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 BLOG >> February 2013

Advice for growing a business [Growth
Posted on February 28, 2013 @ 12:48:00 PM by Paul Meagher

eyebobs logo

Julie Allinson, founder and owner of the successful eyewear company eyebobs, offers the following advice to those starting and growing a business:

  1. Decide early on if you want to own the whole company or if you want investors involved. If it is a capital intensive business, then investors may be required.
  2. The main person you need to listen to is the customer. You might not like their advice, but you need to listen.
  3. Regarding employees: Surround yourself with employees you like and trust because they are running your business. Hire slow, fire fast. If it is not the right fit, then it is unlikely in a small business that you are going to make it the right fit because you do not have enough bodies around, especially when you are just starting out. The hardest lesson to learn for a growing company is that some of the people who helped you get to a certain level of growth may not be the people who will help you get to the next level. Feelings of loyalty may conflict with the requirements for further growth. Some employees either can't or won't peddle as fast as required in a growing company. Others can pick up the pace and will continue to find a place in the company.
  4. It is important to create an atmosphere were employees can have fun, contribute, and feel comfortable.
  5. Move towards open book management if trust is central to your business philosophy. Open book management is an ongoing learning process.
  6. Energy and passion for the business comes from learning best practices in other businesses (for Julie, mostly non eye-wear related companies) and thinking about how their approach might apply to her own business, learning from employees on the front line, and the constant feeling that there is more that they can be doing for their customer. Learning is what keeps business interesting.

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Growth risks assessment tool [Growth
Posted on February 27, 2013 @ 01:31:00 PM by Paul Meagher

risky growth

I'm slowly making my way through the free online course, Grow to Greatness: Smart Growth for Private Business, Part 1, taught by Edward D. Hess (who authored a book by the same name).

He makes the interesting point that growth is not always good if you are not ready for it; in fact, it can do major damage to a company that is not ready for it. With that in mind he came up with a Growth Risks Assessment Tool that consists of a series of questions companies should answer before deciding to pursue a path of further growth:

  1. Why should I grow?
  2. How will we grow?
  3. How much should we grow?
  4. How much growth can we afford?
  5. Do we have enough people?
  6. Do we have the right people?
  7. Do we have hiring and training processes?
  8. Do we have adequate financial controls?
  9. Do we have adequate quality controls?
  10. How will growth create risks for ...
    1. Culture?
    2. Customer service?
    3. Customer experience?
    4. Cash flow?
    5. Supply chain, raw materials and suppliers?
    6. Distribution and delivery?
    7. Financial safety net?
  11. How will we mitigate those risks?
  12. Do we have adequate daily information to monitor these risks?
  13. Who will help us monitor, manage, and correct such risks or results?
  14. Do we need to pace growth?

As an example of growth that was not so good for a company, we can learn from Toyota who became the number 1 automotive company but ended up having severe quality issues that has set them back significantly. Perhaps if they had used the Growth Risks Assessment Tool before rushing headfirst into being number 1, they would have recognized some of the risks that lay in their path and taken appropriate steps to mitigate those risks.

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Five tips for mompreneurs [Entrepreneurship
Posted on February 26, 2013 @ 07:36:00 AM by Paul Meagher

Raising a child can be a full time job so how do you balance starting a business and raising children.

Marie Forleo interviews Latham Thomas, founder of Mama Glow, who provides 5 tips for achieving work-life balance.

The topic generated many comments which you can read at the bottom of this page.

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What is leverage capital? [Investing
Posted on February 25, 2013 @ 12:01:00 PM by Paul Meagher

According to Wise Geek, we can define leverage capital as follows:

A company or institution can use its own funds plus borrowed funds for investment. This is also known as leverage capital. As long as the capital (owned assets), plus the borrowed funds are invested at a rate of return higher than the interest on the borrowed funds, the company or institution makes money. The ratio of borrowed funds to the investor's own funds is the leverage ratio.

The concept of leverage capital is important for both entrepreneurs and investors to understand.

It is important for entrepreneurs to understand because any funds an entrepreneur receives from an investor should be considered leverage capital. In other words, the money borrowed to buy an asset should generate a higher return than any interest on debt. If it does not a generate a higher return, then the borrowed money is not leverage capital; rather, it would be considered an over consumption of capital for the business.


Source: http://seascapepublishing.com/wealth/using-financial-leverage

Leverage capital is useful for investors to understand because the leverage ratio, the ratio of borrowed to owned funds, can be used to assess the risk associated with a potential investment. If an entrepreneur has $20,000 of their own money to invest, and are seeking $40,000 from an investor, then the ratio of borrowed money to owned money would be $40,000/$20,000 or 2. The higher the leverage ratio, the greater the risk; however, keep in mind that sometimes higher risk is associated with higher reward.

Investors often like to see that entrepreneurs have some "skin in the game"; that they have invested, or are prepared to invest some of their own money in the project they are seeking investment for. If you only have $1000 of your own money in the game (in the form of equity), and are seeking $100,000 then the leverage ratio is $100,000/$1000 or 100. If you have $20,000 of your own money in the game (instead of just $1000), then your leverage ratio is only 4 and there is less risk involved for an investor (the company is not "over-leveraged"). This is how a mortage loans officer might think if confronted with a home buyer who can put $1000 down on a house versus $15000 down; the latter home buyer would be considered a less risky loan candidate.

Leverage capital is an important concept in real estate investing where a person might try to leverage some of their savings so that they can buy a building to rent. If they do it right, the amount they earn through rent and deductions can be greater than the amount they pay down on debt servicing. If so, they are leveraging their capital.

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Joint venture agreements [Startups
Posted on February 22, 2013 @ 09:52:00 AM by Paul Meagher

According to Revenue Canada, a Joint Venture is defined as:

An arrangement where two or more persons (participants) work together in a limited and defined business undertaking. Ordinarily, all participants of the joint venture contribute assets, share risks, and have mutual liability.

A joint venture agreement is not a continuing relationship between participants. For example, the venture may be for one specific business project. Once the project is completed, the joint venture ceases to exist.

A joint venture is not considered a "person" for registration purposes, whereas a partnership is. Therefore, a partnership can have a BN; a joint venture cannot. A joint venture is limited in scope; a partnership is generally an ongoing business relationship that exists between persons carrying on common business.

A joint venture agreement is simply a framework for parties to work together. It doesn't require a business number, it doesn't own anything, and it doesn't pay taxes. The individuals involved own their own assets and share in the revenue generated from those assets after expenses. The venturers report the income from the joint venture on their personal tax filings. Because the joint venture does not own assets, the Capital Cost Allowance is claimed by the individual venturer who owns the assets. The simplicity of a joint venture means that it is easy to setup and easy to dissolve (which can be good or bad depending on the situation).

Joint venture agreements are common in farming where, for example, an individual owning land and equipment might partner with a farmer who supplies the labor and management required to grow a cash crop. The Ontario Ministry of Food and Agriculture has a useful factsheet on Farm Business Joint Ventures that can be consulted to see practical examples and considerations in setting up and doing the accounting for a joint venture.

If you are thinking about starting up a business, one option is to setup a joint venture with another person or company for the purposes of jointly maximizing your individual skills and resources.

Because "the whole is often greater than the sum of its parts", a joint venture agreement can form the basis of a profitable business relationship. What one person can do with alot of effort and inefficiency, two people might do quickly and efficiently if they contribute complimentary skills and resources. On Dragon's Den we see angels look for ways in which the resources and capabilities they have might complement what the entrepreneur is bringing to the table. In such cases, it would be interesting to know whether the final deals that are formulated between the dragons and the entrepreneur are setup as partnerships or joint venture agreements.

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Seven internet business models [Business Models
Posted on February 21, 2013 @ 10:32:00 AM by Paul Meagher

I am making my way through the book Simply Seven, which claims that there are only 7 types of internet business models - hence the name.

I encourage you to visit the Simply Seven website to learn more about the seven internet business models they discuss:

  1. Service Sales
  2. Subscriptions
  3. Retail
  4. Commissions
  5. Advertising
  6. License Sales
  7. Financial Risk

In my opinion, the main reason why this is a useful book to read has to do with their comparative analysis of the relative strengths and weaknesses of each business model. They discuss what makes each business model work well and what factors inhibit it or make it fail. They discuss which business models tend to be more profitable. They also do case studies for each business model showcasing a company that is an internet leader in exploiting the business model. They also discuss companies that have fallen from grace trying to exploit the same business model (e.g., AOL and subscriptions).

