Finance for Founders, Creators and Freelancers | Greg Dickens | Skillshare

Finance for Founders, Creators and Freelancers

Greg Dickens, Recovering Banker & Startup Mentor

Finance for Founders, Creators and Freelancers

Greg Dickens, Recovering Banker & Startup Mentor

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23 Lessons (1h 12m)
    • 1. Introduction

      1:13
    • 2. Finance vs Accounting

      3:39
    • 3. Demo: Expenses and Revenues

      5:25
    • 4. Financial Statements

      1:55
    • 5. Income Statement Overview

      2:11
    • 6. Revenues

      1:12
    • 7. Cost of Sales

      1:36
    • 8. Gross Profit and Gross Margin

      1:41
    • 9. Demo: Revenues to Gross Profit

      5:28
    • 10. Operating Expenses

      1:27
    • 11. Cost Drivers

      2:00
    • 12. Income Statement Wrap-Up

      1:21
    • 13. Demo: Gross Profit to Net Profit

      5:42
    • 14. Demo: Income Statement for Freelancers

      3:22
    • 15. Demo: Income Statement for Creators

      7:04
    • 16. Reverse Income Statement

      3:58
    • 17. Demo: Reverse Income Statement

      7:29
    • 18. Demo: Testing the Feasibility of a Business Idea

      1:55
    • 19. Demo: Budgeting

      3:14
    • 20. Demo: Pricing

      2:21
    • 21. Demo: Reverse Income Statement for Freelancers

      2:06
    • 22. Demo: Reverse Income Statement for Creators

      3:41
    • 23. Class Project and Conclusion

      1:30
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About This Class

Cut through the noise and learn the basics of finance to help you make better decisions

Finance is complicated and especially difficult to navigate for founders, creators, and freelancers who don't come from a formal business background. In this course, we will strip away all of the complex concepts that you don't need to know and just focus on what is really important.  You will see step-by-step how to use finance to make better decisions in order to help your business or project succeed.

In this course, we will cover basic financial concepts, get familiar with the Income Statement, and walk you through a very simple yet powerful financial model that can help you make better decisions for prioritizing projects, setting prices, budgeting and more.

Hands-on Learning

You'll follow along with me as I build an example Income Statement and a financial model from scratch and then put them to work testing different business scenarios. You will then be ready to do the same thing for your class project using real-life information from your business.

What You'll Take Away from the Class

Cut through the noise of Accounting and Finance jargon. See how simple finance can be when you only focus on the essentials that you really need.

Understand the most important financial document: The Income Statement. Just knowing this, you can feel confident about knowing your numbers.

Build a simple but powerful financial model. Step-by-step how you will build a financial model based on the Income Statement that will help you understand your business better.

Use a financial model to make better decisions See how powerful a little bit of finance can be as this model can help you with business planning, pricing, budgeting, and more.

Note: I use Google Sheets (part of Google Docs) to build all of the examples in this class but you could also use Microsoft Excel, LibreOffice, or any other spreadsheet tool.

