Build a Financial Model
In this lesson, you will be provided with a beginner’s guide to developing a financial model and we’ll introduce some key concepts related to cost, revenue and break-even point.
Definition
The cost is the value of money that has been used up to produce something.Revenue is the income that a business has from its normal business activities.
Fixed costs are business expenses that are not dependent on the level of goods or services produced by the business.
They are also called indirect costs or overheads.Examples: Office rental cost, Salaries of the founding team.
Variable costs are costs that change in proportion to the good or service that a business produces.
Example: Raw material, shipping costs.
Investments are business expenses that will occur once but will be used for a long period of time.We spread the value of the investment over the lifespan of the asset. We call this depreciation.
Example: Buying new machinery.
The break-even point is the point at which total cost and total revenue are equal: there is no net loss or gain, and one has “broken even.”
Practice
You can easily build your first financial model with Excel.
The point here is to find out how many clients you need for your business to reach break-even.
Example:I want to start selling phone cases. How many products do I need to sell each month to reach break-even?
Let’s build a simple financial model to find out. It doesn’t have to be too complicated at the beginning.
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