You can read some of the reviews on this book and in general they tend to be fairly positive. The website for the book has a weblog that was more active during the writing of the book and which covers some of the same ground as the book so you can get a feel for the books content by reading some of their blog postings.

Factoid from book: Skype was turned down by 13 investor groups before they found an investor. This was in part due to the fact that they originally developed the peer-to-peer file sharing service Kazaa that ran into legal difficulties. The Angel Investor who first invested in the company recognized the advantage of peer-to-peer technology in scaling phone services relative to other approaches to providing phone services. Skype is now the largest phone company in the world.

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Excessive fees for angel investment services [Startups
Posted on February 20, 2013 @ 09:09:00 AM by Paul Meagher

In the last couple of days, the Startup North group blog has posted some blogs that are critical of the operating practices of First Angel Network (FAN) that describes it's mission as follows:

First Angel Network is a not-for-profit organization formed to bridge the capital gap for companies with extraordinary potential in Atlantic Canada. Created by angel investors for angel investors, FAN provides entrepreneurs and investors with a confidential, disciplined, high-quality private equity investment experience. FAN also delivers education and networking opportunities in the areas of investment readiness, angel investing and commercialization.

The First Angel Network is funded by government but that does not stop them from charging entrepreneurs $3000 to participate, and 8% of any closing fees. You can read some of the details here:

I am in agreement with David Crow and Jevon MacDonald on many of the points raised in these blogs, but the idea that entrepreneurs should never have to pay to pitch is dubious because it doesn't address the reality of where investment network funding comes from.

I understand that entrepreneurs are often cash strapped and consequently charging them $3000 for consulting fees and 8% of your company is way over the top, especially, if the organization is supposed to be a non-profit getting over $250 thousand a year through government sources to run the show.

Contrast this with our service where entrepreneurs can in fact anonymously pitch their idea for free; however, if they generate investor interest, they are required to pay our referral fee of $149 for the contact details of all the investors who expressed interest in their proposal. If no investor expresses interest, then no money lost. The basic $149 fee we charge entrepreneurs for investors contact details is comparable to the fees a person might pay on a dating site to be introduced to potential mates. These hookups may or may not work out for a variety of reasons. Sometimes a hookup does work out and that is what we ultimately strive for even though we we are only an introduction service and generally don't know if our hookups have been fruitful or not.

We have never solicited or been awarded government money to develop or maintain the dealflow sites. The fees entrepreneurs pay are used to pay hosting fees and my time to review all proposals and all investors applying to join the site. It is not a simple matter to screen potential investors and this is a time consuming part of the work involved in running a site like this. There are also marketing costs.

That being said, we agree that it would be good if investors bore more of the burden of funding hookups. We have offered a number of services to investors that never really took of. We are working on a new service and we'll see if that works; but it will only work if investors perceive value in the service and to date we have not found the right service to offer. Perhaps this time it will be different.

Even if investors are not funding the hookups, our investors are providing a valuable service to entrepreneurs. They are reviewing proposals when they could be doing something else with their time and if they are interested in a proposal and contact the entrepreneur, it is an opportunity for an entrepreneur to dance with an investor for awhile to see if they are compatible. Often the investor will be a better dancer and the entrepreneur will trip over their feet a few times; but this is part of becoming a better dancer. Our site does not promise that you will find a permanent dance partner, only that we can hook you up, you can dance for awhile, and after that decide if you want to dance some more or find new dance partners. If you do not become permanent dance partners, then you should at least have learned some moves from a more experienced dancer that you can try on future dance partners. The cost of the dance ($149) should not break the bank for entrepreneurs.

Hard to say whether this story will continue to have legs. It was picked up by the Halifax Chronicle Herald (largest circulation in the Maritimes) and I expect the First Angel Network to publish a rebuttal in that paper. My initial thoughts, however, are that it might be the beginning of increased scrutiny into other government-funded Angel Investment organizations in Canada. The manner in which these organizations operate, and why they need funding in the first place, needs more scrutiny which Start Up North has helpfully begun to shine a light on.

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New avenues in business modelling [Business Models
Posted on February 18, 2013 @ 07:18:00 AM by Paul Meagher

On friday of last week, I thought I had posted my last blog on business modelling (A complete and profitable business model). I thought that I had a nice simple story all tied up in a bow. Further reflection, however, has suggested several new avenues to be explored.

One missing piece is the front end to the business model. How does a user interact with a business model in order to specify the parameters and parse the reports. To take this work any further requires that some front end work be done.

Another missing piece is the ability to select the type of business model that would be more appropriate to your business. So far, the business models I have posted have been for a Software as a Service (SaaS) type business model. There are other industries that adopt similiar billing practices so the monthly service fee business model has more generality than just a Software as a Service (SaaS) business model.

Nevertheless, there are business models that depend upon selling x number of product units a month in order to be profitable. The sale of these units is a one time event as far as the model is concerned. There is no carry-on source of revenue from the sale. Consequently, a products-based business model depends upon selling a larger number of units or a few units at a larger cost. The number of units should increase over time if the model is to be profitable or a growth-based business model.

Farm-based business models represent another potential twist in how business models are setup. One way in which a farm audits its operations is in terms of the amount of money that goes into an acre of land and how much money that acre makes in return. The state of California, for example, has recently released a manual called Organic Strawberry Production Manual for those wanting to get into the industry. The book includes an chapter in which the authors calculate the input costs, labor, rents, and income on a per-acre basis. They estimated the income per acre to be $41,250, the total costs per acre to be $26,342, and the net returns above operating costs (profit) to be $14,908. Given these figures, one could begin the process of developing a business model for Organic Stawberry Production. Keep in mind, however, that the estimated costs, revenues, and profits very much depend upon the particulars of the farmland, climate, markets, input and labor costs.

Organic Strawberry Production Manual

So stay tuned for another exiting week of experiments and ideas related to business models.

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A complete and profitable business model [Business Models
Posted on February 15, 2013 @ 08:48:00 AM by Paul Meagher

In a previous blog, entitled including uncertainty in your business model, I laid the groundwork as to how I proposed to integrate uncertainly into a business model. I proposed changing the $num_new_customers_per_month setting in the business model implementation from a fixed value (e.g., $num_customers_per_month=10) to a new customer distribution setting that could vary and grow as the years go by in your business model.

We can store yearly settings for the "new customer distribution" in the following data structure:

$ave_customers_per_month[1] = array(10, 5);
$ave_customers_per_month[2] = array(15, 5);
$ave_customers_per_month[3] = array(20, 5);
$ave_customers_per_month[4] = array(25, 5);

The way to parse this is that in the first year of the model the mean of the new customer distribution is 10 and the standard deviation is 5 (mu=10, sigma=5). In the second year of the model, the mean will increase by 5 to 15, but the standard deviation will remain the same at 5 (mu=15, sigma=5). An so on, for each year that the model projects to.

In order to utilize these settings, I decided I would integrate the PHP-based Probability Distributions Library, or PDL, that provides implementations of the major probability distributions. In this case, I needed the normal distibution and included it like so:

require_once '../PDL/NormalDistribution.php';

Then, before I started looping through each month in a particular year of the model, I initalized the new customer distribution like so (mean and standard deviation values are being passed into the NormalDistribution constructor call):

$new_customer_distribution  = new NormalDistribution($ave_customers_per_month[$y][0], $ave_customers_per_month[$y][1]);

Finally, as each month passes in the business model, I generate a random number from the $new_customer_distribution and assign it to $num_customers_per_month.

$num_customers_per_month = round($new_customer_distribution->RNG());

Voilà, what used to be a fixed value on our business model (i.e, $num_customers_per_month=10), is now a quantity that varies each month according to the new customer distribution being sampled from for that year.

It is in this manner that the business model incorporates uncertainty. Other variables in the model could also be turned into random variables instead of fixed quantities if you felt it was important to add additional uncertainty to your business model.