Meet Your Teacher

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Greg Dickens

Recovering Banker & Startup Mentor

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Transcripts

1. Introduction: 2. Finance vs Accounting: It's one of the first things that I want to cover is a question that I get all the time with the startup. So I'm mentoring. They asked me, What's the difference to in finance and accounting, work weight? Aren't they the same thing? You know, it's all it's all numbers and you know, the answer is very important to understand up from. And if you just remember one thing that the big difference is accounting is all about what happened in the past and finances all about what happens in the future. And for the purpose of this course. We're mostly interested in making better decisions going forward, so we're gonna be dealing with finance most of the time. But I will cover just a little bit of accounting here now. Just so you have a basic understanding now. Another big difference between accounting and finance is what it's used for an accounting since it looks backwards and looks back over the course of, say, the last year, its main importance is for the purpose of taxes. So this is very important, obviously, to actually get this information accurate and correct, but at the same time it doesn't really help us that much in terms of actually running our business, where that's what finances all about. It's about how do you actually take the information that I have and make better decisions with it? And that being said, this is the way that I recommend for start ups and small businesses and freelancers to actually manage accounting and finance for accounting? It's more about Okay, let me make sure everything is accurate and I have a good system in place but don't spend too much time on it and let it become a burden where finance is absolutely fundamentally important to everything that you're doing, and you should be trying to work it into all the decisions that you're making. So that being said, I will cover just a couple of very quick tips on putting in place, Ah, a system that works for you for for accounting, and my recommendation is usually to to use whatever you feel comfortable with. That doesn't demand too much of your time, but it should really cover these key points. Number one is to keep all of your receipts and invoices, whether it's for expenses or for any sales that you make this is very important that, you know, you can always hand these off to an account. And if you're if you're not really sure what to do from there, they can make sense of it from there. So as long as you have records, you're fine, and at the same time, make sure to keep your business expenses separate from personal expenses. This is just gonna make your life that much easier. If you do have to go back through and, um, and pull everything together, credit cards help a lot here because not only do they automatically keep things separate, assuming you have, ah, business credit card, but they also have an automatic digital record of, of all the expenses. So it makes your life that much easier when it comes to managing all of this. And lastly, I would recommend to make a spreadsheet of all of your expenses and all of your cells faras when the when they happen, what the date was. How much was it for? Who was it too? And, um and then, Ah, a little note to yourself. So you remember. You know what it was for? This will just help you. That much more to manage all of this. And I'm gonna show you in the next lesson how it is that you can actually put a list like this together. And that's pretty much all we're gonna cover for accounting for the rest of this class. 3. Demo: Expenses and Revenues: So here we are in Google Sheets were going to be starting our walk through of listing out all of our revenues and expenses. So the first thing that we're going to do is we're going to rename our first sheet to revenues, and then we're gonna do the same thing for our second sheet and name it expenses. Now, on our revenues tab, we're going to start off by putting just a few titles, so amount, then paid from and date. And we'll just change the formatting here to make these stand out a bit more since their category titles. So we'll put a border underneath, resize the columns a little bit and then put these in bold. And then we're all ready to start putting in different amounts that we would have had for, say, this month or this year, whatever we're keeping track of. So let's say we had $500 from square $800 from our shop, a five store and then put in the dates that we received the payment from each of these. So let's say we're just doing it for the month of April. We got a payment from square on the first of the month and then from Shopify on the 10th of the month. And I'll just align everything in the center to make it a little bit more clean. And really, that's it for our revenues. Then we can move on to our expenses tab, and we're gonna do pretty much the same thing. So you'll have amount you'll have paid to since these air expenses. And again the date he we're gonna add a couple of new categories, so one will be four and the other will will call category and you'll see what that means in a little bit. Again, we'll do the same formatting. So the border on the bottom in bold and then we can start listing out are different expenses. So let's say $50 paid to go Daddy or any other Web hosting service say that's on the first of the month for our website for Web hosting. Then, let's say $100 paid to up work for some other freelancing platform. Let's say this is on the 15th of the month. I will say that is for freelance design work, and we'll say $400 paid to our manufacturer in the 21st of April for actual production of T shirts or something like that, and we'll say $100 worship pain or FedEx or UPS or somebody like that on the 25th of the month for the shipping of our product and then $200 coworking space. We work or somebody like that for actual rent. Say we pay that at the end of the month on the 30th of April. Call that rent again. We'll just align it to the center. You see, you have all the amounts that some up to $850 expenses. And you'll note the category column here that we'll get into in the next lesson and basically will want to look at the different categories that these expenses fall into for the purpose of our income statement. 