
00:28:27 Tom Miller
Now total visitors 2 1/2 times for total visitors.
00:28:31 Tom Miller
Very few of them will start a cart. Most of them will abandon it.
00:28:36 Tom Miller
But even this at this low checkout rate.
00:28:40 Tom Miller
Of 10 customers a day out of 1600 visitors, if we if our average purchase is $80.
00:28:50 Tom Miller
Our cost of customer acquisition is $100.
00:28:54 Tom Miller
And again, if you have SEO cost, you could factor that in as well. But the cost of customer acquisition is $10 on an $80.00 purchase price, that’s pretty reasonable.
00:29:06 Tom Miller
Again.
00:29:08 Tom Miller
What you want to do is you look at what I’ll call sort of. The smell test is do the numbers seem to fit together? And yes, I cost of customer acquisition, you know 10 to 12% of your initial purchase is probably not a bad number.
00:29:26 Tom Miller
For.
00:29:27 Tom Miller
You know, so it meets the smell test.
00:29:30 Tom Miller
In my now what’s nice though, is that this is for the first purchase only.
00:29:36 Tom Miller
If you have a.
00:29:37 Tom Miller
Something that they’re going to buy over and over again.
00:29:40 Tom Miller
You go to the second phase of it, which is.
00:29:44 Tom Miller
You know if if we go back to this we had.
00:29:50 Tom Miller
You know, this is a daily number, so.
00:29:56 Tom Miller
Will have 30 people a month checking out.
00:30:01 Tom Miller
And if we say they’re going to purchase our product every three months.
00:30:06 Tom Miller
And 95% of them will purchase again.
00:30:10 Tom Miller
Again, this is pretty easy to do in Excel. This sort of you know, tiered math.
00:30:16 Tom Miller
Where you say, OK, what’s my repeat purchase is basically a percentage and an offset from.
00:30:26 Tom Miller
My initial purchases or my total purchases?
00:30:29 Tom Miller
And therefore what it says is that.
00:30:33 Tom Miller
Again, given these parameters.
00:30:36 Tom Miller
The average customer is going to buy from US 19 times, so the lifetime value of that customer shoots up to $1500 and we got them for 10.
00:30:46 Tom Miller
So that’s really a very, very good investment.
00:30:55 Tom Miller
There are some things over that are big enough or new enough where you need to have that face to face interaction.
00:31:04 Tom Miller
Usually, if it’s a very large purchase purchase, or if you’re selling something business to business.
00:31:11 Tom Miller
You have a different sales funnel. Again the whole key thing of this is to model the sales funnel.
00:31:20 Tom Miller
Here I’m going to model a sales funnel that is primarily based upon a trade show.
00:31:27 Tom Miller
Just to give you some example that yeah, it can be pretty complex, but again, so long as you can identify the assumptions.
00:31:36 Tom Miller
And put them into a spreadsheet where?
00:31:40 Tom Miller
If someone, if you’re talking with someone and they don’t like the assumption you can put in a different number and see what it does. So in this case the we’re saying, OK, we’re going to be at a trade show and it’s.
00:31:51 Tom Miller
Going we’re going.
00:31:52 Tom Miller
To be.
00:31:52 Tom Miller
There 12 hours a day for three days. We’re going to have two people there and it’s going to take us 5 minutes to get a lead.
00:32:00 Tom Miller
So if we do the math, we’re gonna come home with 800 leads.
00:32:05 Tom Miller
But it’s cost us. You know, the booth and the collateral and the hotel and the meals, etcetera, etcetera.
00:32:13 Tom Miller
And maybe that needs to be updated, but again the math is you can update the numbers and the math will will flow through because again these are live spreadsheets, the cost for that lead is $15.
00:32:28 Tom Miller
Then what we do is we say we go, we go back to our home or our office and say, OK, we have to qualify these leads.
00:32:36 Tom Miller
Qualifying takes a 15 minute phone call and we’re going to pay the salesperson 40 bucks an hour to do this.
