Most of us start our small business journey by selling something we are good at doing or making.
Before we know it, we get caught up with the day-to-day operations of the business and neglect to make plans on how to grow our business.
OK, but what am I talking about?
Iâ€™m talking about working out your business finances, specifically, the financial model.
And Iâ€™m not going to start throwing a bunch of accounting terms at you.
Instead, in this article I want to give you a simple outline you can use to start figuring out how your business is going to use money to make money (finance).
A financial model will give your business a competitive advantage
Unless youâ€™ve tried to get a business loan from a bank, it is likely you have not been asked for a financial model.
Most small business owners have not worked on theirs. Thatâ€™s an opportunity for your small business.
By working out a financial model, you are already ahead of most of the competition.
Not only that, but youâ€™ll be able to quickly catch up and go past existing competitors whoâ€™ve been around for years, but because they have not worked out a financial model, their business is stagnant.
Start with a simple financial model for your small business
The following financial model works for anyone, but it will be most useful to someone with little entrepreneurial experience who is starting or running a small business and is beginning to think about acquiring new customers by advertising.
Here is an outline of things (inputs) you need for an ultra minimal financial model:
- Product or service price
- Cost of your product or service (Cost of Goods Sold, aka. COGS)
- Fixed costs (i.e. Rent, Utilities)
- Estimated or average Cost of Acquiring a Customer (CAC) per channel
- Marketing Budget per channel
- Ads (i.e. PPC, Social Media Ads)
- Organic (SEO, Social Media Content)
With these numbers youâ€™ll calculate two additional numbers:
- Number of Customers Acquired per channel
- Return on Ad Spend (ROAS)
Letâ€™s run through a simple example
You are starting an eCommerce business selling private-label whey protein powder.
Private-label just means another company manufactures the product, you just brand it and sell it.
Say each whey protein bottle costs you $20 (COGS) and you sell it for $50 (Product Price).
Say your fixed costs are negligible compared to the revenue (Maybe you work from your cell phone and your parents pay for that, so yeah).
Say your brand is your personality. People see you on social media and know you geek out about fitness, so if they see you promoting a product, they trust you, and will likely buy it.
You get your allowance, income from your part-time job, and donations from twitch and run ads to your product page with $1000.
So, because of the leverage your brand gives you, you end up selling 50 bottles, meaning you are able to acquire a customer for about $20 (CAC).
So you made a $10 profit per bottle. Sold for $50. CPC $20. COGS $20. So in total you made $500 from your campaign.
Now you calculate your ROAS.
$1000 in ads, made you $500 of profit. That is a 50% ROAS.
You get excited.
What if you put $4000? or what if you put the profit back into the business? or what if you work on your brand to get the ROAS higher than 100%? ðŸ¤¯
You feel the power?
OK, while the example above is simplistic, I made it deliberately this way in order to elicit a feeling of clarity.
The point is that no matter what kind of business you are running, you should have a similar clarity about your business finances.
Where to go from here
A financial model exists for every type of business.
You can find spreadsheet templates or software specifically tailored for each of the following types of businesses just to name a few:
Still donâ€™t trust yourself or would rather get help?
I get it. As you dive deeper into financial modeling for your small business, youâ€™ll encounter more terms (i.e. LTV) and you may need help making calculations.
Use the idea of six degrees of separation. Ask your digital marketing for help with financial modeling.
If your digital marketer is competent, theyâ€™ll definitely know what a financial model is and be able help you.
If your digital marketer is amazing, theyâ€™ll automate this.