Business Model Output

This business model output will differ from other model output that I displayed in previous blogs in two major ways.

First, you will see that the number of customers per month grows in an irregular manner. In the first year you might add 8 new customers one month, and 12 new customers the next month. If you refresh the page that displays this report, a new set of overall estimates of costs, reveneues, and profits will appear due to the uncertaintly/randomness we have introduced. Indeed, it is critical that you do refresh the model many times to get a sense of the range of variability you might get out of your business model. Look in particular at the variability in the overall estimates of costs, revenues, and profits. A business model with uncertainty has the benefit that instead of generating only point estimates of your yearly costs, revenues, and profits, you can re-run your model to generate range estimates of your yearly costs, revenues, and profits.

The second difference you will see in this model output is that the business model is profitable for the investor. To date, the investor did not recoup their investment of $50,000 after 3 years by offering 20 percent of the profits. In order for the investor to recoup their investment in a 3 year time frame, I steadily increase the expected number of customers per month for each year in the model from 10 to 25. I also offered the investor 50 percent of the ongoing profits. After three years, the investor makes $31,790.00 or a 64% return on investment (keep in mind that this return will change as you refresh the business model).

Without further ado, here is the business model output:

YearMonth# Customers RevenuesCostsProfits Company ProfitsInvestor Profits
2013 2 12 $360.00 $1,120.00 -$760.00 -$760.00 $0.00
2013 3 28 $840.00 $1,280.00 -$440.00 -$440.00 $0.00
2013 4 46 $1,380.00 $1,460.00 -$80.00 -$80.00 $0.00
2013 5 61 $1,830.00 $1,610.00 $220.00 $110.00 $110.00
2013 6 66 $1,980.00 $1,660.00 $320.00 $160.00 $160.00
2013 7 80 $2,400.00 $1,800.00 $600.00 $300.00 $300.00
2013 8 88 $2,640.00 $1,880.00 $760.00 $380.00 $380.00
2013 9 102 $3,060.00 $2,020.00 $1,040.00 $520.00 $520.00
2013 10 115 $3,450.00 $2,150.00 $1,300.00 $650.00 $650.00
2013 11 127 $3,810.00 $2,270.00 $1,540.00 $770.00 $770.00
2013 12 137 $4,110.00 $2,370.00 $1,740.00 $870.00 $870.00
2013 Totals $25,860.00 $19,620.00 $6,240.00 $2,480.00 $3,760.00
2014 1 142 $4,260.00 $2,420.00 $1,840.00 $920.00 $920.00
2014 2 155 $4,650.00 $2,550.00 $2,100.00 $1,050.00 $1,050.00
2014 3 164 $4,920.00 $2,640.00 $2,280.00 $1,140.00 $1,140.00
2014 4 177 $5,310.00 $2,770.00 $2,540.00 $1,270.00 $1,270.00
2014 5 187 $5,610.00 $2,870.00 $2,740.00 $1,370.00 $1,370.00
2014 6 208 $6,240.00 $3,080.00 $3,160.00 $1,580.00 $1,580.00
2014 7 230 $6,900.00 $3,300.00 $3,600.00 $1,800.00 $1,800.00
2014 8 251 $7,530.00 $3,510.00 $4,020.00 $2,010.00 $2,010.00
2014 9 267 $8,010.00 $3,670.00 $4,340.00 $2,170.00 $2,170.00
2014 10 282 $8,460.00 $3,820.00 $4,640.00 $2,320.00 $2,320.00
2014 11 289 $8,670.00 $3,890.00 $4,780.00 $2,390.00 $2,390.00
2014 12 310 $9,300.00 $4,100.00 $5,200.00 $2,600.00 $2,600.00
2014 Totals $79,860.00 $38,620.00 $41,240.00 $20,620.00 $20,620.00
2015 1 333 $9,990.00 $4,330.00 $5,660.00 $2,830.00 $2,830.00
2015 2 350 $10,500.00 $4,500.00 $6,000.00 $3,000.00 $3,000.00
2015 3 367 $11,010.00 $4,670.00 $6,340.00 $3,170.00 $3,170.00
2015 4 391 $11,730.00 $4,910.00 $6,820.00 $3,410.00 $3,410.00
2015 5 412 $12,360.00 $5,120.00 $7,240.00 $3,620.00 $3,620.00
2015 6 428 $12,840.00 $5,280.00 $7,560.00 $3,780.00 $3,780.00
2015 7 441 $13,230.00 $5,410.00 $7,820.00 $3,910.00 $3,910.00
2015 8 468 $14,040.00 $5,680.00 $8,360.00 $4,180.00 $4,180.00
2015 9 487 $14,610.00 $5,870.00 $8,740.00 $4,370.00 $4,370.00
2015 10 511 $15,330.00 $6,110.00 $9,220.00 $4,610.00 $4,610.00
2015 11 535 $16,050.00 $6,350.00 $9,700.00 $4,850.00 $4,850.00
2015 12 548 $16,440.00 $6,480.00 $9,960.00 $4,980.00 $4,980.00
2015 Totals $158,130.00 $64,710.00 $93,420.00 $46,710.00 $46,710.00
2016 1 574 $17,220.00 $6,740.00 $10,480.00 $5,240.00 $5,240.00
2016 2 596 $17,880.00 $6,960.00 $10,920.00 $5,460.00 $5,460.00
2016 Totals $35,100.00 $13,700.00 $21,400.00 $10,700.00 $10,700.00
Overall Totals $298,950.00 $136,650.00 $162,300.00 $80,510.00 $81,790.00

The investor has recouped their $50,000.00 investment. The investor has earned $31,790.00 in profits so far.

GitHub

If you want to run the latest business model which includes uncertainty, it will require a bit more setup work to get it to run. You need to download the Probability Distributions Library because the newest business model depends on that library now. I'm currently working on getting my https://github.com/mrdealflow Github account setup as a place where I can share code more easily and others can contribute.

I will let you know in a blog next week when everything is ready to go. Until then, here is the code for a business model that now includes uncertainty and a profitable outcome for an investor.

<?php
/**
* Prototypical business model involving the generation of monthly
* revenue based upon the number of existing customers plus new
* customers per month with each customer paying a monthly fixed fee.
* Costs based upon monthly fee for servicing "rents" and a cost per
* customer (variable cost) for providing the service to the customer.
*
* The involvement of an investor is assumed in this model.  The
* investor is represented with two variables.  An "investment size"
* variable and an "investor profit percentage" variable.  

* Uncertaintyin the number of new customers per month is also 
* incorporated in this business model.
*
* @script: monthly_growth_with_uncertaintly.php
* @author: Paul Meagher
* @company: Dealflow Solutions Ltd.
* @url: http://www.planetdealflow.ca
* @version: 0.3
* @modified: Feb 15, 2013
*
* Changelog:
*  + feb 11, 2013 - released
*  + feb 14, 2013 - add money_format.php fallback
*  + feb 14, 2013 - add uncertainty to nun new customers per month
*/

// get rid of inclusion warning
error_reporting(0);

// Not all PHP setups implement the money_format function.  Current version
// of wampserver does not (www.wampserver.com) so must include a php
// implementaiton of this function
if (!function_exists('money_format'))
  include_once 
"utils/money_format.php";

require_once 
'../PDL/NormalDistribution.php';

// PART 1: CHANGE THESE SETTINGS

// Set number of years for your projections.
$num_years 3;

// Replace fixed variable
// $num_new_customers_per_month = 10;

// With distibution settings per year
$ave_customers_per_month[1] = array(105);
$ave_customers_per_month[2] = array(155);
$ave_customers_per_month[3] = array(205);
$ave_customers_per_month[4] = array(255);

$monthly_fee_per_customer   30;
$monthly_cost_per_customer  10;

// Cost of "rents" per month.
$fixed_cost_per_month 1000;

// Starting number of customers customers - default 0.
$num_customers 0;

// New variables added to model investor involvement
$investment_size 50000;
$investor_profit_percentage .50;

// Set money formatting according to a locale setting.
setlocale(LC_MONETARY'en_CA');

// Starting month - defaults to current month.
$start_month date("n");