00:32:44 Tom Miller
Turns out only 20% are are qualified.
00:32:48 Tom Miller
So what that means is we now are we’ve now cut our population down to 172 qualified leads.
00:32:55 Tom Miller
But only and, and the cost for those qualified leaves has gone up.
00:33:01 Tom Miller
So what do we do with the qualified leads? Well, we prepare a proposal and it takes an hour.
00:33:07 Tom Miller
But maybe we’re only going to prepare it for.
00:33:11 Tom Miller
40% of those.
00:33:14 Tom Miller
Because we’ve got a sense that, you know, maybe some of them really aren’t, are not as interested as we we as we think. So we’re going to prepare 60 or 70 proposals.
00:33:25 Tom Miller
And what that means is that for each proposal.
00:33:28 Tom Miller
You know the cost per proposal goes up.
00:33:32 Tom Miller
We’re going to process some of them are going to order 60% of the proposals are going to say yes, so we’re going to get 40 orders, take some time to process the order.
00:33:42 Tom Miller
And it therefore our cost of that customer acquisition after we’ve gone through the qualifying, the leads, putting together a proposal and accepting the order is 600 bucks.
00:33:54 Tom Miller
So we need to make sure or 650 nineteen. Pardon me, we have to make sure that we’re whatever we’re selling.
00:34:03 Tom Miller
Now is commensurate with that $700.00 cost of customer acquisition.
00:34:12 Tom Miller
The last one is one that you will typically rarely see.
00:34:17 Tom Miller
But if any of you have should ask any of you still carry around a flip phone?
00:34:26 Tom Miller
Probably not.
00:34:28 Tom Miller
And my guess is most of you don’t have.
00:34:31 Tom Miller
If you have a TV, you probably don’t have a black and white TV.
00:34:36 Tom Miller
So and and if you buy music, you probably do it, buy it digitally as opposed to having CD’s or cassettes.
00:34:44 Tom Miller
Now, some collectors may still have vinyl, but.
00:34:48 Tom Miller
The the whole idea of this is that there are some technologies.
00:34:53 Tom Miller
That are so innovative, such as the smartphone, the color TV and different.
00:35:01 Tom Miller
Methods of distributing music that they completely wipe out the prior technology and nobody uses them anymore.
00:35:13 Tom Miller
An example of this actually, I’ll argue is if anybody knows Brian Roof and tenant systems.
00:35:21 Tom Miller
I will argue that his is is an innovative product that will follow this and at some point radio dispatch will be as as prevalent as eight track tapes.
00:35:36 Tom Miller
Now anybody takes ever have statistics.
00:35:42 Tom Miller
Or maybe have some of you seen this curve?
00:35:49 Tom Miller
My guess is most of you have.
00:35:53 Tom Miller
This is the standard distribution.
00:35:55 Tom Miller
And if you understand it, you know you have these innovators and early adopters and so on.
00:36:02 Tom Miller
Couple of things here that are interesting to note.
00:36:06 Tom Miller
The the primary buying criteria of the late majority has nothing to do with price or need, but is.
00:36:14 Tom Miller
Primarily A psychological purchase.
00:36:17 Tom Miller
And you know, they’re buying criteria is that if half the people I know already have it, then I should buy it too, because I I don’t want to be left in the dust.
00:36:31 Tom Miller
So it’s a very much a me too purchase criteria purchase.
00:36:40 Tom Miller
Purchase mentality.
00:36:43 Tom Miller
And again, one of the things to realize that that this is linear over time.
00:36:48 Tom Miller
So things like advertising, if you do broad based advertising, it’s pretty useless because.
00:36:55 Tom Miller
The only people who will buy a new innovative product are these innovators. These 2 1/2%, so the others will see your your ads and say, oh, it’s too new.
00:37:08 Tom Miller
I don’t know anything about it.
00:37:10 Tom Miller
And dismiss it.
00:37:13 Tom Miller
What’s nice though, is that.
00:37:16 Tom Miller
If you are a statistician, you can actually estimate the area under the curve, and in fact I did this for one of my clients more years ago than I care to think about. It was 2012.