4. Financial Statements: so the building blocks of finance are three documents that are called financial statements . The first of these is called the Income Statement and is the primary one that we're going to be covering in this clip in this class. In fact, I'm of the opinion that for a small business, the income statement is all you really need to know. Here is why the income statement is essentially a list that shows you how much you've sold at the top and then deduct your different kinds of expenses all along until you get to the bottom, which shows your net profit or the amount you're left with after expenses. This is really the heart and soul of a business, and it tells you how you're performing. The other two financial statements are really only there for larger and more sophisticated businesses that have different situations that need to be adjusted for. For example, ah, large company probably gives their clients up to 90 days to pay for something they buy, so even though they're making sales that might not be getting the cash immediately from the cells to compensate for this, there's a statement of cash flows that is a list of cash in minus cash out. But for a small business, you're probably collecting and paying your bills pretty quickly through cards or online payments, so this adjustment won't be necessary. The other financial statement is a balance sheet, which keeps track of how many assets and loans a company has. Again, this isn't as important. Such a small business will not be making so many large investments and equipments and won't have as many big loans or or selling equity like a big corporation will. So you can probably get away without this one completely as well. So for the purpose of this course, where we're focusing on the basics, we're just going to be focusing on learning the income statement and really getting to know that. And just with that, we're gonna have the tools to make a lot better decision 5. Income Statement Overview: Let's take a look at a typical income statement. This is what you find if you Google income statement, and this is actually directly from from Wikipedia. And look, this is why people can be overwhelmed by finance. You know, there's a lot of terminology in there that, you know, sounds like a foreign language. You have depreciation, amortization, impairment loss, non controlling interest, discontinued operations. Okay, enough for it. So the good news is that, you know, most of this again only applies to very big and complicated businesses, so you can really do without almost all of it. You know when when you actually boil it down to the basics. You know, a lot of these items are really again adjustments for very big companies. So So when you actually remove all of the noise, you're left with something that looks like this. So what this is is very simply, like I said before, you know how much you sell at the top, you know, your revenue. And then very simply, all of your different types of expenses subtracted from that. So, you know, your cost of goods sold operating expenses and income tax expenses, and we're gonna go into each of these categories in the next few lessons, Um, but again, just to subtracting different types of expenses from your cells until you get to your profit of the bottom. One thing to note about the income statement before we move into we to the different categories in detail. It's a time period that it covers. It could be for a month, 1/4 or year, whichever works best for your planning purposes. But the important thing to know is it is a sum of all the activity that happened during that period. So, for example, if you're looking at it for one year and looking at your sales, it would be the sum total of all the cells that you had over that one year period, say in 2018. So that being said, let's move into each of the categories in more detail 6. Revenues: so starting at the very top of the income statement, we have revenues, and this is just, very simply the amount of money that you make from your cells. So again, if you're looking at a one year period, this would be all of your cells in dollar terms or whatever currency you're you're working in for that whole year. Now, that's the way that you would calculate it if you're looking backwards. But remember, we won't look forward and use this to make better decisions. So how is it we calculate this number if we're looking ahead? Is very simply action simple. Actually, you just multiply the number of units that you sell by the price that you charge for each unit. So if you're a freelancer, this would be your hourly or daily average rate times the amount of hours to work. Or if you're a small business for start ups selling a product, that would be the number of products that you sell times the price that you sell it for. That's your revenues. Simple, right. And don't worry, it doesn't get a whole lot more complicated than this. Uh, 7. Cost of Sales: the next night about the income statement is what's known as cost of sales or could also be called cost of goods sold. This is the amount that is directly related to selling your product. So in other words, for every sale that you have in every unit that goes out the door, your costs will go up by some amount. Now, if you're selling a product, this should be pretty obvious. This will be all the costs that go into producing your product, including materials manufacturing, labor and shipping. So, for example, if you're selling shirts, you would calculate here the number that it cost for you to actually produce that shirt and it delivered to your customer. Now, if you wanted to calculate this number looking forward, we would again take the number of units that you want to sell. But this time we multiply it times how much it costs per unit. Now this a little bit trickier for digital products, and it could very well be zero again. Think back to how much something will actually cost every time that you ship it and it goes out the door now for freelancers, this will almost always be zero because we're going to factor in your own salary later on. The exception here is if you're a photographer or some other type of freelancer with an output that directly costs you for each engagement. In the case of the photographer, you would include the price of the actual photographs, anything you have to print out here. But you actually wouldn't include the cost of your time that comes later. 