// PART 2: DO NOT CHANGE THESE INITIALIZATION SETTINGS

// setup year number to year date mapping for reporting purposes
$year_num_to_year_date[1] = $next_year date("Y");
for(
$n 2$n <= $num_years+1$n++) {
  
$next_year $next_year 1;
  
$year_num_to_year_date[$n] = $next_year;
}

// Zero the parameters we will be estimating
$costs    = array();
$revenues = array();
$profits  = array();
$company_profits  = array();
$investor_profits = array();

// Zero the accumulator variables
$total_profits 0;
$total_costs 0;
$total_revenues 0;
$total_company_profits 0;
$total_investor_profits 0;

// PART C: GENERATE REPORT PROVIDING ESTIMATES OF COST, REVENUES, & PROFITS

?>

<table border='1' cellpadding='5' cellspacing='0'>
  <thead>
    <tr>
      <th>Year</th><th>Month</th><th># Customers</th>
      <th>Revenues</th><th>Costs</th><th>Profits</th>
      <th>Company Profits</th><th>Investor Profits</th>
    </tr>
  </thead>
  <tbody>
  <?php
  
if ($start_month == 1)
    
$y_end $num_years;
  else
    
$y_end $num_years 1;

  for(
$y=1$y<=$y_end$y++) {

    if (
$y == 1)
      
$m $start_month;
    else
      
$m 1;

    
$new_customer_distribution  = new NormalDistribution($ave_customers_per_month[$y][0], $ave_customers_per_month[$y][1]);

    for (
$m$m<=12$m++) {

      
$num_customers_per_month round($new_customer_distribution->RNG());

      
$num_customers $num_customers $num_customers_per_month;

      
$year_date $year_num_to_year_date[$y];

      if ((
$y == $y_end) AND ($m == ($start_month+1)))
        break;
      else {
        
// The data structures don't have to be this complicated but they can 
        // be used in downstream calculatios more easily in this format.
        
$costs[$year_date][$m]    = ($num_customers $monthly_cost_per_customer) + $fixed_cost_per_month;
        
$revenues[$year_date][$m] = $num_customers $monthly_fee_per_customer;
        
$profits[$year_date][$m]  = $revenues[$year_date][$m] - $costs[$year_date][$m];

        
// Allocate perentages of the profit to the investor or the company
        // when profits are negative investor makes 0 and company takes
        // the loss.  Could also allow both parties to assume the loss.
        
if ($profits[$year_date][$m] < 0) {
          
$investor_profits[$year_date][$m] = 0;
          
$company_profits[$year_date][$m] = $profits[$year_date][$m];
        } else {
          
$investor_profits[$year_date][$m] = $profits[$year_date][$m] * $investor_profit_percentage;
          
$company_profits[$year_date][$m] = $profits[$year_date][$m] * (1-$investor_profit_percentage);
        }

      }
      
?>
      <tr>
       <td><?php echo $year_date ?></td>
       <td align='center'><?php echo $m ?></td>
       <td align='center'><?php echo $num_customers ?></td>
       <td align='right'><?php echo money_format('%n'$revenues[$year_date][$m]) ?></td>
       <td align='right'><?php echo money_format('%n'$costs[$year_date][$m]) ?></td>
       <td align='right'><?php echo money_format('%n'$profits[$year_date][$m]) ?></td>
       <td align='right'><?php echo money_format('%n'$company_profits[$year_date][$m]) ?></td>
       <td align='right'><?php echo money_format('%n'$investor_profits[$year_date][$m]) ?></td>
      </tr>
      <?php
    
}
    
$profits[$year_date]['total']          = array_sum($profits[$year_date]);
    
$costs[$year_date]['total']            = array_sum($costs[$year_date]);
    
$revenues[$year_date]['total']         = array_sum($revenues[$year_date]);
    
$company_profits[$year_date]['total']  = array_sum($company_profits[$year_date]);
    
$investor_profits[$year_date]['total'] = array_sum($investor_profits[$year_date]);

    
$total_profits +=  $profits[$year_date]['total'];
    
$total_costs += $costs[$year_date]['total'];
    
$total_revenues +=  $revenues[$year_date]['total'];
    
$total_company_profits += $company_profits[$year_date]['total'];
    
$total_investor_profits += $investor_profits[$year_date]['total'];
    
?>
    <tr>
      <th colspan='3' align='right'><?php echo $year_date." Totals"?></th>
      <td align='right'><?php echo money_format('%n'$revenues[$year_date]['total']); ?></td>
      <td align='right'><?php echo money_format('%n'$costs[$year_date]['total']); ?></td>
      <td align='right'><?php echo money_format('%n'$profits[$year_date]['total']); ?></td>
      <td align='right'><?php echo money_format('%n'$company_profits[$year_date]['total']); ?></td>
      <td align='right'><?php echo money_format('%n'$investor_profits[$year_date]['total']); ?></td>
    </tr>
    <?php
  
}
  
?>
  <tr>
    <th colspan='3' align='right'><?php echo "Overall Totals"?></th>
    <td align='right'><?php echo money_format('%n'$total_revenues); ?></td>
    <td align='right'><?php echo money_format('%n'$total_costs); ?></td>
    <td align='right'><?php echo money_format('%n'$total_profits); ?></td>
    <td align='right'><?php echo money_format('%n'$total_company_profits); ?></td>
    <td align='right'><?php echo money_format('%n'$total_investor_profits); ?></td>
  </tr>
  </tbody>
</table>

<?php
$amount_owing 
$investment_size $total_investor_profits;
if (
$amount_owing 0) {
  
?>
  <p>
  <b>The investor has not recouped their <?php echo money_format('%n'$investment_size?>
  investment yet.  You still owe the investor <?php echo money_format('%n'$amount_owing?>.</b>
  </p>
  <?php
} else {
  
$profit_earned $amount_owing * -1;
  
?>
  <p>
  <b>The investor has recouped their <?php echo money_format('%n'$investment_size?> investment.
  The investor has earned <?php echo money_format('%n'$profit_earned?> in profits so far.</b>
  </p>
  <?php
}
?>

Permalink 

Year of the hustle [Business Models
Posted on February 14, 2013 @ 08:34:00 AM by Paul Meagher

Amy Hoy has been making a name for herself of late based upon a successful workshop she runs called the 30x500 Workshop.

It is a workshop aimed at software developers in which she explains how to make money by selling software as a service (SaaS Business Model). If you charge consumers a monthly fee of $30 and you add a regular number of new customers each month, you could be generating this type of income:


Source: Amy Hoy - http://unicornfree.com/30x500.

Does this business model look familiar? It looks very much like the linear growth business model (or one with low curvature) I have been discussing in my last several posts. The parameters of the business model overlap as well - for example, I also configured the monthly customer fee to be $30 a month. I may have even been inspired by this article to blog on the topic of implementing business models as PHP programs.

Whatever the case, there are two aspects to a $30 (monthly fee per customer) x 500 (number of customers) business model that are not discussed in the marketing material for the workshop. The business model does not discuss costs. What are the fixed monthly costs, the "rents", for opearating the business. Second, what is the cost per customer of providing the service. If you have to purchase more server capacity and pay off more suppliers, then your cost per customer should be going up as well.

What is also not discussed in the Amy Hoy business model is the potential role of an investor. I think it would be a better business model if it could speak to that aspect as well. See my article, including investors in your business model, for more on this apsect.

I congratulate Amy for the success in her business and her efforts to educate software developers about alternative business models they might be using to earn a living. Amy also provides tips about starting up a SaaS business model that would be useful to know (i.e., sourcing of profitable ideas for services).

She also alludes to the "year of the hustle" as a critical element in her business model. The business model is not going to achieve it's guidance estimates if you are not prepared to engage in a "year of the hustle". The "year of the hustle" could refer to the collection of marketing techniques you plan to apply to the problem of growing your business. As you refine your business model, you should also be scheming about the collection of marketing techniques that might be used to help launch and grow your product or service. Then you execute during the "year of the hustle".

The "year of the hustle" is a timeframe that a startup might reasonably take to launch and start growing a business to a level where the income generated starts meeting bill obligations or lifestyle requirements again. If an entrepreneur can live cheaply and spend wisely, then they can potentially run a lean ship until profits start rolling in at a sufficient rate to justify the "year of the hustle". Your business model after 1 year can be used to project where you should be financially at the end of year 1. The end of year 1 totals for revenue, costs, and profits are, for startups, critical to determining the ultimate validity of the business model and its ability to sustain itself.

