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P&L for digital Startups

Arbeitsplatz mit Ideensammlung

The creation of a detailed business plan can be a major hurdle for many startups. Many rack their brains over industry figures, consult their old accounting textbooks, or struggle with web tools. There is a real risk that the resulting spreadsheet will A) not provide the right answers or B) be much too detailed or not nearly detailed enough.

Before embarking on the actual financial plan, your business plan should be ready – if not on paper, then at least in your head. The problem is this: The business metrics and assumptions to be used in a financial plan only evolve while you deal in depth with target segments, purchasing criteria, sales channels, and other planning components.

Once the fundamental business and profit model and the main assumptions have been developed, you are ready to start creating the spreadsheet. All too often, startup founders use the old/traditional planning perspective:

  • Freelancers usually multiply a common industry hourly rate with the desired or planned load factor. Planning security is based on building a virtual monopoly among personally known customers and relying on extensive professional experience.
  • Traders rely on an action radius – which has hopefully been tried and tested – and use the customary margins in creating a competitive advantage. Their experiences in connection with the product market mix and local circumstances will help them to set up a strategic framework.
  • Digital startups, on the other hand, will combat uncertainties using a completely different approach. Competition in the innovation field works differently from ordinary cutthroat competition or virtual monopolies. Digital startups cannot count on decades of experience using a product market mix or stereotypical profit and loss figures.

While, sooner or later, self-employed startup founders need to compete on the basis of customary turnovers per employee, gross margins, personnel and operating expenditures (see, e.g., accounting results of Swiss enterprises, http://www.bfs.admin.ch/bfs/portal/de/index/themen/06/22/publ.html?publicationID=6722 ), digital startups need to focus on the following dimensions:

  • Growth: A clearly analyzed, well-segmented market is a good indicator of the maximum potential available. To estimate growth: Possible indicators can be similar business models (e.g., SAAS), customer types (e.g., telecommunications – rather slow sales processes) or profit models (e.g., Freemium).
  • Customer Acquisition Costs (CAC): These are closely linked to growth. How many and which points of contact are needed in order to gain customers needs to be carefully considered and verified as soon as possible: It is a long road from targeting Internet users (through Adwords) to acquiring them as trial customers to winning them as paying customers, and personal phone calls or even meetings may be required. Acquisition costs per customers are calculated by adding all sales and marketing expenses and dividing them by the customers gained over a time period.
  • Lifetime Value of a Customer (LTV)/ARPU: The lifetime value (LTV) of a customer is defined as the value a customer brings to a startup (based on the gross margin) until that customer is lost. Closely tied to this is the average revenue per user (ARPU). For this final key figure, the revenue is divided by an existing number of users. The ARPU of LinkedIn, for instance, is approx. 6 US dollars per annum.

Naturally, the LTV needs to be higher than the CAC – at least 2-3 or even 5-7 times higher.

In their financial planning, digital startups are therefore faced with the great challenge of eliminating uncertainties with regard to the above-mentioned dimensions. This usually can’t be achieved by means of experience and comparisons alone. Rather, they have to go by trial and error and determine the figures in the market.