Finalizing Business Model and P&L Statements

2. Astana = Turin
•City planned
by the “King”
•Grid system
near a river
•Vanity
Architecture

3. Module Objectives
• Learn the basics of unit economics
•Understand
–Unit Revenue
–Unit Costs
–Fixed Costs (overhead)
•Build a basic Profit & Loss (P&L) statement
Unit Economics Gross Profits Fixed Costs Full P&L
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue $288 $1440 $2592 $3744 $4896
COGS 65 324 583 842 1102
Gross
Profit
223 1116 2009 2902 3794
Expenses Salaries 360 690 1020 1350 1560
Rent, Utilities, … 90 180 270 360 450
Marketing 72 360 648 936 1224
Startup Costs 100 100 100 100 100
Total Expenses 622 1330 2038 2746 3334
Net Profit $399 $214 $29 $156 $460

4. Unit Economics
•Understanding the basics of what it costs to
produce and sell one unit of goods
–One pizza
–One job done
–One client serviced
Unit Economics Gross Profits Fixed Costs Full P&L

5. Unit Economics
•Things to consider:
–Unit Price
–Unit Cost to produce and sell
•These are your variable costs
•Also called COGS for Cost Of Goods Sold
•Unit Price minus Unit Cost
is your gross UNIT PROFIT
Unit Economics Gross Profits Fixed Costs Full P&L

6. Unit Cost Example
Pepperoni Pizza
Dough: $0.20
Cheese: $0.30
Sauce: $0.35
Pepperoni: + $0.45
Total: $1.30
Unit Economics Gross Profits Fixed Costs Full P&L

7. Unit Cost Example
Should we include delivery? … It
depends
Yes:
If the delivery man only gets paid to
deliver each pizza.
This is a Unit Cost.
No:
If the deliver man is on salary and
will be paid whether pizzas are
ordered or not.
These are Fixed Costs
Unit Economics Gross Profits Fixed Costs Full P&L

8. Unit Cost Example
Pepperoni Pizza
Dough: $0.20
Cheese: $0.30
Sauce: $0.35
Pepperoni: + $0.45
Subtotal: $1.30
Delivery: + $0.40
Total Unit Cost: $1.70
Unit Economics Gross Profits Fixed Costs Full P&L

9. Unit Profit
This is the profit you make per unit sold
Assuming a price of $8.00:
Pepperoni Pizza Price: $8.00
Unit Cost: - $1.70
Unit Profit: $6.30
Unit Economics Gross Profits Fixed Costs Full P&L

10. Exercise
What do consider to be your “unit”?
–One cubic meter?
–One device or set of sunglasses?
–One new client using your service?
Figure out the
Unit Economics
for your business:
HOW DO YOU MAKE MONEY?
Revenue per unit
- Costs per unit
Gross profit per unit
Unit Economics Gross Profits Fixed Costs Full P&L

11. Net Revenue or Gross Profit
If you sell 3000 pizzas, your net revenue will be
(3000 x Unit Price) – (3000 x Unit Cost):
Gross Revenue: $24.0K (same as $24,000)
COGS: - $5.1K
Gross Profit: $18.9K
Notes:
1. US uses period as a decimal point
2. Larger numbers always expressed as $K ($1000)
Unit Economics Gross Profits Fixed Costs Full P&L

12. Units Sold, Gross Profit
Estimate how many units are to be sold each day, month, year
Unit Economics translates into Gross Revenues and Gross Profits
Unit Economics Gross Profits Fixed Costs Full P&L
Year 1 Year 2 Year 3 Year 4 Year 5
Units Sold (k) 36 180 324 472 612
Revenue $288 $1440 $2592 $3744 $4896
COGS 65 324 583 842 1102
Gross Profit 223 1116 2009 2902 3794

13. Exercise
How many units to you expect to sell each
month for the first 18 months?
How many per year for the first 5 years?
Construct a 5-year annual table of Gross Profit
Consider product introduction dates and
potential delays
Unit Economics Gross Profits Fixed Costs Full P&L

14. Fixed Costs
The costs of being in business
These generally include:
– Salaries
– Marketing
– Rent, Insurance and Utilities
– Interest payments
All stay the same whether you sell one or 1M units
Unit Economics Gross Profits Fixed Costs Full P&L

15. Calculating Fixed Costs
Almost all businesses have some Rent
Most B2B businesses are driven by Salary costs
Most B2C and B2B2C businesses
add Marketing and Sales as a
primary expense
* Exception to both would be large factories where Capital cost
considerations need to be added
Unit Economics Gross Profits Fixed Costs Full P&L