Permalink 

Including uncertainty in your business model [Business Models
Posted on February 13, 2013 @ 08:09:00 AM by Paul Meagher

A major missing ingredient in my business modelling efforts to date is the concept of "uncertainty". When we are projecting our business model into the future we can really only speculate as to whether the assumptions on which the business model are based are realistic and will approximate the true values for revenues, costs, and profits over time. That being said, we can still try our level best to create a business model that approximates how we think the future will unfold. In order to do our level best, however, we have to have tools for modelling the future that are up to the task. There are many variables that you might want to add to a model in order to accommodate some unique quirck of your business model. Ideally, the business modelling tool you select will have a built in knob for that variable. Or you can just use a general purpose programming language like PHP and hack one up yourself. This article series provides "hackers" or "DIY" types with some code and ideas to get started in crafting a business model for your business.


Source: http://en.wikipedia.org/wiki/Uncertainty

The concept of uncertainty is a very peculiar one. It is located in the nether regions between the concept of chaotic randomness and risk. The term is often used in professional discourse to denote a random variable that is quantifiable, such as the distribution of height among the population where the mean and standard deviation of the distribution can be estimated (along with kurtosis and skew). You may want to compare this definition to the above diagram to see where it fits (perhaps along the upper or lower arm depending on your philosophical stance towards the nature of uncertainty).

In the context of business modelling, we can introduce uncertainty into any variable. For example, instead of assigning the variable $num_new_customers_per_month the single value of 10, we might assign it a mean value for each year in the projection along with either a single variance estimate or a set of variance estimates for each year. As each year passes in our model, we sample from a "new customers per month" normal distribution (or poisson distribution for fewer customers or rare events) that has a different mean, and perhaps a different variance. This will produce monthly estimates of new customers that varies around a mean each year with the mean expected to increase as the model projects further into the future.

So that is how I propose to introduce uncertainty into business modelling.

There will be no code in todays' post because introducing uncertainty will require the inclusion of a Probability Distributions Library (PDL) to make the inclusion of random variables into our modelling efforts more elegant and powerful. Fortunately, I have developed a Probability Distributions Library using PHP that can be used for this purpose. In order to share code in the future, however, I need to setup a repository where the full code base powering the business models is available. Towards that end I have setup a MrDealflow github account and am in the process of figuring out how to use it (looks like it will be fairly straight-forward so far). When I have the next iteration of my business model prototype ready that includes uncertainty, I will upload the code to this location and post an article on it.

Permalink 

Including investors in your business model [Business Models
Posted on February 12, 2013 @ 08:05:00 AM by Paul Meagher

I added some new features to the monthly linear growth business model I discussed in my last blog posting. In the newest version of that business model, I have added the idea of investor involvement. Including an investor in the business model has the benefit of clarifying the timeframe in which an investment might be paid back. The investor is assumed to receive, on a monthly basis, some percentage of the overall profit the company makes in that month. These profits will be paid out, or at least calculated, on a monthly basis and at the end of the projected time period, we can determine if the investor has recouped their original investment yet. If they have, we can calculate how much profit they have earned so far.

I developed a script called monthly_growth_with_investor.php to model investor involvement.

I configured this model with the same settings I used in the monthly_growth.php business model discussed in my last blog posting (Implementing a business model in PHP). I added two new settings, one for the size of the investment made in the company ($investment_size) and a second for the percentage of profits the investor will earn in return for their investment ($investor_profit_percentage). Given these additional settings, this is the report that the monthly_growth_with_investor.php script generates.

YearMonth# Customers RevenuesCostsProfits Company ProfitsInvestor Profits
2013 2 10 $300.00 $1,100.00 -$800.00 -$800.00 $0.00
2013 3 20 $600.00 $1,200.00 -$600.00 -$600.00 $0.00
2013 4 30 $900.00 $1,300.00 -$400.00 -$400.00 $0.00
2013 5 40 $1,200.00 $1,400.00 -$200.00 -$200.00 $0.00
2013 6 50 $1,500.00 $1,500.00 $0.00 $0.00 $0.00
2013 7 60 $1,800.00 $1,600.00 $200.00 $160.00 $40.00
2013 8 70 $2,100.00 $1,700.00 $400.00 $320.00 $80.00
2013 9 80 $2,400.00 $1,800.00 $600.00 $480.00 $120.00
2013 10 90 $2,700.00 $1,900.00 $800.00 $640.00 $160.00
2013 11 100 $3,000.00 $2,000.00 $1,000.00 $800.00 $200.00
2013 12 110 $3,300.00 $2,100.00 $1,200.00 $960.00 $240.00
2013 Totals $19,800.00 $17,600.00 $2,200.00 $1,360.00 $840.00
2014 1 120 $3,600.00 $2,200.00 $1,400.00 $1,120.00 $280.00
2014 2 130 $3,900.00 $2,300.00 $1,600.00 $1,280.00 $320.00
2014 3 140 $4,200.00 $2,400.00 $1,800.00 $1,440.00 $360.00
2014 4 150 $4,500.00 $2,500.00 $2,000.00 $1,600.00 $400.00
2014 5 160 $4,800.00 $2,600.00 $2,200.00 $1,760.00 $440.00
2014 6 170 $5,100.00 $2,700.00 $2,400.00 $1,920.00 $480.00
2014 7 180 $5,400.00 $2,800.00 $2,600.00 $2,080.00 $520.00
2014 8 190 $5,700.00 $2,900.00 $2,800.00 $2,240.00 $560.00
2014 9 200 $6,000.00 $3,000.00 $3,000.00 $2,400.00 $600.00
2014 10 210 $6,300.00 $3,100.00 $3,200.00 $2,560.00 $640.00
2014 11 220 $6,600.00 $3,200.00 $3,400.00 $2,720.00 $680.00
2014 12 230 $6,900.00 $3,300.00 $3,600.00 $2,880.00 $720.00
2014 Totals $63,000.00 $33,000.00 $30,000.00 $24,000.00 $6,000.00
2015 1 240 $7,200.00 $3,400.00 $3,800.00 $3,040.00 $760.00
2015 2 250 $7,500.00 $3,500.00 $4,000.00 $3,200.00 $800.00
2015 3 260 $7,800.00 $3,600.00 $4,200.00 $3,360.00 $840.00
2015 4 270 $8,100.00 $3,700.00 $4,400.00 $3,520.00 $880.00
2015 5 280 $8,400.00 $3,800.00 $4,600.00 $3,680.00 $920.00
2015 6 290 $8,700.00 $3,900.00 $4,800.00 $3,840.00 $960.00
2015 7 300 $9,000.00 $4,000.00 $5,000.00 $4,000.00 $1,000.00
2015 8 310 $9,300.00 $4,100.00 $5,200.00 $4,160.00 $1,040.00
2015 9 320 $9,600.00 $4,200.00 $5,400.00 $4,320.00 $1,080.00
2015 10 330 $9,900.00 $4,300.00 $5,600.00 $4,480.00 $1,120.00
2015 11 340 $10,200.00 $4,400.00 $5,800.00 $4,640.00 $1,160.00
2015 12 350 $10,500.00 $4,500.00 $6,000.00 $4,800.00 $1,200.00
2015 Totals $106,200.00 $47,400.00 $58,800.00 $47,040.00 $11,760.00
2016 1 360 $10,800.00 $4,600.00 $6,200.00 $4,960.00 $1,240.00
2016 2 370 $11,100.00 $4,700.00 $6,400.00 $5,120.00 $1,280.00
2016 Totals $21,900.00 $9,300.00 $12,600.00 $10,080.00 $2,520.00
Overall Totals $210,900.00 $107,300.00 $103,600.00 $82,480.00 $21,120.00

The investor has not recouped their $50,000.00 investment yet. You still owe the investor $28,880.00.

