Revenues (Money people give you) – Expenses (cost of goods sold, overhead, interest, and taxes) = Net Profit. Cha-Ching!. As we fall towards 30,000ft each category starts to expand (and the ground gets a lot closer, how’s that airplane going?) 

Revenues: Is there a Problem in the Market? Is there a Market for the Solution? Are there Customers? How many Customers? What will they Pay? Is there Competition? Is your Solution: better, cheaper, faster, or disruptive!!? How will you Market it? How will you Sell it? – Sales will be less and take longer than you plan: be conservative. 

Expenses: What does it cost to develop (people / R&D / patents / etc.)? What does it cost to make or replicate (people / materials / licensing / manufacturing / etc.)? What does it cost to sell (people / advertising / marketing / etc.)? What will it cost to manage and run the business (people / software licenses / travel / rent / legal / accounting / bookkeeping / HR / Interest / taxes / etc.)? Expenses will be greater than you expect, production will take longer, things will cost more, and things will go wrong: be conservative. 

Net Profit: Is there a path to where the profits go from negative to positive before you run out of money? Is there a path to net profits that pay back your loans or give investors a large enough multiple to get excited? Is there a path to you achieving your personal financial goals? Be conservative. 

Once you answer all these questions through research and analysis, you can build a three to five year financial model. This model will show the cost of development, production, operations, overhead, sales, and marketing, and the projected revenue over time. At the point where the net profit turns positive, add up the total losses prior (add a healthy margin) and that’s the amount of cash you need to put in (credit cards, day job, second mortgage, Triple F), or the ask of a bank or an investor. 

I’ll be breaking each of these categories down even further in future blogs.