8. Gross Profit and Gross Margin: so not that we've covered revenue and costs of goods sold. We can now calculate what's called the gross profit, and this is very simple. You just subtract your cost of sales from your revenues again. Simple. Right. Okay, So what does this tell us? Actually, the gross profit is a good indicator of how healthier businesses at a very fundamental level. Because if you're negative here, it means that you're losing money on every transaction that you make before you even look at other expenses. Now, a very good metric to know here is well, that you can now calculate is called gross margin. Now, this is just a gross profit divided by your total revenue. And this gives your percentage number that tells you how much money you make per transaction. Now, in the case that we're looking at here we have a gross profit of 6000 and revenue of 10,000 . Your gross margin would be 60%. Now, again, as a freelancer, your gross margin will most likely be 100% because, as we just saw, your cost of goods sold will be either zero are very low. But for other businesses, you can compare your gross margin to industry averages, and it's a very helpful number to get an idea of how healthier margin is if you're marched is much lower than than the average, then it's telling you one of two things. Either your prices are too low and you might be able to raise them, or your costs of production are too high and you'll have to try to work to get those down I 9. Demo: Revenues to Gross Profit: So here we are back on our list of expenses and revenues. If I flipped back to the revenues tab, you'll see here. If you remember, we had this category called Category and this is where it's going to come into play now when we start our income statement. So first, let's start a new tab and rename it Income statement. Then we'll start off just by putting income statement at the top. It was reformat a little bit Here, put this in bold. I'm here. Let's put the year 2019 and the month that we're looking at. So in this case will to say it's April formatting a border underneath. Put it in bold a line that left Linus to the middle. Now we're ready to get started with our income statement. If you remember, start off with revenues at the top, and what we'll do for this is we'll go back to our list of revenues and this will be the some of everything that happened that month. So all the revenues that we had in that month, which is $1300 unsee it shows up here the next we have our cost of cells. So when we get back to our expenses tab, this is where the category comes into play. So I have to think about which of these expenses I actually directly related to shipping our product, getting it to our customers, because that's what's going to go into our cost of cells. So if you go back to the list, a Web hosting a freelance design will come later and operating expenses, but our production and shipping we'll definitely go into our cost of sales. Then I rent now that that will come later as well and operating expenses. So it's just in this example are manufacturer and shipping costs that will then come into our cost of sales. So he would take that and some it up. And let's put everything that is an expense into negative. Now we have everything we need to calculate our gross profit, which will now just be revenues, not we plus cost of sales just because we've put all of our expenses and negative to have it really stick out our income statement that they are there actually expenses. Now let's put our gross profit and bold, and now we can calculate our gross margin as we saw before, which will now just be $800 gross profit divided by the $1300 revenue. I will take this and put it into percentage format. You see 61 a half percent, but that in italics to show that's a calculation that doesn't flow through the rest of the income statement. Now, I would go a little bit to the side here, um, will calculate our unit price and are cost per unit. So first, let's start with units sold. And let's say in this case we sold 100 units, so let's just put that in. So then we have our press per unit underneath, which is going to be simply our revenues divided by our units. Sold gives us $13 and then our cost per unit will now be a cost of cells divided by units sold, which gives US five per unit 10. Operating Expenses: So now the question is, what do you do with all of your other expenses? And that's where the next category comes in. And this is a category of expenses that will cover nearly everything else that you're spending. We call this operating expenses, but you could also see it called selling general and administration expenses or something similar the way you want to think about these costs. This is to split them into two categories. Fixed and variable costs. Now fixed costs means something that doesn't change. Depending on the activity of your business, it will stay whatever it is. Good examples of this are rent or the cost of your company website. Hosting it will be the same, and you can easily predict it because you know what, you know exactly what it is. Variable costs, on the other hand, will go up and down depending on the activities that you're conducting. Think, for example, about product design again, back to someone who is selling T shirts. Let's say you hire a freelance designer to do a new design for each T shirt that you want to sell. Some months you might come out with a new T shirt, but other months you might not. So the cost of design will go up and down, depending on which months you're designing a new shirt. 11. Cost Drivers: with variable costs. It's important to understand what business activity is that is driving the cost or what you refer to in finance very clearly. For once, as a cost driver now on the tee shirt example, the cost driver would be the number of new designs per month or per year. So why is this important? Let's think about an example where you launch two new products in the past year. And for these new products, who had a certain amount of design and marketing costs, Let's say, 3000 marketing in 4000 and design. So if we look at your other costs renting company website, you know these air fixed. These are These aren't going to change, but you're marking design are variable costs because you hire freelancers for these new product launches. And you know, some months you won't have new product launches, and you won't have to hire these these freelancers. So what you want to do is you want to calculate the amount that it costs for each product launch, so if you look at our calculations on the right hand side, you'll see your total fixed costs of 1000 which is very simply, just your your rent and your company website added together and then you'll see your marketing costs per product launch. So this is just what we described earlier, which is marketing costs of 3000 total divided by your number of product launches, which was two gives you the 1500 and you can see the same for your design costs per product launch. So 4000 total costs divided by a number of products. Launch, which was two. So you can see that for every new product that you would launch, you would expect to have a total variable cost of 3500. So then, looking ahead, you know that if your plan to launch three products next year, it is very likely going to cost you around $4500 in marketing and $6000 in design. I 12. Income Statement Wrap-Up: So I hope by now you're starting to see that finance doesn't have to be that complicated. Really. It's all about getting everything down to simple terms that you can then use to particular future with. And by predicting the future, you can make better decisions. Now, before we get into our find financial model for helping us make those decisions. Let's tie everything together on her income statement. So after we subtract, are operating expenses were left with our profit before tax. This should be pretty self explanatory as taxes are deducted after all other expenses, and you wouldn't actually be paying any tax if you weren't making any money. So here will put the income tax rate at 35% as an example, but it will be different depending on what country or jurisdiction you're operating them. Now, when you subtract this amount, you're left with your net profit. Your net profit can then be returned to you in the form of dividends or payments to the owners, or it can be reinvested back in your company. And that's all there is to the income statement, which, as you can see now, is really just a list that starts with your sales and then the doctor, different expenses, your cost of sales, your operating expenses and finally, your tax expense. And that's all there is to it. Simple, right? 