00:37:29 Tom Miller
And in 2012, the smartphone had been out for about half a year, about five years.
00:37:35 Tom Miller
And they were selling about half of the phones that were being sold with smartphones. So we did an estimate and said, OK, yeah, that means we’re probably about here in the curve.
00:37:47 Tom Miller
That means that the the.
00:37:50 Tom Miller
Time from time zero to here was five years.
00:37:55 Tom Miller
So we’re going to say this Sigma amount. So that was 60, if that was 60 months, I think we said the Sigma was about.
00:38:07 Tom Miller
Maybe 18 to 20 months, maybe 20-4 months.
00:38:11 Tom Miller
Something like that.
00:38:15 Tom Miller
And.
00:38:16 Tom Miller
What you can do is if you slice up this curve and say, OK, I got this little portion here, this you know, 160th of the curve. And I know the total addressable market which is the area under the curve.
00:38:32 Tom Miller
And then in our case, we use the total population of.
00:38:36
Of.
00:38:38 Tom Miller
Or close to the total population of the country, because we figured that somebody everybody over six years old would have a smell phone.
00:38:45 Tom Miller
And what that does is that gave us allowed us to estimate what our sales would be.
00:38:54 Tom Miller
Yes. Yeah, thank you, I actually.
00:38:59 Tom Miller
I believe I actually met Mr. Rogers and not not that one. But Mr. Everett Rogers. And if you don’t know the, this whole thing dates back to his PhD thesis, which he did in the late 50s.
00:39:16 Tom Miller
On the.
00:39:20 Tom Miller
He actually he was doing it on a new type of seed.
00:39:24 Tom Miller
But this actually came out of his review of the review of the literature, and he found this pattern that, you know, no matter what sort of new technology came out, it always followed this adoption curve because it’s primarily A psychological buy and not a technological buy.
00:39:44 Tom Miller
Fascinating stuff, but yeah, you have to be really in a specialized niche to be able to use this.
00:39:55 Tom Miller
What’s next in the story? Well.
00:39:59 Tom Miller
If the the sales are the the sort of top line, the costs are then the next part of the line.
00:40:06 Tom Miller
Cost of goods sold. How much is this gonna going to?
00:40:11 Tom Miller
Cost for us to make.
00:40:13 Tom Miller
You should have a really good idea based upon either Bill of materials or contracting with the manufacturer or some such thing as that that will let you know what your cost of goods sold are. Again third party data.
00:40:27 Tom Miller
You can make some estimates as to what your SG and A are based upon. Things like how much how many people are you going to have, what’s the rent.
00:40:41 Tom Miller
How much are you going to spend on insurance again, sometimes you can get quotes. Sometimes you can make estimates, sometimes you can go to sort of industry standards.
00:40:51 Tom Miller
But again, so long as it’s not a swag but a number that you can say this is where I got it from.
00:41:00 Tom Miller
It increases the credibility.
00:41:03 Tom Miller
Now.
00:41:04 Tom Miller
People are are an interesting thing.
00:41:07 Tom Miller
We have to we have to pay people.
00:41:10 Tom Miller
So how much do we pay the people?
00:41:13 Tom Miller
Well, the government is is our friend in this case because there’s something, especially in California, there’s something called the occupational.
00:41:24 Tom Miller
Wage survey and it will tell you every year they they put out this number say.
00:41:30 Tom Miller
In you know.
00:41:32 Tom Miller
In this particular county, how many workers are there in this category? What do we pay them and the the SoC? These standard occupational qualification? Now the good data source, good. The government number to say, well, what does, what does a restaurant cook do as opposed to a short order?
00:41:54 Tom Miller
And in fact, the government will help you determine, you know, based upon what these people do and what you’re expect your people to do, which category that would fall in.
00:42:06 Tom Miller
So that’s the wages. But then what you have to do is you have to add on to those wages. You have to add on.
00:42:12 Tom Miller
Unemployment.
