Ryan Carson created and released a spreadsheet model which is extremely helpful for startup founders and management to help get a good idea about the health of the company. I will not be explaining what he did, so if you want some background, I would recommend you read his article first – to understand what I am talking about here.
I am getting ready to launch Comp Versions any day now, and one of the last few things I had to do was to sort out my financial dashboard. I used Ryan’s spreadsheet and took it a bit further.
A Quick Rejig
The first major thing I did was re-organized the line items so that the structure more accurately resembles that of an Income Statement – which I am more accustomed to reading. For example, here is Apple’s. What you will see is that all the revenue related items are at the top, then the first thing deducted from the revenues are the costs of those revenues.
Those things are typically variable drivers specific to that revenue. So in Apple’s case, that would be things like inputs needed to actually create Apple’s products (the material needed to create the unibody of the Macbook Pro, or the glass for the face of the iPhone/iPod/iPad, etc.). As they sell more Macbooks they have to buy more of that metal for the unibody. The same applies to the glass. All monies paid to their manufacturers also go in this line item.
Ryan’s original version lumped more general things in ‘COGS’ (Cost of Goods Sold). Specifically salaries. Salaries belong further down the income statement. If you are looking at Apple’s Income Statement, they typically get lumped in the line item ‘Selling/General/Administrative Expenses’.
So in my modified version, I still have the breakdown of customers, churn, etc. at the top because all of those are revenue specific. Then for ‘Cost of Goods Sold’ for webapps, you typically have hosting costs (I broke them down into two separate categories, variable and non-variable).
Variable Hosting Costs are any hosting bills you have to pay due to higher usage (on a per unit basis). So in my case, since designers will be uploading images and they will be stored on AWS & CloudFiles, my variable hosting costs are not my regular server costs. They are costs associated with both AWS & CloudFiles, because I only incur them when people upload images.
Non-variable hosting costs are server related costs – so if you rent a server with Rackspace, your monthly Rackspace bill would go here. Now I know this might be a bit confusing, because if 1 server can only manage X amount of traffic (say 500,000 uniques per month), if you double your traffic you will have to add more servers.
However, you don’t have to pay hosting costs per unit. In this case, you don’t get charged by Rackspace per Unique Visitor. That’s the major difference. For instance, for the same monthly fee you pay for 1 server, you could tweak the server so much that you increase the # of visitors it can manage to say 750,000 unique visitors without paying anything extra. With a true variable cost, you can’t do that.
I also added Gross Profit lines. These lines are very important because you need to get an idea as to how one of the most fundamental costs of your businesses are working. For instance, if you are experiencing phenomenal revenue growth, but your gross profit margins (%) are reducing, you know that likely indicates that your Cost of Goods Sold is increasing – which should be a worrying trend.
Usually what happens is as you push more volume, your unit costs should come down significantly. Not just in the tech industry, but in most (if not all) industries. So while your revenues are increasing, your COGS should be decreasing – for instance, if you look at the pricing chart for AWS you will see the cost per GB reduces as you go up in volume.
However, at some point in the future – it might become less beneficial to host my images with Amazon rather than hosting it on my own. 37Signals is famous for discussing outgrowing Amazon’s web services for their primary storage – because it has gotten too costly. I suspect, this is likely what happened. At some point, they realized that their Gross Profit Margins are getting thinner and thinner – which would cause them to look at the variable costs associated with their revenues. If it didn’t, it should have
So in my case, I suspect that at some point in the future, my gross profit margins will stop decreasing and start increasing again. At that point, I will want to look at other options.
COGS (Cost of Goods Sold)
I added a ‘COGS’ sheet, which breaks down the entire Cost of Goods Sold. If you have other variable costs (aside from the ones I have included) this is the sheet you will want to update. Once you update that sheet, you can then link it to the main sheet with a line item that has the total of the new variable cost, and update your Total COGS.
At the top of the main ‘Figures’ sheet, I added the breakdown of the pricing plans and the distribution of the % of customers on each one.
This is to give you a quick overview for which plans make sense and which don’t.
On the COGS sheet, I also broke down the Gross Profit ($ and %) of each plan – which can quickly tell you which plan makes most sense for you. With my default numbers, you can see that the gross profit margin (%) reduces steadily as the plans increase in cost.
That is because I chose to give each plan more space and transactions (relatively speaking) – for the purposes of this article, that is. So the $99 plan gives more than double the storage space than the $49 plan does. As a direct result, you can see that the gross profit margins (%) decrease from 89.69% to 89.14%. This trend continues as you go up in price. So even though you are making more money per plan, you aren’t keeping as much as the lower plans. This is an important figure to watch as you decide to tweak your pricing and value proposition.
Please note though, that the Gross Profit amounts in the ‘COGS’ sheet are plan specific, and do not include transaction fees (e.g. Paypal, credit card processing, etc.) and other things included in the true COGS from the ‘Figures’ sheet.
Quarterly to Monthly
Lastly, another key change I have made is getting rid of the bottom section that spells out some key metrics quarterly. I have put Net Profit (% & $) monthly, and have re-calculated CACR monthly. I have very low marketing costs – because I am bootstrapping, at the onset – but I expect to boost those significantly. As a result, my CACR ratios look pretty high early on. But that will change as we progress.
Please remember that all of the figures here are just placeholder default values – that are approximates according to my needs. Feel free to tweak, add, subtract, multiply & divide as your needs see fit.
See for Yourself
To see the spreadsheet online, go here: http://bit.ly/compversions-spreadsheet