13. Demo: Gross Profit to Net Profit: So here we are back on our income statement. Remember, we just finished with gross profit and gross margin, so now we'll have to add in our operating expenses just underneath. So let's list out everything over to the side here that we will have. It will go into our operating expenses, puts that in bold. So if we go back to our expense tab, everything else will be operating expense. But let's put it in a little bit of ah better Cata Marie than that. So we'll have website for what posting will call freelance designer, but that the design category and then rent and the reason we have this categories that if you have multiple different charges that we're going to design or marketing or all other kinds of categories, you would then be able to some those up and keep things a little bit cleaner on your actual income statement, since you'd only have maybe four or five categories rather than all the actual individual expenses going inside. So now let's just list those categories again over here and again will want them to be all in negative terms for expenses. So let's just take each 11 by one website. 50 Design 100 and your Rent 200. Great. Now I've got over operate expenses. I'm Tour Income statement. So now here we can just sum up. These are the total, which is 350. So now it's very easy to calculate our profit before talks, which will be negative. 3 50 operate expenses plus gross profit of 800 which makes $450 profit before tax. So next is our income tax rate, which, for all my example of them, is using 35%. But this will change depending on where you are. And then, based on that income tax rate, you can calculate your income tax expense, which again, since we want all the expenses to be a negative, we'll start with negative and then just the 35% times your profit before tax. Then comes in that profit, which again just very simple profit before tax, plus your income tax expense negative could you a net profit of $293? So now let's look at our cost drivers that we talked about. We'll put these over here by our operating expenses, so if you look at our website, we know that that's a ficc fixed expense and I won't have a cost driver. It's well, let's put fixed here, but not for design. We will have, right So our cost driver will say, is our number of new products just like the T shirts that we talked about in the slides and rent again is fixed and doesn't have a cost driver. So let's note that here. So let's say in this month we had two new products and that's what's driving our design cost and then again, rent website or fixed so there won't be anything there. So what we can calculate is our cost per driver again. Nothing for a fixed but for design. We can calculate the $100 total design cost divided by the number of new products that we had in that period, which was two, gives us $50 cost per driver cost per new product. So now we know that every time we have a new product, it's going to cost us $50 in terms off design costs 14. Demo: Income Statement for Freelancers: So let's take a look at our income statement and how it will change for freelancers. So first, let's go to our revenue tab, where before we had Square and Shopify revenues, let's change these to a couple of clients we might have is a freelancer. So it's a client. A client. Be. Let's change the amounts to 3000 and 2000. Let's move to our expense tab where, since the freelance business will have a little bit different expenses than what we would have if we had a business that was actually selling products. So if you remember we had our manufacturing and are shipping expenses before which were cost of cells, we're not gonna have those anymore. So we're just gonna go ahead and delete those rose. And now also, let's look at our design expense that we had before. And let's just take that line and change it to use that for what we will pay ourselves as a freelancer. So we'll change that to salary paid to myself. Category salary, an amount. Let's say 4000 is the amount we pay back to ourselves each month in salary. Okay, great. So now we move back to our income statement tab and you see there's some broken formulas here and we'll get to those in just a bit. But first, let's change our units sold two days build, and we'll call this price per days of your day rate. Let's call this cost per day, which will be zero if you remember. From what we're disgusting before, obviously can't work 100 days per month. So said 20 there, and then you can calculate your average daily rate by dividing revenues by days. Build gives you 250. And now let's fix these formulas here, which are broken because we deleted those costs of cells lines on expense sheet. So let's make that zero since, as we said before, freelancers usually have zero for cost of cells but weaken still put this formula in for their cost per day. Just take the zero and divide it by 20 which gives you zero. So now you see gross profit is 5000 and our gross margin is 100% which we talked about being the typical gross margin for freelancer. I see everything flows down to our net profit of $488. So we just have to now fix our operating expenses here, which the 4000 flows through. But it still says design. So it's change that salary. And now we don't have any cost drivers here that will not be a fixed cost. And we can zero out these cells as well. And there we have it. This is how we would change our income statement for a freelancer. 