I am amazed at the lack of basic financial understanding that many entrepreneurs have. This is especially evident in entrepreneurs presenting to Shark Tank investors. The Shark Tank is a “high pressure” presentation to potential angel investors offering venture capital.
Entrepreneurs are generally good at showcasing their products. Samples and demonstrations are aplenty. However, financial plans are often lacking. The entrepreneurs often end their presentation by asking for an investment for a percentage of ownership.
Some basic cross multiplication maths can quickly reveal a business valuation. If an entrepreneur offers 20% equity for $250,000, that implies a business valuation of $1.25 million.
Any investor will likely want some basic sales and profitability numbers based on historical trade or a pilot project.
There are three pieces of essential data that are required. They are the monthly fixed expenses, the gross profit margin, and the potential monthly sales volume. The average selling price can be easily derived from this data, but it is always good to know the average selling price off the top of your head.
Here are some break-even “income statement gymnastics” that will give any investor piece of mind that you understand the financial basics of your business.
1. Ave Selling Price (SP) — Ave Cost Price (CP) = Margin
2. COS includes all variable expenses
3. EXP includes all fixed expenses
4. @Break even Gp = Fixed expenses (Exp)
5. Volume (VOL) = Gp / Margin
6. Sales = Vol x SP
7. COS = Vol x CP
8. GP = Vol x Margin
9. Gp — Exp = Pbt
10. Margin / Ave SP x 100 = GP%
11. Sales = Gp / Gp%
Once an entrepreneur understands the breakeven point of their business, different profitability scenarios can be extrapolated. Insert a profit target into Pbt, and add the expenses to get Gp. Divide Gp by Margin to get Volume (Formula 5). Use Formula 6 to calculate Sales.