So, after three years the investor has not earned back her initial investment of $50,000. If we ran the model out to 5 years with all the other configurations staying the same, you might have a situation where the investor has recouped their investment and made some profit. Alternatively, if we offer the investor a greater percentage of the profits, we can pay back the investor (with a profit) in a period of 3 years or less. The benefit of a formalized business model is that it puts relevant decision making information on the table for an entrepreneur and an investor to inspect, jointly understand, and hopefully agree upon as to the exact arrangement that might work.

For those more technically inclined, below is the PHP script implementing a simple linear business model with an investor.

<?php 
/**
* Prototypical business model involving the generation of monthly 
* revenue based upon the number of existing customers plus new 
* customers per month with each customer paying a monthly fixed fee.  
* Costs based upon monthly fee for servicing "rents" and a cost per 
* customer (variable cost) for providing the service to the customer.
*
* The involvement of an investor is assumed in this model.  The 
* investor is represented with two variables.  An "investment size"
* variable and an "investor profit percentage" variable.
*
* Assumes simple linear growth with an investor. 
*
* @script: monthly_growth_with_investor.php
* @author: Paul Meagher
* @sponsor: Dealflow Solutions Ltd. & PlanetDealflow.ca
* @url: http://www.planetdealflow.ca
* @version: 0.2
* @modified: Feb 11, 2012
*/

// PART 1: CHANGE THESE SETTINGS

// Set number of years for your projections.
$num_years 3;

$num_new_customers_per_month 10;
$monthly_fee_per_customer 30;
$monthly_cost_per_customer  10;

// Cost of "rents" per month.
$fixed_cost_per_month 1000;

// Starting number of customers customers - default 0.  
$num_customers 0;  

// New variables added to model investor involvement
$investment_size 50000;
$investor_profit_percentage .20;

// Set money formatting according to a locale setting.
setlocale(LC_MONETARY'en_CA');

// Starting month - defaults to current month.
$start_month date("n");

// PART 2: DO NOT CHANGE THESE INITIALIZATION SETTINGS

// setup year number to year date mapping for reporting purposes
$year_num_to_year_date[1] = $next_year date("Y");
for(
$n 2$n <= $num_years+1$n++) {
    
$next_year $next_year 1
    
$year_num_to_year_date[$n] = $next_year;
}

// Zero the parameters we will be estimating
$costs    = array();
$revenues = array();
$profits  = array();
$company_profits  = array();
$investor_profits = array();

// Zero the accumulator variables
$total_profits 0;
$total_costs 0;
$total_revenues 0;
$total_company_profits 0;
$total_investor_profits 0;

// PART C: GENERATE REPORT PROVIDING ESTIMATES OF COST, 
// REVENUES, & PROFITS
?>

<table border='1' cellpadding='5' cellspacing='0'>
  <thead>
    <tr>
      <th>Year</th><th>Month</th><th># Customers</th>
      <th>Revenues</th><th>Costs</th><th>Profits</th>
      <th>Company Profits</th><th>Investor Profits</th>
    </tr>
  </thead>
  <tbody>
  <?php
  
if ($start_month == 1
    
$y_end $num_years;
  else
    
$y_end $num_years 1
  
  for(
$y=1$y<=$y_end$y++) {
      
      if (
$y == 1
        
$m $start_month;
      else
        
$m 1;
    
    for (
$m$m<=12$m++) {
      
      
$num_customers $num_customers $num_new_customers_per_month;
      
      
$year_date     $year_num_to_year_date[$y];
      

      if ((
$y == $y_end) AND ($m == ($start_month+1)))
        break; 
      else {
          
          
// The data structures don't have to be this complicated
        // but they can be used in downstream calculatios more  
        // easily in this format.
        
$costs[$year_date][$m]    = ($num_customers $monthly_cost_per_customer
                                    + 
$fixed_cost_per_month;
        
$revenues[$year_date][$m] = $num_customers $monthly_fee_per_customer;
        
$profits[$year_date][$m]  = $revenues[$year_date][$m] - $costs[$year_date][$m];
        
        
// Allocate perentages of the profit to the investor or the company
        // when profits are negative investor makes 0 and company takes 
        // the loss
        
if ($profits[$year_date][$m] < 0) {      
          
$investor_profits[$year_date][$m] = 0;
          
$company_profits[$year_date][$m] = $profits[$year_date][$m]; 
        } else {
          
$investor_profits[$year_date][$m] = $profits[$year_date][$m] * 
                                              
$investor_profit_percentage;
          
$company_profits[$year_date][$m] = $profits[$year_date][$m] * 
                                              (
1-$investor_profit_percentage);          
        }
      
      }      
      
?>
      <tr>
       <td><?php echo $year_date ?></td>    
       <td align='center'><?php echo $m ?></td>    
       <td align='center'><?php echo $num_customers ?></td>           
       <td align='right'><?php echo money_format('%n'$revenues[$year_date][$m]) ?></td>    
       <td align='right'><?php echo money_format('%n'$costs[$year_date][$m]) ?></td>    
       <td align='right'><?php echo money_format('%n'$profits[$year_date][$m]) ?></td>    
       <td align='right'><?php echo money_format('%n'$company_profits[$year_date][$m]) ?></td>    
       <td align='right'><?php echo money_format('%n'$investor_profits[$year_date][$m]) ?></td>    
      </tr>
      <?php
    
}
    
$profits[$year_date]['total']          = array_sum($profits[$year_date]);
    
$costs[$year_date]['total']            = array_sum($costs[$year_date]);
    
$revenues[$year_date]['total']         = array_sum($revenues[$year_date]);
    
$company_profits[$year_date]['total']  = array_sum($company_profits[$year_date]);
    
$investor_profits[$year_date]['total'] = array_sum($investor_profits[$year_date]);    
    
    
$total_profits +=  $profits[$year_date]['total'];
    
$total_costs += $costs[$year_date]['total'];
    
$total_revenues +=  $revenues[$year_date]['total'];
    
$total_company_profits += $company_profits[$year_date]['total'];
    
$total_investor_profits += $investor_profits[$year_date]['total'];
    
?>
    <tr>
        <th colspan='3' align='right'><?php echo $year_date." Totals"?></th>
        <td align='right'><?php echo money_format('%n'$revenues[$year_date]['total']); ?></td>
        <td align='right'><?php echo money_format('%n'$costs[$year_date]['total']); ?></td>
        <td align='right'><?php echo money_format('%n'$profits[$year_date]['total']); ?></td>
        <td align='right'><?php echo money_format('%n'$company_profits[$year_date]['total']); ?></td>
        <td align='right'><?php echo money_format('%n'$investor_profits[$year_date]['total']); ?></td>
    </tr>
    <?php
  
}      
  
?> 
  <tr>
    <th colspan='3' align='right'><?php echo "Overall Totals"?></th>
    <td align='right'><?php echo money_format('%n'$total_revenues); ?></td>    
    <td align='right'><?php echo money_format('%n'$total_costs); ?></td>
    <td align='right'><?php echo money_format('%n'$total_profits); ?></td>    
    <td align='right'><?php echo money_format('%n'$total_company_profits); ?></td>
    <td align='right'><?php echo money_format('%n'$total_investor_profits); ?></td>
  </tr>
  </tbody>   
</table>

<?php
$amount_owing 
$investment_size $total_investor_profits;
if (
$amount_owing 0) {
  
?>
  <p>
  <b>The investor has not recouped their <?php echo money_format('%n'$investment_size?> 
  investment yet.  You still owe the investor <?php echo money_format('%n'$amount_owing?>.</b>
  </p>
  <?php
} else {
    
$profit_earned $amount_owing * -1;
    
?>
    <p>
  <b>The investor has recouped their <?php echo money_format('%n'$investment_size?> investment.
  The investor has earned <?php echo money_format('%n'$profit_earned?> in profits so far.</b>
  </p> 
  <?php
}
?>

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Implementing a business model in PHP [Business Models
Posted on February 11, 2013 @ 05:07:00 AM by Paul Meagher

In my previous article, I critized the idea that you could claim to have a business model if it was not sufficiently well defined that you could run it as a computer program that would estimate costs, revenue, and profit over time. I concluded by saying that I would reveal a runnable business model in my next article. Well, here it is.

I developed a script called monthly_growth.php which implements a business model that assumes you will grow your business by a certain number of new customers each month and those customers will each pay a monthly fee for your service. The revenues from new and existing customers each month is offset by two types of costs - a fixed monthly cost for "rents" and a variable costs associated with the cost of servicing each client. As the number of clients grows this servicing cost grows.