00:42:15 Tom Miller
Because indeed you have to if your business has to pay unemployment. These are the current rates. They’ve been that way for a while.
00:42:25 Tom Miller
In addition to that, you have to pay.
00:42:29 Tom Miller
The employer portion of of Medicare.
00:42:32 Tom Miller
And Medicaid and actually the I I did not update it, I apologize. I think the the current limit is about 170 or 180.
00:42:43 Tom Miller
But there’s still more.
00:42:45 Tom Miller
As an employee, you have to pay for workman’s comp.
00:42:49 Tom Miller
I’m going to assume that I’m not. I don’t have to explain what workman’s comp is, but workman’s comp.
00:42:57 Tom Miller
Can be messy and it can also be simple. It sort of depends.
00:43:01 Tom Miller
There’s two sources of data for workman’s comp.
00:43:04 Tom Miller
One is the workman’s comp Insurance review board or the WC IRB.
00:43:11 Tom Miller
And now?
00:43:13 Tom Miller
It will tell you which code to use in this case, if we are using a restaurant, everybody from the server to the entertainers are all in the same classification and other companies. The sales people, the outside sales people. Maybe at one rate, the desk workers, maybe at another factory works at 1/3.
00:43:35 Tom Miller
And I could tell you some stories about that, but I want to make sure we get through within the hour that we have allocated.
00:43:42 Tom Miller
But this will get you the code.
00:43:45 Tom Miller
Then what you do is you go to the second source of data, which is the.
00:43:51 Tom Miller
California Insurance board.
00:43:54 Tom Miller
An insurance commissioner and they published the rates.
00:43:57 Tom Miller
And I typically go for the state compensation insurance fund, because that’s the insurer of last resort here in California. I believe they are by law required to issue you insurance.
00:44:09 Tom Miller
So again, for this particular industry code, you’re going to pay basically $4.00 out of every hundred.
00:44:19 Tom Miller
Or workmen’s comp?
00:44:21 Tom Miller
Some industries are more some industries are less.
00:44:25 Tom Miller
But as with all these other costs, if you add up all these payroll costs, it adds up to between 15 and 20%.
00:44:33 Tom Miller
And if you had forgotten to put those in?
00:44:36 Tom Miller
And maybe had a very labor intensive business, you could think you’re doing OK, but you hadn’t got your all your costs in so.
00:44:46 Tom Miller
You’re not really doing as well as.
00:44:47 Tom Miller
You think you did?
00:44:49 Tom Miller
So that’s we, we can find out pretty easily how we pay people and and we can make some assumptions about when we’re going to hire and and who we’re going to hire.
00:45:03 Tom Miller
The last thing is we look at the the balance sheet and say, well, OK, where are we going to get stuff cash from and and where is it going to go to.
00:45:14 Tom Miller
Cash is king. Certainly. We have to understand that the only two things cash can we you can.
00:45:20 Tom Miller
Be used for.
00:45:21 Tom Miller
Is first is, it’s buying something else.
00:45:27 Tom Miller
If you buy equipment, if you buy a building, if you buy inventory, if you buy any other asset, what you’re doing is you’re trading off a cash asset or a non cash asset.
00:45:42 Tom Miller
That’s in the the long term assets, the fixed cap fixed assets as well as inventory, no. So working capital actually it’s not in general I take that one back what we call working capital is made-up of two things.
00:45:59 Tom Miller
One is if you sell on account, you’re basically acting as a bank.
00:46:05 Tom Miller
And you have to have money working capital to support both the accounts receivable as well as the inventory.
00:46:16 Tom Miller
That you’re using.
00:46:17 Tom Miller
Now, on the other hand, you may get a little bit of leeway if you have and push your payables out and in fact, one famous story is that one of the ways that.
00:46:29 Tom Miller
Nolan Bush now got his got his start is that he went to his.
00:46:35 Tom Miller
Customers and said I want to.
00:46:37
Right.
00:46:38 Tom Miller
Went to his customers, his accounts receivable.
