Summary of Back-of-the-Envelope Financial Planning for Startups

## Introduction Understanding the financial side of a startup is essential for deciding whether an idea is worth pursuing. This guide breaks down core financial concepts you need to evaluate early-stage ventures, explain how costs and revenues work, and provide simple calculations and examples you can use to test your assumptions. > **Definition:** Revenue is the total money received from sales. Costs are all expenses incurred to run the business. Profit is the remainder after costs are subtracted from revenue. ## Key Concepts and Terms ### Revenue - **What it is:** All money received from selling products or services. - **Example:** If you sell 500 T-shirts at ₹ 600 each, Revenue = $500 \times 600 = ₹ 3,00,000$ per month. > **Definition:** Revenue is the total inflow from sales and other operations. ### Costs Costs cover everything spent to operate the venture. Break costs into categories to understand how they behave as sales change. #### Fixed Costs - **What they are:** Costs that do not change with the number of units sold in the short term. - **Examples:** Rent, salaries, internet. > **Definition:** Fixed costs are expenses constant across output levels for a given period. #### Variable Costs - **What they are:** Costs that vary with production or sales volume. - **Examples:** Raw materials, printing, shipping, performance-based ads. > **Definition:** Variable costs change in direct proportion to the number of units produced or sold. #### Setup Costs (One-Time) - **What they are:** Initial expenses before launch. - **Examples:** Buying a laptop, building a website, licenses. > **Definition:** Setup costs are one-time expenditures required to start operations. #### COGS (Cost of Goods Sold) - **What it is:** The direct cost to produce and deliver each unit. - **Includes:** Materials, packaging, direct delivery costs. - **Example:** If one T-shirt costs ₹ 250 to make and you sell 100, COGS = $250 \times 100 = ₹ 25,000$. > **Definition:** COGS are direct costs tied to producing the goods sold during a period. #### CAPEX (Capital Expenditure) - **What it is:** Larger purchases that provide benefit over multiple periods. - **Examples:** Machinery, office fit-out, vehicles. > **Definition:** CAPEX refers to long-lived assets purchased to support operations over several years. ### Profit - **What it is:** What remains after subtracting all costs from revenue. - **Formula (display):** $$\text{Profit} = \text{Revenue} - \text{Total Cost}$$ - **Total Cost (display):** $$\text{Total Cost} = \text{Fixed Costs} + \text{Variable Costs} + \text{Setup (one-time)}$$ > **Definition:** Profit is the financial surplus after all expenses are accounted for. ## Comparing Cost Types | Cost Type | Behavior with Scale | Examples | Planning focus | |---|---:|---|---| | Fixed Costs | Remain constant short-term | Rent, core salaries | Control overhead; amortize over volume | | Variable Costs | Increase with units sold | Materials, shipping | Optimize unit economics | | Setup Costs | One-time | Website, legal fees | Capital budgeting; include in initial funding | | COGS | Direct per-unit cost | Fabric, packaging | Key to gross margin | | CAPEX | Long-term asset purchase | Machines, vehicles | Depreciation and financing | ## Practical Examples and Calculations 1. Unit economics for a T-shirt business: - Price per unit: ₹ 600 - COGS per unit: ₹ 250 - Gross margin per unit (display): $$\text{Gross margin/unit} = 600 - 250 = ₹ 350$$ 2. Monthly profit estimate: - Monthly sales: 500 units - Revenue (display): $$\text{Revenue} = 500 \times 600 = ₹ 3{,}00{,}000$$ - Total COGS (display): $$\text{COGS} = 500 \times 250 = ₹ 1{,}25{,}000$$ - Fixed costs per month: ₹ 70,000 - Profit (display): $$\text{Profit} = 3{,}00{,}000 - (1{,}25{,}000 + 70{,}000) = ₹ 1{,}05{,}000$$ 3. Breakeven units (display): $$\text{Breakeven units} = \frac{\text{Fixed Costs}}