Finance Flashcards
Building blocks for viability (should I do it?) analysis:
- Revenue
- Costs
- Investments
Revenue:
- Figure out how you are going to charge your customers (revenue model)
- How much are you going to charge your customers (pricing)
- Should the price be higher or lower – depending on how much the customer wants to buy the product
- Think about to whom you are selling? (target market)
How do you expect revenue to grow?
The growth of a company is not only related to revenue, but also to investments and your costs. Think critically, how does the revenue growth impact your costs and what investments do you need along the way.
TAM-SAM-SOM: TAM
TAM - Total Addressable Market, all the people in the world that could buy your product or service. It is divided in different sectors; transportation sector, energy sector, etc.
* Total market for your product
* Every potential customer
TAM-SAM-SOM: SAM
SAM - Serviceable Available Market. Smaller portion of the market that you as a company can acquire, based on your business model
* Geographical area; your state, a big country
* -> who potentially can actually buy from you
TAM-SAM-SOM: SOM
SOM - Serviceable Obtainable Market. Your target, how much you can reach from your SOM.
* The part/percentage of SOM where you think you have the capability of obtaining for yourself realistically.
Example TAM-SAM-SOM
You are a food safety software company. You detect pathogens, allergens or foreign object in food at a manufacturing level.
- TAM = all the money being spent on food safety across the entire food value chain. Where are people spending money? -> your TAM.
- SAM = anybody in the food manufacturing space that wants to use software, or is using software currently. How much money is spent on that? This is you serviceable addressable market.
- SOM = (short term goal), maybe just focus on a specific allergen, which is one thing that we can detect at the food manufacturing space.
Why is TAM-SAM-SOM important?
Because for example as an investor, you want to know where the company wants to go and what their marketplace is. TAM / SAM = vision, where do you want to go to with your company. SOM = how focused are you, which market are you going to target, which strategy are you going to use for that?
Costs:
- You need to have knowledge about the variable costs and the fixed costs
- Example; when you company is growing, think of the possibility to produce more products so you have lower costs. Higer volume – lower costs per product,
- What are the risks?
Investments:
- You want the highest return with the lowest risk possible
- Invest as little as possible, in case things do not work out as you wanted to -> you don’t lose a lot of money
Why would anyone want to invest/innovate?
To reduce costs.
To increase revenue.
To be exclusive, to enhance their reputation.
To increase employee satisfaction.
To reduce risk.
To build a circular economy.
7 Key Strategic Financial Questions
- What are the costs of this investment?
- Who is financing it?
- Who runs, and pays for the operation?
- Who are we selling to?
- How do we calculate the benefits and costs of the investment?
- How do we price?
- How do we model the outcome?
Key financial indicators: Payback period
Accept: If calculated payback period is less than established criteria.
Reject: If calculated payback period is more than established criteria.
Key financial indicators: Net Present Value (NPV)
Accept: If NPV > 0
Reject: If NPV < 0
NPV deducts the investment amount from the present values of the future cash flows.
In basic terms, NPV is today’s value of the expected cash flows minus today’s value of the invested cash, if NPV is positive then the investment will create a profit in today’s money.
The investment should be accepted, if the net present value is positive, and rejected if it is negative.
Advantage: Uses time value of money by discounting with WACC , uses cash flows, shows the absolute amount of value created
Disadvantage - It ignores the size of the investment needed. It only shows the absolute value created and not the relative value (this is what the IRR does!)
Key financial indicators: Probability Index (PI)
Accept: If PI > 1
Reject: If PI < 1
PV of future cash flows: You calculate it the same way as you did for the NPV, namely the sum of all discounted cash flows. If you only have the NPV at hand and not all discounted cashflows, you can simply add the initial investment to the NPV to find the present value of future cash flows.
The larger, the more profitable (above 1 is profitable, below 1 is not), especially handy if you compare different investments .
Advantage: Uses time value of money by discounting with WACC, uses cash flows, it makes it easy to compare investments
Disadvantage: shows only value relative to the investment