I run the script by pointing my browser at the url where it resides on my web server. If you host a site you probably have access to a PHP interpreter so could potentially run this script by saving it in a web folder on your site and then typing in the url to that file in your web browser. If you have the php module running in your webserver then you will see the table output below when you do so. I will also be making a web-based front end to this script in it's next iteration so that you can just run the model from this site by entering values in the input form. I did, however, want you to see the "guts" of what an implemented business model looks like so wanted to keep this version as simple as possible to make it easier to follow and modify for your own purposes.

Before running the script you need to review a few settings and change them to values that might be more appropriate to your situation. In this example, I'm assuming that we are starting from 0 customers, will add 10 new customers each month, and each of those customers will pay a monthly fee of $30. The monthly fixed fee, the "rents", is assumed to be $1000 a month and the cost of servicing each customer is assumed to be $10 a month. I'm interested in projecting out to 3 years into the future. This set of configurations generates this business model output:

YearMonth# CustomersRevenuesCostsProfits
2013 2 10 $300.00 $1,100.00 -$800.00
2013 3 20 $600.00 $1,200.00 -$600.00
2013 4 30 $900.00 $1,300.00 -$400.00
2013 5 40 $1,200.00 $1,400.00 -$200.00
2013 6 50 $1,500.00 $1,500.00 $0.00
2013 7 60 $1,800.00 $1,600.00 $200.00
2013 8 70 $2,100.00 $1,700.00 $400.00
2013 9 80 $2,400.00 $1,800.00 $600.00
2013 10 90 $2,700.00 $1,900.00 $800.00
2013 11 100 $3,000.00 $2,000.00 $1,000.00
2013 12 110 $3,300.00 $2,100.00 $1,200.00
2014 1 120 $3,600.00 $2,200.00 $1,400.00
2014 2 130 $3,900.00 $2,300.00 $1,600.00
2014 3 140 $4,200.00 $2,400.00 $1,800.00
2014 4 150 $4,500.00 $2,500.00 $2,000.00
2014 5 160 $4,800.00 $2,600.00 $2,200.00
2014 6 170 $5,100.00 $2,700.00 $2,400.00
2014 7 180 $5,400.00 $2,800.00 $2,600.00
2014 8 190 $5,700.00 $2,900.00 $2,800.00
2014 9 200 $6,000.00 $3,000.00 $3,000.00
2014 10 210 $6,300.00 $3,100.00 $3,200.00
2014 11 220 $6,600.00 $3,200.00 $3,400.00
2014 12 230 $6,900.00 $3,300.00 $3,600.00
2015 1 240 $7,200.00 $3,400.00 $3,800.00
2015 2 250 $7,500.00 $3,500.00 $4,000.00
2015 3 260 $7,800.00 $3,600.00 $4,200.00
2015 4 270 $8,100.00 $3,700.00 $4,400.00
2015 5 280 $8,400.00 $3,800.00 $4,600.00
2015 6 290 $8,700.00 $3,900.00 $4,800.00
2015 7 300 $9,000.00 $4,000.00 $5,000.00
2015 8 310 $9,300.00 $4,100.00 $5,200.00
2015 9 320 $9,600.00 $4,200.00 $5,400.00
2015 10 330 $9,900.00 $4,300.00 $5,600.00
2015 11 340 $10,200.00 $4,400.00 $5,800.00
2015 12 350 $10,500.00 $4,500.00 $6,000.00
2016 1 360 $10,800.00 $4,600.00 $6,200.00
2016 2 370 $11,100.00 $4,700.00 $6,400.00

So what we have here are monthly estimates of cost, revenue, and profit over a three year period. We can see how our revenues grow faster than our costs and eventually starts producing a profit situation which increases over time. You might be saying "but the assumptions are too simple". You might argue that customers won't come in as regular blocks of 10 new customers a month but rather as a smaller number per month at the beginning and a larger number per month as your business gains momentum. The beauty of providing you with the source code is that you are now empowered to change the business model so that customer growth follows, say, an exponential function or piecewise-linear function rather than a simple linear one. You can do that if you have access to the source code which is provided below (with lots of comments in the code that preclude the need for me to explain it much more):

<?php 
/**
* Prototypical business model involving the generation of monthly 
* revenue based upon the number of existing customers plus new 
* customers per month with each customer paying a monthly fixed fee.  
* Costs based upon monthly fee for servicing "rents" and a cost per 
* customer (variable cost) for providing the service to the customer.
*
* Assumes simple linear growth. 
*
* @script: monthly_growth.php
* @author: Paul Meagher
* @version: 0.1
* @modified: Feb 11, 2012
*/

// PART 1: CHANGE THESE SETTINGS

// Set number of years for your projections.
$num_years 3;

$num_new_customers_per_month 10;
$monthly_fee_per_customer 30;
$monthly_cost_per_customer  10;

// Cost of "rents" per month.
$fixed_cost_per_month 1000;

// Starting number of customers customers - default 0.  
$num_customers 0;  

// Set money formatting according to a locale setting.
setlocale(LC_MONETARY'en_CA');

// Starting month - defaults to current month.
$start_month date("n");

// PART 2: DO NOT CHANGE THESE INITIALIZATION SETTINGS

// setup year number to year date mapping for reporting purposes
$year_num_to_year_date[1] = $next_year date("Y");
for(
$n 2$n <= $num_years+1$n++) {
    
$next_year $next_year 1
    
$year_num_to_year_date[$n] = $next_year;
}

// Zero the parameters we will be estimating
$costs    = array();
$revenues = array();
$profits  = array();

// PART C: GENERATE REPORT PROVIDING ESTIMATES OF COST, 
// REVENUES, & PROFITS
?>

<table border='1' cellpadding='5' cellspacing='0'>
  <thead>
    <tr>
      <th>Year</th><th>Month</th><th># Customers</th>
      <th>Revenues</th><th>Costs</th><th>Profits</th>
    </tr>
  </thead>
  <?php
  
if ($start_month == 1
    
$y_end $num_years;
  else
    
$y_end $num_years 1
  
  for(
$y=1$y<=$y_end$y++) {
      
      if (
$y == 1
        
$m $start_month;
      else
        
$m 1;
    
    for (
$m$m<=12$m++) {
      
$num_customers $num_customers $num_new_customers_per_month;
      
$year_date     $year_num_to_year_date[$y];
      
// the data structures don't have to be this complicated
      // but they can be used in downstream calculatios more  
      // easily in this format
      
$costs[$year_date][$m]    = ($num_customers $monthly_cost_per_customer
                                  + 
$fixed_cost_per_month;
      
$revenues[$year_date][$m] = $num_customers $monthly_fee_per_customer;
      
$profits[$year_date][$m]  = $revenues[$year_date][$m] - $costs[$year_date][$m];
      if ((
$y == $y_end) AND ($m == ($start_month+1)))
        break; 
      
?>
      <tr>
       <td><?php echo $year_date ?></td>    
       <td align='center'><?php echo $m ?></td>    
       <td align='center'><?php echo $num_customers ?></td>           
       <td align='right'><?php echo money_format('%n'$revenues[$year_date][$m]) ?></td>    
       <td align='right'><?php echo money_format('%n'$costs[$year_date][$m]) ?></td>    
       <td align='right'><?php echo money_format('%n'$profits[$year_date][$m]) ?></td>    
      </tr>
      <?php
    
}
  }
  
?>
</table>

There is more to be said and done on the topic of business models so I may continue posting on this topic this week.

Permalink 

What is your business model? [Business Models
Posted on February 8, 2013 @ 10:06:00 AM by Paul Meagher

If your answer is along the lines of sell units and make money, then sorry, that is not a business model. Why? Because it is not precise enough to be formalized into a program that generates estimates of revenue, cost, and profit over time. That is a business model. Reminds me of Crocodile Dundee who famously said "that's not a knife, this is a knife".

