This is the second in a series of posts on the numbers you need to know when preparing your startup business plan for a shark tank pitch, a need which is highlighted by TV programs such as Shark Tank and Dragons’ Den.
The first post in the series dealt with the unit retail price, selling price, and product cost of your product, and went on to explain how this information could be used to calculate the products gross margin percentage. This second post explains how the income statement from the financial projections template, can be used to provide additional information often requested by the panel of potential investors during a shark tank pitch.
Shark Tank Pitch – Income Statement
The income statement sometimes referred to as the profit and loss account shows the financial performance of a business over an accounting period. A typical format is shown below.
|Cost of sales||206,118|
|Income before tax||23,760|
|Income tax expense||5,940|
The format above is simplified for illustration purposes, the actual format may vary depending on the level of detail required. Page one of our financial projections template will provide all the information you need to obtain the numbers relating to your business plan projections. If you are an established business, and have historical information, this can be be found in your annual financial statements or management accounts.
During the shark tank pitch the panel of investors will normally request details of the revenue, gross margin, and net income numbers for the last two to three years of actual historical information if available, and for the next three to five years of projected information.
What is your Revenue?
Revenue refers to the monetary amount from the sale of goods or services in which the business normally trades. Confusingly different terms are often used to refer to revenue, and you might find you are asked for details of your turnover, sales revenue, or sales, all of these terms mean the same thing.
Revenue is normally the top line on the income statement, and in the example above, the revenue is 297,000.
Depending on your type of business you might discuss sales in terms of the number of units sold. So for example you might quote unit sales of 11,100 units resulting in revenue of 297,000. When discussing revenue in this way, the panel of investors will check to see that the average selling price per unit (in this case 297,000/11,100 = 26.76), is similar to the unit product selling price you gave to them earlier in the presentation (see part one of this series, in which the product selling price was quoted as 27.00). If the two values differ substantially, then expect further questions, and be prepared to provide an explanation.
In addition, while discussing revenue, the potential investors might ask what the revenue growth is projected to be. This is simply calculated by taking the change in revenue between two years and dividing the result by the revenue for the first year. For example, suppose revenue for the next three years is shown as follows:
Then the revenue growth for each year is calculated as follows:
Year 2 Revenue growth = (341,550 - 297,000)/ 297000 Revenue growth = 15% Year 3 Revenue growth = (375,705 - 341,550)/ 341,550 Revenue growth = 10%
What is your Gross Margin?
The gross margin is often referred to as gross profit or gross income, again, they mean the same thing. The gross margin is the revenue of the business less the cost of sales.
The cost of sales is simply the total of the product costs relating to the goods you have sold during the accounting period. Product cost was discussed in detail in part one of this series and is the amount it costs you to either purchase or manufacture the product.
The costs to include are those necessary to bring the product to its present state and condition prior to sale. For a manufacturing business this is usually direct materials, direct labor, allocated factory overheads and freight inwards, for retailers it will include the purchase cost of products, and for service businesses the direct labor costs, subcontracting and report production costs. Product costs do not include selling expenses, distribution costs, marketing etc, such costs are included as part of operating expenses.
In the above example, the cost of sales is 206,118, and therefore the gross profit or gross margin is given as follows:
Gross margin = Revenue - Cost of sales Gross margin = 297,000 - 206,118 Gross margin = 90,882
Check the Gross Margin Percentage
The gross margin percentage is the gross margin expressed as a percentage of the revenue, and is sometimes referred to as the gross profit percentage.
In our example the gross margin percentage is 90,882 / 297,000 = 30.6%.
When you provide the information during the shark tank pitch the investors will check to see that the gross margin percentage calculated above is similar to the unit product gross margin percentage discussed in part one of this series.
Although the two values are unlikely to be identical, particularly for historical information where changes in selling prices, product costs, discounts, damage returns etc might be included in the income statement, they should be similar. Claiming that your product has a gross margin percentage of say 55% and then revealing an income statement showing 30.6% will only lead to further questions, and unless a satisfactory explanation can be given, will almost certainly result in a failed attempt to raise finance.
What is your Net Income?
The net income is the bottom line of the income statement, it is the amount left after deducting all expenses from your gross margin. Net income is sometimes referred to as net profit or profit after tax.
(To add to the confusion the figures are often discussed before tax, so it is best to clarify which numbers you are referring to when they are disclosed.)
The extent to which these expenses are broken down will depend on the exact format of income statement, but usually the panel of potential investors will simply want to know whats left (net income) after all expenses.
In our example, the net income is 17,820. Sometimes this is expressed as a percentage of revenue, and in this case the percentage is 17,820 / 297,000 = 6%.
It is important to do your research and find out financial information about your nearest competitors and what your industry standards are in preparation for the shark tank pitch. The panel of investors will be looking to see that you know your numbers and that the information provided is consistent with the norms within your industry. Concerns will be raised and further questions asked, if you provide revenue, gross margin, and net income figures which are substantially different than industry standards, and which are not consistent with the unit product prices and costs discussed in part one of this series.
The financial projections template provides a quick and easy format for producing income statements, and gives you the revenue, gross margin, and net income numbers sheet needed for hopefully a successful shark tank pitch.
This post is the second in a series of posts entitled know your numbers for shark tank and dragons’ den. The next post in this series deals with the balance sheet and in particular the debt and equity numbers you need to know, and sets out to show how this information can be found from our financial projections template.
Posts in This Series
- Product price, cost and gross margin.
- Balance sheet numbers, assets, liabilities and equity.
- Startup valuation.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.