Entrepreneur’s Journey to Get Funded — Part 2: Profit
This a Part 2 of the Series. Here I will explain the Second Step that an Entrepreneur MUST take after analyzing the Market so that he/she has a bulletproof fundraising event.
Develop a 5-Year Profit & Loss Statment
As an Entrepreneur, you need to estimate a monthly 5-year profit/loss account. This is a prerequisite of your cash flow statement and also the basis of your financial model.
Here are the things you need to do
- Revenue Assumptions: Based on the Market analysis you completed in Part1, you need to estimate how many units product are you going to sell. Your product can be physical machinery, subscriptions, licenses as well as consultancy hours.
- Cost Assumptions: The Entrepreneur has to also estimate the cost. How much is the unit cost? Is it going to change if the company scales? Is the cost defensible or competition is going to increase/decrease it? How much is allocated for promotional discounts, fixed costs, salaries, office space, rent, electricity, and SG&A type cost? How is it going to change over time for 5 years?
- EBITDA: EBITDA is basically Earning Before Interest, Taxes, Depreciation, and Amortization. This is basically what a VC will look at. This number is also important to compare companies across different states and countries. To Calculate it for the 5-Years time period, You basically have to subtract your cost assumption from your revenue assumptions.
- Growth Assumption: What is going to be your organic growth assumption? How quickly and why do you expect the sales to grow? You also want to run different scenarios to see what impact it will have on cash flow and how much working capital the business will need. In summary, you have to take different scenarios and run the Revenue Assumptions, and Cost Assumptions and calculate EBIDTA. When I mentioned different scenarios, it can be possible government incentives for your product. It can be also a regulatory hurdle your product might face. It can be also a possible supply chain issue or talent issue.
- Cash Flow: Based on all those analyses above, you will have a different monthly cash generation from an operation of the business, The key here is to find out the most…