What is a Financial Model?
You have a business idea, and your family and friends think it is awesome! That is good news, but have you done any calculations on the profitability of this potential business?
In this post, I am going to show you how to estimate the revenue, cost, and profit of your eCommerce business idea using an Excel template. You can also download my FREE calculator spreadsheet and customize it for your own business.
Business planning and financial modeling is what can shed light on your business ideas. According to Investopedia, Financial modeling is the process of creating a summary of a company’s expenses and earnings in the form of a spreadsheet that can be used to calculate the impact of a future event or decision.
Here are the steps that we are going to follow:
- Market and revenue assumptions: we will start with high-level market assumptions (traffic, spending habits, etc.) and translate them into potential numbers for revenue.
- Cost assumptions: includes all the operating and capital expenditures that you need to serve the total number of customers you estimated in the previous step.
- Financial statements: I will show you how to create an Income Statement, a Balance Sheet, and a Cash Flow Statement based on your revenue and cost estimates. But do not worry! If you use my Excel template, these financial statements will be populated automatically based on the inputs from previous steps.
- In the last step, we can calculate the financial profitability metrics like IRR and NPV. These metrics can show if your business idea will be profitable or not.
Market and Revenue Assumptions
The first step in developing a business plan is to know the market. In our example case, our fictitious company is going to sell yoga mats online in the US market. To understand how much we can sell, we need to know the online market for yoga mats.
One approach that can give us an understanding of online demand for yoga mats is to see how many times people search for it on Google and Bing.
Google provides a few free tools that we can use to estimate the demand for products. We also know that a substantial portion of the market go straight to Amazon to do product search, but in this case, we are going to consider only selling on our online store.
To see the total number of searches in Google Ads Keyword Planner, you need to have your credit card added and have an active Ad campaign running. Otherwise, you can use some other tools like SEO PowerSuite to pull data from Google Ads. There is a free version of SEO PowerSuite that will be more than enough for this purpose.
If you are using SEO PowerSuite, open Rank Tracker tool and select “Keyword Research” >> “Keyword Planner” from the left panel. Then select “Google Ads Keyword Planner” tool and start searching for the keywords related to your product.