Hello, I'm Dr. Jim Watson. Welcome to How to develop a new product and take it to market. We're going to begin section five profitability analysis, in particular talking about sales costs and profits. But first let's visit where we are. If we go to the slide you saw in the introduction that's so the new product development process. You will see we've taken this journey where we started off by generating ideas screening and an idea, developing a concept testing the concept by developing a prototype or minimal viable product and getting feedback from the our target customer community.

From that we developed a marketing strategy, we developed a business model of how to take our product to market. We finished our product development and testing. We began our manufacturing and distribution. We got our organization in place. We got all the legal things Taking care of. And now we're ready to do our financial analysis See?

Are we making a success of the business? Is it making money for us? So, I said at the introduction, the key to success are three components, the the the technical completion of the product, the commercialization, looking at it from a marketing focus, and finally, the economic success given the commercialization looking at it from a financial focus. So we're in the last section, the financial analysis, and we're going to start off with talking about economies of scale. Now, when you developed your sales forecast, you had a projection of how you're going to increase your sales. And as you increase your sales, your cost of making your products are going to go down.

Why is that? Because now you're able to buy your raw materials in larger quantities. Now you're able to optimize the manufacturing process to To include automation to reduce the touch labor cost. So as you're increasing your production, and you're increasing your sales, you should be declining the cost in that it takes to make that product and as such increasing your profitability. Now, how do you know when you're going to be profitable? Well, you have to conduct a breakeven analysis, or breakeven analysis determines the number of units needed to be sold, where revenues equal the total cost.

Now you see on this chart, there's, there's fixed costs and there's variable costs. So we have to take both into consideration. Fixed Costs are things like your rent is the same every every month, utilities doesn't change much. Your your labor other than the labor for the production, your marketing costs, perhaps anything that really doesn't change with the production is fixed cost. The variable costs changes as production increases. So you're going to increase your production labor, you're going to increase your materials that are that you're buying from your from your suppliers, you're going to increase your distribution cost, the variable costs will, will rise.

But as you're bringing the economies of scale on reducing the cost of your product, you're going to come to a break even point where the revenue from your sales meets what your fixed and variable costs are. That is very important. Investors look at the break even point, they want to see you break even maybe two or three years at the very most, before you're before you're profitable. The sooner you can break even the better. That's what you should be really shooting for. So when you do a financial analysis, there's actually four key parts of it.

First off is your startup cost you have to estimate put together a list of all the items you need to purchase in order to get the business running. So you're let's say you're going to outsource your manufacturing. You need some tooling cost. You need to buy some raw materials, some inventory, you need some staffing. You need equipment, whatever you need for your startup cost, put it down on a sheet of paper list your startup costs, include that working capital, what's working capital, that is money that you need to to keep the business running until you reach that breakeven point where you've got more revenue than you have expenses. Okay, put all that together.

And that's what you need to ask for. If you go for a bank loan, or you go to investors asking for equity. Whatever your source of revenue is, we'll get into that. At the next part of the lesson. You need to know your startup cost to that breakeven point. Then you need to put together a balance sheet.

A balance sheet shows what assets you own what you owe, when Your liabilities are and your earnings your earnings are what you've initially invested in the business plus what you've retained earnings from the from the business. I'm going to show you some examples of these spreadsheets because they're very important when you go to raise capital. Now this right here is a balance sheet. So you'll see at the top it has assets that's what the company owns. So the company starts off with accounts receivable and cash with the company's evil, that's money you're that you're coming in from from your sales. And that's customers paying you for your for your product.

You paid for inventory, so that's an asset. You own the inventory until the inventory is turned into a product that's your raw materials and you sell it. So here you have the total current assets, which is what is current for that particular month. So this is a month by month balance sheet and then the non current assets is pretty much what's fixed. So let's say you bought some equipment, some furniture, some office supplies, it's $140,000, that's not going to change that's a fixed asset, the assets will depreciate. So you have to subtract the depreciation and you'll from your current assets and your non current assets, you'll have your total assets here, this example $338,000.

Now, below that line, you have liabilities, that's what the company owes is the liabilities and you have capital and that work. Okay, so the liabilities are accounts payable, that's what you owe your, your suppliers for the raw raw materials, accrued taxes. Any long term debt you have, so there's, there's current liabilities for the month. So if there's let's say you've got a debt payment of 30 $600 on a loan, the long term payable is the note the the loan is fixed. $4,000 so you add up your current liabilities and your and your, your total liabilities. And then you look at what your capital or net net worth is.

So the owners investment, there's $20,000 that the owners have invested in it and there's retained earnings, earnings that you have retained from the business or putting back into the business $75,000. So you have a total capital net worth of $95,000 plus your total liabilities, the 242, that's 330 $8,000. That must equal the same as your total assets. That's why they called a balance sheet, the assets must balance liabilities, plus capital. So that's very important for showing what the windrow company is worth. Investors are going to want to see that loan officer is going to want to see that there's two more spreadsheets that you need to develop and doing your financial analysis.

So one is called an income statement. It's all Also known as a profit and loss statement, and that shows what your gross profit margin is. gross gross profit margin is. You sell your product less with a cost to make the product, that's your gross profit margin. And then you have to subtract from that your operating expenses, and that's your net profit margin. You pay your taxes on your net profit margin that determines what your tax liabilities are.

Another important financial statement is your monthly cash flow. Cash Flow is king. I've seen more businesses that go belly up because they don't have cash in order to meet their obligations. So money that comes in and money that goes out to cover day to day operations, that's your monthly cash flow. So a company can be profitable, but they can have negative cash flow. And that's a bad situation.

So we want to avoid that. So here's what these look like the income statement Or profit and loss statement is a is a year to year statement. So here's a comparison of this company 2013 versus 2014 we see what their sales revenue is coming in, we subtract the cost of goods sold Cost of Goods Sold again is what it costs to make the make the product the inventory, the the purchases the the labor, and so we come up with a gross profit. That's what we're making from the sale of our product less what it costs to make it and then we have our offer an expense, commission salaries, mileage, General administrative expenses, such as office supplies, rent, utilities, we add up all our operating expenses and then we subtract our operating expenses from our gross profit we come up with what our what our net profit, profit and losses after we pay our taxes and and interest expenses.

So, this particular company right here in 2014, they started off with $900,000 in net sales. After they, they subtracted what it costs to make the product it was 360,000. And then after they subtracted their operating in the the operating expenses, they have $53,000 of net net profit, not not too bad. I said the cash flow statement is very important that that's on a month to month basis. So it's just like balancing your checking account, okay. You want to make sure that the bottom line there never goes negative because if it goes negative, you can't meet your expenses.

So on every month you put in what your cash sales are in and then you list out what all your expenses are used to you subtract your, your, your income, that the top line, the income from all your expenses, and you come up with what you have have left to put back Back in the bank to cover the next month. Hopefully, you've got some additional revenue put back in the bank to cover any unexpected occurrence is always important to do. So I just want to summarize here with some key points that the breakeven occurs when the sales volume covers both your fixed and variable cost. Very important to estimate when your breakeven point is and to get the breakeven point as soon as possible. And financial analysis requires you to put together a sales forecast because not you're not going to know what your break even point is until you have a sales forecasts.

And you should have done that when you put your marketing plan together in Section three, and then you have to estimate your startup cost in order to request financing to get the business started. And you have to determine what your operating expenses are to maintain a positive cash flow. And the next lesson the final lesson, we're going to talk about How to obtain financing. Now that you've estimated what your startup costs are, thank you very much. Have a great day.