15. Demo: Income Statement for Creators: So now let's look at how our income statement would change for creator. So again, back to revenue tab. And rather than having square and Shopify here, let's say this is somebody who's making money from videos on YouTube on DSO. Let's say we're getting paid directly from YouTube for the actual advertising revenues, and that's a category for this as well on a revenue tab, since we're going to assume that this person actually makes revenue from two streams, one from actually being paid directly by a platform like YouTube, this could be medium for a writer, and we'll call this purview. And then we'll have revenue coming from referrals, referral links that are embedded in the video. So let's say this is from Amazon as $400 and we'll call this category referral. And let's put another referral on there as well. So let's say $700 paid from Ali Baba, and we'll put a date in here in April, say, 21st of April, and this will also be referral. So let's move on to the expenses and see how these will change as well. So if you remember in the original example, you had expenses like design, cost of sales for manufacturing and shipping. So there's gonna change a little bit for creator as well. So let's say you have some expenses every month to Amazon for demo items. You're reviewing items in YouTube videos, and we put this in the category production. So now let's get rid of this shipping line, and we'll take this line that we had for manufacturing, and we'll change this one a little bit as well. So let's put $20 here. But let's call this tickets for Metro to say that you want to do some, you know, on site location shooting in different areas around your city where you live. So we'll call this production as well. And the other categories we won't change will say that you still have a website and you still have rent. So now we're gonna have to look at this unit soul because this will be a little bit different. So this will now be you views or reads. If you're ah, publishing on a platform like medium, which is more geared towards writing, will say price per view or read, and then cost per unit will change to cost per view or read. So now we have our airs again for cost of sales. Plug in zero because you won't actually have ah cost per view directly. So not for revenues. This is gonna be a little bit different for a creator. So we're gonna take the sum of all the revenues here. But if you remember, we actually have two different sources of revenue that's going to factor in in just a little bit here. But first will make the views a little bit more risk. Realistic Will say 4000. Winning is another category here, and we're gonna call this referrals and here will have price per referral, cost per referral and let something else here which will call referral purview, put 100 referrals. And the way you would calculate this would be your views divided by referrals. I actually saw your referrals divided by your view. And next we'll go to the price per view, or Peru agreed. And that's where we have to go back to actual revenue sheet. So here will just take the $100 from YouTube first. Since this is our purview revenue. But we're gonna divide this by the number of use that will give us something small. So it's changed the decimal points here. So it's about three cents per view and we'll do the same thing with our price per referral . So we'll take the some Oh, are Amazon and Ali Baba revenues. Sum that up and then we're gonna divide that by our number of referrals 100 which gives us $11 per referral and cost for a referral is zero. And then we just have to go down and look at these operating expenses again. So we don't have design anymore, So this is actually going to be our production expense. So we'll go back to our expense tab here and some of everything that we had under production. So that's our demo items on our on location shooting what's at those together. And, as always, we want our expenses and negative on our income statement. That gives us negative 120 for production costs and we'll change our cost driver here so it's no longer number of new products, but instead it's number of videos, and we'll add that to something more realistic. Let's say 10 videos gives us a cost driver off or cost per driver of $12 per video 16. Reverse Income Statement: now that we know the basics of how an income statement works were ready for one of my favorite tools that I use with all the startups that I mentor. It's called the reverse income statement, and it is exactly what it says it is. It's an income statement that's flipped upside down. But why is it that it helps us? Let's take a look. So with the reverse income statement, you're starting with your net profit of the top, and then you're adding back all of your expenses until you get back to your revenue. This forces you to think about how much money you need to make from your business in order for it to be worthwhile. That's a very important question that many people I work with haven't even thought about until I asked them the question. So that's your goal. That's the target that you want to put right at the top of your reverse income statement, and then everything works backwards from there. So then what happens next? So the income tax rate is easy, 35% in our case or whatever it is for for you, and you know very quickly what your profit before taxes. That's just a calculation. Then, after that, you add back in your operating expenses, so your fixed costs or your variable costs depending on the cost drivers that we just covered. And that gives you your gross profit. So not too difficult to work backwards to that. Then add in a few other things that we already know. So you know what? You're selling prices, and you know what your cost of cost of sows is per unit. And then based on that, you know that in this case, for example, that you're making a margin of 60%. So for every unit that you sell your making $6. So if you want to make a gross profit of $6000 you have to sell 1000 units. So, just like that, using this model, you've been able to figure out that in order to hit the target that you want to hit in order for your business to be worthwhile $2600 you need you need to sell 1000 units. It's that simple. So how would it work in a different example? So, for example, if your net profit that you needed was $12,000. How could you get back to your unit sold? So again, you start with your net profit of 12,000. The top. You work backwards with your 35% income tax rate in this example, which gives you 16,200 profit before tax that you need to get. Then let's say you have operating expenses of $4000. Just add those back, which gives you a gross profit of 20,200 that you need. So then how do you calculate your units sold? And again, it's the same similar situation where we had before you have Ah, you know, you have a selling price of $15 the cost of sales off $5 per unit. That means for every unit you're going to make $10. So in order to get your gross profit of 20,200 you need to sell 2000 and 20 units. And this is just one of many ways that you can use this. Really, It depends on which field you plug in for. So what I mean by that is in this case, units sold was what we returned to solve for. But you can also play around with different scenarios where you try to solve for the price or the cost per unit for the operating expenses. And in each of these situations, you're able to really test different scenarios around pricing around production costs and around budgeting in a lot of different ways. And we're going to see that in the next few lessons as I take you through all the details in Google documents to show you just all the ways that you can use this model. 