Quick guide for startups: using the business model canvas to build a financial plan.
Category: Financial management
Wout Bobbink, 8 February 2017
‘How the hell do you start with building a financial plan?’
This is one of the most common questions we get from entrepreneurs. Well, easy answer: you start with your business model canvas!
In one of our earlier blogs we concluded that building and managing your business model canvas aka BMC is a hard nut to crack, but building and managing a proper financial plan is maybe even harder. Good news: the BMC and the financial plan are basically two sides of the same coin. This means that if you follow the next 5 steps, you’ll better understand how to start building your forecast based on the BMC.
As an example we’ll take the below BMC of cola brand X. Let’s call the brand ‘Happy Cola’. As can be seen Happy Cola’s value proposition is as follows: ‘Make the world smile’. How does this affect the financial plan? Well, it already implies Happy Cola wants to have a large reach (the world) and wants to be present during moments and situations of joy (smile). This already sets the context for the cost structure and how money will be earned.
Happy Cola’s value proposition forces the company to have a large reach and to be present during moments of joy. Therefore the company decides to sell via supermarkets (large reach) and via events, cinemas, restaurants and other types of hospitality (moments of joy). This determines the type of products Happy Cola sells:
1. bottles for supermarkets to have a large reach
2. dispensers to be able to meet the large simultaneous demand at events/cinemas/etc. to be present during joyful situations
Awesome! Based on the BMC we have just defined the products Happy Cola is selling.
Next up: customer segments. Why is it important for your financial plan to identify customer segments? Knowing your customers, means knowing your market! And knowing your market size can help you set sales targets.
As Happy Cola is targeting young hip adults, it has identified that there is a great need for a new coke brand in the rather small country of Luxembourg. In Luxembourg young adults are desperately looking for a new coke brand as the country currently only sells Pepsi (or Coca-Cola, whichever you prefer 😉 ). The country is selling 10 million cokes per year to young adults and Happy Cola wants to capture 10% of that market in 2018. If the company aims to sell 900.000 bottles and 100 dispensers (each selling 1.000 cokes per year) we get the following sales target and capture 10% of the market.
Bottles: 900.000 cokes sold
Dispensers: 100.000 cokes sold (100 dispensers * 1.000 cokes sold each)
Revenues! Now we’re getting close to the actual financials! You have defined your products and you have set your sales target. If you now define your business model, you are able to make an actual sales projection already! To define your business model you basically have to ask yourself two questions: 1. How am I going to make money (one-off sales, renting, leasing, subscription, etc.)? 2. What price will I ask?
Happy Cola is selling bottles via supermarkets using one-off sales of €1 per bottle. Dispensers are rented out for €7.500 per dispenser per year using a 5 year contract. This will mean that in 2018 Happy Cola’s revenue forecast is as follows:
Bottles: €900.000 (900.000 cokes * €1)
Dispensers: €750.000 (100 dispensers * €7.500)
*Online CFO alert*: The bottles might seem as a more valuable income stream, but don’t forget they are sold as a one-off while dispensers are rented out for 5 years, meaning Happy Cola will collect a yearly €750.000 over 5 years and not just once!
With the cost structure, we have made it to the final piece of the puzzle. Again, here you should ask 2 questions: 1. What are the costs that are dependent on the number of sales I have (which are called variable costs)? 2) What are the costs I will incur anyway, so not depending on the number of sales (fixed costs)?
Happy Cola’s variable costs for its bottles consist of €0,50 of material costs per bottle (the plastic to produce the bottles). Happy Cola’s variable costs for dispensers are €2.000 per dispenser (materials used in producing the dispensers). Happy Cola also rents a large sales office in Luxembourg and has to pay €50.000 per year for that. The latter would be a fixed cost: no matter how many bottles Happy Cola will sell, whether it’s 0, 100.000 or 500.000, it will always have to pay the rent.
There you go! You just made yourself a very high-level forecast for Happy Cola in 2018. If we put all the pieces together, including the costs we just defined, we get to the extremely nicely designed table below. If you are going to build your financial plan, it won’t be that much different from this procedure, except for the fact it will be on a more detailed level.
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