16. Salaries
How many people to run the business?
–Management
–Engineers
–Workers
•Run a total for each of first 5 years
•Add salaries to get final total
Unit Economics Gross Profits Fixed Costs Full P&L

17. Salary Example
Title
Monthly
Salary
Annual
Salary
People
Year 1 Year 2 Year 3 Year 4 Year 5
Owner $2500 $30K 1 3 5 7 9
Manager $1500 $18K 5 10 15 20 25
Worker $1000 $12K 20 35 50 65 70
Total
People
26 48 70 82 104
Total $K $360K $690K $1020K $1350K $1560K
Unit Economics Gross Profits Fixed Costs Full P&L

18. Marketing and Sales
•Expenses relating to
promotion and selling
•Can be significant for B2C
and B2B2C companies
•Use 20% to 40% of sales if
you need to build a brand
Unit Economics Gross Profits Fixed Costs Full P&L

19. Marketing and Sales
Example
Annual
Salary
Year 1 Year 2 Year 3 Year 4 Year 5
Annual Sales $288 $1440 $2592 $3744 $4896
25% for
Sales &
Marketing
$72 $360 $648 $936 $1224
• For a B2C business where brand matters somewhat:
• Spending 25% of gross revenues on marketing & sales
Unit Economics Gross Profits Fixed Costs Full P&L

20. Total Fixed Costs
•Add Salary, Marketing and Sales and other
Fixed Expenses
Unit Economics Fixed Costs Salaries
Marketing and
Sales
Full P&L
Example Year 1 Year 2 Year 3 Year 4 Year 5
Salaries $360K $690K $1020K $1350K $1560K
Marketing $72K $360K $648K $936K $1224K
Rent, etc $90K $180K $270K $360K $450K
Total $K $522K $1230K $1938K $2646K $3234K

21. Let’s Build a P&L
•Revenue minus COGS = Gross Profit
•Gross Profit minus Fixed Costs = Net Profit
1. Start with assumptions & build a timeline
2. Unit economics used to derive gross profits
3. Add in fixed costs / expenses
4. Construct your P&L table
Unit Economics Gross Profits Fixed Costs Full P&L

22. Assumptions for
Kazakh Pizza
– One store à 10 stores, one every six months
– $50K to open a store
– Pizza ASP is $8, COGS is $1.70
– 200 pizzas/store/day
– $5000 rent & utilities/month
– 1 managers, 3 engineers, 10 workers per store
– 25% of sales for marketing
Unit Economics Gross Profits Fixed Costs Full P&L

23. Timeline for
Kazakh Pizza
Show all relevant activity
Q3Q1 Q2 Q7Q6 Q8
Series B Funding
Started
company
First
Store
Q9
Series A FundingInitial Funding
Q4 Q5
Employees: 15 30 45 60 75
Q10
Second
Store
Thirds
Store
Fourth
Store
Fifth
Store
Unit Economics Gross Profits Fixed Costs Full P&L

24. Exercise
List out your assumptions for the timing of
your product/service into the market
Consider geographic expansion strategies
Build a company timeline
Put this into a slide and add it to your
presentation
Unit Economics Gross Profits Fixed Costs Full P&L

25. Exercise
• Generate a 5-year P&L
• Steps:
– List assumptions
– Build timeline
– Generate gross profits
– List out fixed costs
– Format into table
Unit Economics Gross Profits Fixed Costs Full P&L

26. A Final P&L
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue $288 $1440 $2592 $3744 $4896
COGS 65 324 583 842 1102
Gross
Profit
223 1116 2009 2902 3794
Expenses Salaries 360 690 1020 1350 1560
Rent, Utilities, … 90 180 270 360 450
Marketing 72 360 648 936 1224
Startup Costs 100 100 100 100 100
Total Expenses 622 1330 2038 2746 3334
Net Profit $399 $214 $29 $156 $460
Unit Economics Gross Profits Fixed Costs Full P&L

27. Final Check:
The Common Sense Test
•Investors see if your
P&L makes sense
–Proper growth
rate
–Reasonable
amount of money
needed
–A sound,
profitable business
Unit Economics Gross Profits Fixed Costs Full P&L

28. Question
• Is Kazakh Pizza a reasonable
business?
• Would you invest?
• Why or why not?
Unit Economics Gross Profits Fixed Costs Full P&L