17. Demo: Reverse Income Statement: now that we've got everything for income statement. Let's look at how we're gonna change this around to build our reverse income statement. So let's start by duplicating the tab that we have, so we don't lose any of the work that we've done before then let's rename this sheet to reverse income statement. Let's change. Appear to reverse income statement now actually change 2019 to 1 month target. Since we're actually not looking at what actually happened, we're looking at what we would like to happen going forward and we'll get rid of the April as well. This is just our our one month target. Could be any month in the future. It's not. Let's cut everything here and some good reminders from Google docks on shortcuts that you can use. So that's used. One of the shortcuts Control X to copy everything, paste it with control V that will help us. We're gonna do a lot of cutting and pasting here, so we'll cut our net profit and put it up here. Next. We'll cut our income tax rate and income tax expense together and put that next Don't take our profit before tax cut that then our operating expenses goes next in our gross profit and gross margin together than cost of cells and finally, revenues after that. So here we are, nothing has changed with the numbers. We just have it in the order that we want for our reverse income statement. So now it will actually change some of the formulas because if you remember, a net profit is your actual target, that you want the top. So this is something that you're going to enter in manually. Let's just change this to an actual value for now. So we'll say that it's the value that we had before to 93. But this isn't calculated anymore. This is actual value that you put at the top so we'll get rid of the income tax expense for now. The easiest way to calculate this from our actual that profit target. If the calculator profit before tax first that's going to be to 93 Are net profit divided by one minus the income tax rate, which is 35%. So it gives us our profit before tax that we need to have a $450 Then we can plug back in our income tax expense, which will be net profit minus our profit before tax. Give us a negative 1 58 So now we have our operating expenses. So this is still going to be some of everything that we have over here. But what's going to change is that our design expense, which actually has a cost driver, will now be calculated by how many new products we have times how much it costs for each product. Now that will give us an air because it goes in a circle here with this reference. Um, So what we have to do is we have to put in the value that we know for a cost per driver. So we know that it costs $50 for each new product that we launch. So we take that from our old income statement and then this to weaken now, change and play around with, depending on what we plan to have for for our target. So maybe our target is to launch four products in a month that would cost $200. Or let's just put the two back in. So we try to replicate all the numbers that we had before. So now let's change our gross profit. So just simply our prophet minus operating expense to 800 and the gross profit were actually going to or gross margin. So we will actually take from our income statement. So we don't want this to change. We'll assume that this days the same. This will help us with some of our calculations later on. So then we will delete the cells for cost of sales and revenues. And the way that we will calculate our revenues by looking are gross profit and then divide by the gross margin gives a $1500 and then cost of cells will be cross profit minus revenues. So now if we go over to our units sold on our price well, now take our price from our income statement tab and take our cost per unit from the income statement. So we'll assume that this stays the same. Now, what we can do is, rather than having ah, hard coded units sold number, we can actually calculate this from our revenues and from our price. So we divide revenues divided by price or we could have also calculated by taking our cost of sales and dividing that by cost. So now we've ended up with the same numbers that we had before and our previous income statement tab. But now we have everything in a financial model that we can use to predict lots of different fields as you'll see in the next lesson. 18. Demo: Testing the Feasibility of a Business Idea: So now that we have our reverse income statement model, there's a lot of different things that we can do with it. So the first thing that we can look at is theatrical feasibility of a business idea. So what we'll do is we'll get rid of our net profit at the top here, and we'll put in a new target. So let's say that for this idea to be feasible and worthwhile for us, we need to make $2000 per month. So now our model automatically calculates what the income tax expense would be and our profit before tax. Now, let's take a look at our operating expenses so we can say that in order to hit this target , we think we'll have to have at least one new product per month. So one times 50 changes are designed to $50 per month, and this automatically flows down to our gross profit and then, with our gross margin that we already know from before, we can automatically calculate our cost of cells and the revenue that we need. So what we can see in this example is it without changing a whole lot of other things in our model, just mainly our target net profit of 2000. We need to sell 422 units. 19. Demo: Budgeting: So the next thing that will be looking at with our reverse income statement model is budgeting, and really, it just takes a little bit of, ah, different way of looking at the model. So before we're looking at net profit, we're trying to figure out how many units we have to sell based on getting a net profit of 2000. We're now we're going to flip that. I'm going to say Okay, we know that we can sell 422 units so we paste that as a value. And then we have to just reconfigure our formulas to work backwards through the model. So to get our revenues, we will take our price. Times are units sold, which gives us the same number we had before. Since we're just flipping things around, then to get our cost of cells will take our cost per unit. Now multiply it times 422 units sold. So now we will change our gross profit formula so that its revenues plus cost of sales and again the number won't change. But it's just changing the formulas inside operating expenses still the same, but a profit before tax will now be gross profit plus upper expenses, and now our income tax expense will change to 35% times for tax. And remember to put this into negative terms. There we go in our net profit will be income tax expense and profit before tax