00:46:41 Tom Miller
And said I want to get paid in not in 30 days because I’m a poor entrepreneur. I need my money fast and then he went to his vendors who he was buying his inventory from and said, hey, you know, I’m a poor startup. I’d like you to, if you could give me 90 day terms instead of your normal 30.
00:47:03 Tom Miller
And they said yes and he was be able to use his cash flow. He helped build his business.
00:47:10 Tom Miller
But understanding those three things.
00:47:14 Tom Miller
Are you going to sell on credit? How much inventory do you need and when do you have to pay for that inventory? Are all key things because.
00:47:25 Tom Miller
This is why.
00:47:25 Tom Miller
You do a cash statement of cash flows.
00:47:28 Tom Miller
Is because if.
00:47:29 Tom Miller
You don’t have that. You can actually grow yourself into bankruptcy if you don’t have enough working capital or all of your profits are tied up in inventory that you can’t sell.
00:47:46 Tom Miller
The last thing about a believable plan.
00:47:48 Tom Miller
Is you have to know what you’re asking for. Are you asking for debt money? Are you asking for equity money? What’s that money used for?
00:47:58 Tom Miller
And.
00:48:00 Tom Miller
Because depending on the source of those, the use of those funds, you could go to different sources.
00:48:06 Tom Miller
If I were buying equipment, I might go to an equipment financing company such as GE.
00:48:12 Tom Miller
If I’m going to be using it for marketing, I’m going to have to sell. No one is going to lend me money to use for marketing there. I’m going to have to go to.
00:48:23 Tom Miller
Investors equity sources.
00:48:26 Tom Miller
Going back to our friend Bushnell.
00:48:29 Tom Miller
It’s important to understand the the payment, the industry standard payment terms.
00:48:36 Tom Miller
One of them is we’ll call prepayments.
00:48:40 Tom Miller
If any of you have gone on a cruise or rented a taking the air flight.
00:48:46 Tom Miller
Normally they get their money way in advance of when you actually travel.
00:48:51 Tom Miller
So oftentimes they don’t have cash flow issues, they just need to make sure that they have.
00:48:56 Tom Miller
The.
00:48:56 Tom Miller
Cash still in hand. When indeed you want to board the boat or board the airplane.
00:49:02 Tom Miller
So those are prepayments.
00:49:04 Tom Miller
You have what is called coincidental payments, meaning that they happen at the same time.
00:49:08 Tom Miller
Time and what this is is that this way a retailer typically has very little in terms of accounts receivable because when they sell something, they’ll either get cash which is immediate or they’ll get a credit card. And usually that’s maybe a payment term of two or three days depending on how quickly it terms.
00:49:29 Tom Miller
So they have very little in terms of accounts receivable, if any.
00:49:35 Tom Miller
Then you have big companies. You know if they’re selling.
00:49:40 Tom Miller
A big computer system, if they’re. If they’re selling manufacturing equipment, it may indeed take a long time to put in, and you may end up.
00:49:50 Tom Miller
Selling things on terms and you have to realize that.
00:49:57 Tom Miller
If most people say they would like payment in net 30, the actual payment history typically is about net 45.
00:50:06 Tom Miller
And the last thing I’ll talk about is inventory management, which is when do?
00:50:09 Tom Miller
I need to pay for stuff.
00:50:11 Tom Miller
Just like.
00:50:13 Tom Miller
People will try and push you out to 45 days. You in turn can either be a good guy and pay your vendors in 30 days or push them out to 4060 or 90, like Walmart does.
00:50:29 Tom Miller
So the key things here.
00:50:31 Tom Miller
Again, go from data if you don’t have data, make reasonable assumptions and document your assumptions. That’s number two.
00:50:40 Tom Miller
Build it from the bottom up.
00:50:42 Tom Miller
So that you can then also track.
00:50:46 Tom Miller
Your number so that this isn’t just a financial model for raising money, it’s also financial model that you can use to track your actuals as you begin buying, selling and doing stuff. And I think I have all of two minutes. If anybody has any questions.