A Revenue Model:You are going to need a model for revenue. Revenue is the top-line, what people pay you. To create a model follow these simple steps:
- Decide the "Value" of what you are selling (Product or Service).. in terms of your TARGET MARKET AUDIENCE.
- Set a "Price" for your product that is less than the Value:
- this might be recurring (e.g. monthly) or one-time (transnational)
- Value has NOTHING to do with COST. (ignore cost).
- Value can be calculated as either:
- the price of an alternative +/- some premium (because yours is better/worse)
- the sum of 'savings' that a user experiences with your product/service
- the sum of 'benefits' that a user gets, in terms of a number of alternative products/services.
- Now, figure out a Quantity you think you can sell.
- Bottoms-up: Use some model of Customer Acquistion (like impressions->clicks->sales)
- or Tops-down: Use some model of Target Market Size (like 1% market penetration in year 1 of your target market).
- Now, simply multiply the monthly Quantity * the Price, and you have a Revenue Model.
- Show some scale/growth in subsequent months according to some formula (like 5% annual growth or as a complex model with advertising causing growth)
A Cost Model:
Next, you are going to need a cost model simply:
- Calculate the cost per unit by summing the cost of it's parts + the sum of the cost of the labor to 'produce it' (or in the case of a service, the labor cost of providing the service).
- Multiply the monthly Quantity (above) with the monthly Cost, to get Monthly Costs.
- NOTE: COSTS ARE NOT EXPENSES!!! Costs, are purely the VARIABLE costs that it takes to produce a good/provide a service.
This is simply Revenue - Costs
Estimate monthly expenses for operating the business.... here's a rule of thumb:
- Use $4000 for rent, $2000 for Legal, $1000 for Misc. (or do a better job than me at estimating your actual costs!)
- Use at least 5% of Revenue as a Marketing Allotment (or do a better job than me at estimating your marketing expenses).
- Scale expenses yearly to increase by 10%.
- Any employees you have are also here as an expense. (yourself for example).
- Use the monthly salary * 1.17 (for benefits/taxes)
Net Income is simply Revenue - Costs - Expenses.
(it gets more complex if you have loans and other stuff... but for now this is a simple model).
Take your starting cash, then add your Net Income to it each month.
(this is not precise at all, but also not a bad model).
Enjoy! Feedback/suggestions welcome!
* photo courtesy of: http://www.geograph.org.uk/photo/2824035