again gives us our 2000. But now this will change depending on how are expenses change. So, for example, you can change website to 200 and see what impact that has on our net profit. So what you can do here is you can test all of these different operating expense categories that you have, like rent. For example, if that went up to 400 what would be the impact that that would have your net profit and then see here that it goes down to $1700? Or you can look at your variable costs in your cost, drivers say if you had to launch three products per month and say you wanted to increase the quality of the design of these products and you're going to pay $200 per new product gives you now $600 design cost, and again you can see the impact that this has on your net profit. It's now down to 1400 20. Demo: Pricing: So let's look at the third scenario that you can run with a reverse income statement model , and that's pricing. So before we're looking at the impact that are operating expenses would have on our net profit now we're simply looking at the impact that are price will have on profit. So let's start off by zeroing that out and see what happens. So, as you can see with the price zero that flows through to our revenues, which now show is zero. But our cost of sales are still there at negative 2111 so that flows through to our gross profit, and then eventually it flows through to the net profit of negative 1500. So now what we can do as we can add back in the price of $10 and as you can see, that flows through to our revenues and then through our entire model, and we end up with a net profit of 1177. So we can now look at what happens if, say, we double our price to $20 and again you can see that that flows through and we end up with a net profit of $3921. And we can look at all sorts of scenarios so we can look at what happens if we have to cut our price to $8. What type of impact does that have? What if we go all the way down to $6 and what you can do with this? You contest all kinds of scenarios and see whether you can cover your operating expenses and whether you can meet the net profit targets that you have in order for this business to be worthwhile for you. 21. Demo: Reverse Income Statement for Freelancers: So now let's look at how we would use our reverse income statement for a freelancer. So we've got all the fields changed here that we had done for our income statement for a freelancer. So we've got our days build price per day, cost per day salary and all of our cost. Drivers are fixed, so we don't actually have any variable costs in this example. So let's look at what would happen if we wanted to increase the salary that we paid out to ourselves. So let's say we wanted that to be $5000 per month. What changed at $2? The decimal places here, So, as you can see, it automatically flows up to the net profit and you see a negative 1 63 So we're not able to quite pay ourselves that yet. So we'll look at what happens if we increase our days build to 22. In that case, we are actually able to pay ourselves 5000. So let's play around with a couple of the other operating expenses here and increase the rent to 800 the website up to 500 and see what the impact is on our net profit. So we see that were negative 5 20 If these costs rate increased by that much, so then we can see what happens if we increase our price per day, our daily rate to 300 and we would actually be able to cover those expenses and make a small net profit of $195. So if playing around of these different variables, you're able to see what the impact is on your net profit if you're able to afford different increases in expenses and figure out how much you're able to pay yourself. 22. Demo: Reverse Income Statement for Creators: it's not. Let's go back to our YouTube creator example and see how we can use the rarest income statement for them. So as you can see, we have the same categories that we had before in our income statement for our creator with our views reads referrals, referral purview and then our production costs under operating expenses, a number of new videos. So we will link all of these fields, including the referral purview, back to our income statement, because we had calculated that before based on our prior data. So our price per referral I refer a purview and our price per view all come from our income statement in the prior tab. So these, these will assume, won't change. They'll stay the same just so you can see where these are all linked to. So an important thing to remember about our creators example is that revenues actually coming from two sources from the views and reads so this $1200 in revenue is made up of 4000 views times three cents per read. We're purview and the 100 referrals times the $11 per referral so are $1200 in revenue comes from the sum of those two things together. So let's start looking at what happens if we change some of our operating expenses so we can look at if we reduce the number videos, the one and our website and rent 20 we can see Okay, how much does it actually cost us, too? Make a video and what? It's the minimum number of use that we need. So by playing around a bit, we can see that about 40 views and one referral were able to cover the production cost off one video, how we add back in our operating expenses, our website and and rent. And we had back in our 10 for for videos. So it's looking at net profit. Now let's say that we want to make a minimum of $3000 in that profit per month, and we think it will take 20 videos to do this. So that's plugged those in those 20 videos into our cost drivers. Let's start playing around with a number of use, so 15,000 doesn't quite do it. 18,000 is actually more than we need. As you see, it flows through in that profit to be about $3200 and we see 17,000 is just about right. So we now know that, you know, if we still get the same number of referrals purview 17,000 views will give us 425. Referrals will result in the 3000 net profit that we're looking for. You could also work backwards in the same way that we've done in prior examples and put the formulas into toe work from the 3000 back. And you can you can calculate it in the same way. But just for simplicity sake, I just a little trial in there. 23. Class Project and Conclusion: and that wraps up finance for founders, creators and freelances. Thanks for sticking with me the whole way. If you will find directions for the class project below well, I want you to build a similar model, starting with your list of expensive revenues, Then will be not your income statement. And then finally, using the information your income statement test different scenarios on your reversing from statement once you're done to be sure to upload your class project skill share and then follow me on skill share So you could be the first to know when I published a new class. Thanks again for watching. I hope to see you again soon.