Many entrepreneurs have gotten along in business without having to develop a formal business model so why is it necessary or important to create a business model? A formal business model may not, in fact, be necessary to grow and run your business if you are able to grow your business organically without outside loans or investment (a sell units and make money orientation is sufficient). If, however, you require outside loans or investment to grow your business then the process of raising capital becomes more efficient for the investor and the entrepreneur if you can run a business model that can be used to generate estimates of cost, revenue, and profit over time. A shared understanding of the business model is a valuable tool to move the investment process along. Like any model, a business model does not account for all aspects of your business, only the critical elements, and for specific purposes. What is most important is that you and the investor can agree that this is how the business can work given some reasonable assumptions.

So what does a business model look like? Stay tuned next week when I will post a simple business model formalized as a PHP program.

Permalink 

You can now comment on blog postings [Site News
Posted on February 6, 2013 @ 07:54:00 AM by Paul Meagher

I have enabled commenting on our blog postings. Because I code most my own software it took me awhile to get around to implementing, testing, and tweaking a commenting feature. Anyone visiting this site is welcome to add a comment. If you are a registered entrepreneur or investor, you can speed up the process of adding a comment by first logging in, and then entering your comment. When you do so, you will notice that parts of the comment form are pre-filled for you so all you have to do is enter your comment.

So welcome to the more interactive version of our blog and please let us know what you think about any of our blogs.

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Characteristics of high income Canadians [Statistics
Posted on February 6, 2013 @ 05:18:00 AM by Paul Meagher

Statistics Canada has release a recent update on the composition of high-income Canadians. The cutoff for defining a high income Canadian is someone with an annual income of $201,400 or higher. This conveniently splits the distribution of Tax filers into the 1% earning this amount or above, and the 99% of Canadians earning less than this amount. Given this definition of a high-income Canadian, here is a table giving the composition of these high-income Canadians:

One interesting observation from this report is that the "income of top filers was increasingly dependent on their jobs, rather than on investments". The fact that Statistics Canada feels the need to point this out is probably because in other countries high income earners derive the majority of their income from investments rather than wages. It is possible that policy in Canada needs to change to incentivise these top income earners to invest in small businesses, a position that the National Angel Capital Association has been advocating for many years.

Another interesting observation is where in Canada these high income earners are located:

In 2010, four provinces – Ontario, Alberta, Quebec and British Columbia – accounted for 92% of the 254,700 people in the top 1%.

Ontario had 110,300, followed by Alberta with 52,200, Quebec at 42,600 and British Columbia with 29,500.

Between 1990 and 2010, Alberta's share of the top 1% of filers doubled from 10% to 20%, while Ontario's proportion fell from 51% to 43%.

The areas of strongest angel investment activity in Canada corresponds to areas where high-income earners are most concentrated. In recent years, Alberta has become a leader in the angel investment industry with one of the leading organizations being Venture Alberta.

Permalink 

Plan for investors [Entrepreneurship
Posted on February 5, 2013 @ 05:44:00 AM by Paul Meagher

If you have built your business from the ground up, you may be reluctant to give up ownership of that company to a private investor. If you do give up ownership, you may be reluctant to give up enough ownership to encourage investor involvement.

Many of these issues are avoided if your business plan includes room for investors to get involved in the formative stages of your company. This does not mean that you seek investors before you have reached significant milestones or achieved some traction in the marketplace, but it does mean that there is a plan in place to have investors involved at critical stages in your companies growth so that you can accelerate or ensure growth.

Instead of a business plan oriented around the idea that I will own and run company x, your business plan might be oriented around the idea that you will eventually have co-investors and co-directors in your company so that you can reach your goals for growth in the best way possible. Growth planning is easier if it includes room for co-investors and you make plans to use the equity you have built up to get funding for your company at a critical stage in your companies' growth.

A plan for investors may be one in which your first set of milestones are specifically designed to get an investor on-board rather than to achieve early profits. It may be designed to get your future customers using your product and helping you to evolve it rather than getting them to pay to use a beta product or service. Your plan may be to get an investor involved when you are ready to exit a beta stage and are ready to scale and/or market your product or service.

So the moral is that giving up a piece of your company is not so painful if you have planned for it. This is very different than running out of money and feeling torn about giving up a piece of your baby to an investor to keep it running.

Permalink 

Are you an entrepreneur or self-employed business owner? [Entrepreneurship
Posted on February 4, 2013 @ 07:08:00 AM by Paul Meagher

According to Statistics Canada, we can distinguish between self-employment and entrepreneurship as follows:

Self-employment is often considered as an indicator of entrepreneurship. However, not all self-employed individuals innovate or intend to innovate, nor do they grow or intend to grow their business (Hurst and Pugsley, 2010). Thus, not all self-employed are "entrepreneurs".

Under this definition, Statistics Canada considers farmers, doctors, lawyers, baby-sitters, paper-carriers, garage owners, contractors, store owners, dentists, and many others to be self-employed business owners rather than entrepreneurs per se.

According to Brandon Kennington, the difference between an entrepreneur and a self-employed business owner comes down to mindset:

Take an example: an Interior Designer, an Architect, Lawyer, or even a Doctor. All could own their own business, large or small, but if the business depends on the talent of the business owner to be there and perform the work, then the person is just self-employed....

Observe a day at your work. Are you building the business or are you running the business? If you find that you are running the business, don’t be surprised if you still are working the same "job" after 20 years and ready to retire with nothing to show for it. If you are simply running the business, your business is your "job", with no fringe benefits paid for by someone else.

Brandon suggests the difference comes down to the entrepreneur coming to work each day trying to figure out how to automate parts of their business so they can grow their business. I'm not convinced that this is the critical mindset difference, but business automation broadly construed to mean "not doing it myself anymore" is an important aspect of growing a business.

So, are you an entrepreneur or a self-employed business owner? Do you view innovation as a critical aspect of your business? Do you want to grow your business through innovation or are you happy running a business and earning a comfortable income from it based largely on your own skills and work-ethic?

Permalink 

Protection of minority shareholders [Investing
Posted on February 1, 2013 @ 07:29:00 AM by Paul Meagher

BusinessDirectory.com defines a minority shareholder as:

Equity holder of a firm who does not have the voting control of the firm, by virtue of his or her below fifty percent ownership of the firm's equity capital.

When we think about minority shareholder rights, we probably associate this with our rights when we buy into a publicly listed company rather than private equity deals between a small business and an angel investor; however, many of the same issues apply irregardless of scale.

When an angel investor purchases shares in a company that are less than 50% of the value of the company, then the issue arises of what rights they have within the company. If you really want to break things down you can generate quite a long list of rights that a minority shareholder might be entitled to. In an article entitled Minority Shareholder Rights in Ontario Private Companies, business lawyer Phil Thompson describes 15 general classes of rights that minority shareholders are entitled to under Ontario's Business Corporations Act:

  1. Shareholder meetings
  2. Directors
  3. Share certificates and transfer rights
  4. Appropriation of corporate financial resources
  5. Corporate records
  6. Financial records, statements and auditors
  7. Voluntary liquidation
  8. Amending articles
  9. Amalgamations
  10. Sale of the corporation
  11. Court ordered investigations
  12. Derivative actions – rights to intervene in corporation litigation in certain circumstances
  13. Court ordered winding up in certain circumstances
  14. Oppression remedy - rights to seek court protection from oppressive actions by board or majority shareholders
  15. Unanimous shareholder agreements

The reason I became interested in the issue of minority shareholder rights was because I saw a surprising claim in a book on Private Equity in Emerging Markets that I am currently reading:

Private equity in emerging markets

In Chapter 13 of this book, entitled Private Equity in Southeast Asian Emerging Economies: An Institutional Perspective, the authors display this table ranking countries on various business-friendliness attributes.

Institutional and venture capital rankings on business friendliness

Notice that the US is ranked the lowest on Protection of minority shareholders of all the countries compared (in case you can't read it, the legend says higher rank in "protection of minority shareholders" indicates minority shareholders are protected by law).

I'm still not sure what to make of this ranking, but it does suggest that minority shareholder rights are more protected in some emerging markets than in so-called developed markets. Whether the US gets a low ranking due to poor laws or the lack of enforcement of laws is a question I can't answer, however, I suspect the latter.

There are many interesting rankings in the table above than just the ranking having to do with minority shareholder rights. It is repays closer study.

Permalink 

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