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Reverse Financials: Analyzing Revenue Streams and Cost Structure for Business Growth

Learn how to assess the performance of your current business model and identify potential unit of business changes to drive growth. Understand the concept of reverse financials to determine profitability and return on assets for new business ventures.

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Reverse Financials: Analyzing Revenue Streams and Cost Structure for Business Growth

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  1. “Born ASEAN”ProjectModule 31Reverse FinancialsOctober, 2015Advisor, Waseda UniversityDr. Takeru Ohe

  2. Table of Contents • Drill Basic Math • Unit of Business • Reverse Financials (Revenue stream and cost structure) • Performance of the current business • Performance Requirements of new business • Performance Requirements of new business in relationship to the Main business • Profit ModelsRevenue stream and cost structure (C) Dr. Takeru Ohe

  3. 1. DrillBasic Math (C) Dr. Takeru Ohe

  4. ２．UNIT OF BUSINESS (C) Dr. Takeru Ohe

  5. Relationship between Unit of Business and Business Model Unit of Business (C) Dr. Takeru Ohe

  6. Unit of Business • Unit of business is the fundamental thing that you sell. • For manufacturing companies, the traditional unit of business is literally a unit, typically of a Innovation product. • In services, the potential units of business are more varied. Typically, professional services firms (law firms, accountancies, consultants) charge for a unit of time, such as a billing day. Concept of “Unit of Business” is defined in Page 237, Rita Gunther McGrath and Ian MacMillan 2000 The Entrepreneurial Mindset, Harvard Business School Press. (C) Dr. Takeru Ohe

  7. Unit of Business (Example1)Changing the unit of business for growth • One way to growth is to change the rules by changing the unit. • One bicycle seller changes to bicycle-for-rent business and to bicycle-for-share business. (C) Dr. Takeru Ohe

  8. Unit of Business (Example 2) From car selling to car sharing (Forbes Asia Dec. 22,2008) • The planet’s getting crowded and streets more congested. It might be time for carmakers to stop making cars-and sell transportation instead (C) Dr. Takeru Ohe

  9. Zipcar.com • We envision a future where car-sharing members outnumber car owners in major cities around the globe. • Zipcar is the world's largest car sharing and car club service. It is an alternative to traditional car rental and car ownership. Share Zipcars in Atlanta, Boston, Chicago, London, New York, Philadelphia, Pittsburgh, Portland, San Francisco, Seattle, Toronto, Vancouver and Washington DC. Zipcars also live on campus at universities across North America. (C) Dr. Takeru Ohe

  10. Unit of Business (Example 3)from hairdo to just haircut • A barbershop in Tokyo usually charges the 30US$. It takes around 60 minutes for a hairdo including hair cut, shaving, shampoo, massage, and etc. The receipt describes as the charge of a hairdo. • QB Net Co.,Ltd. • Hair cut only: 10 minutes for10US$ • Started in 1996 and now it has 393 stores (C) Dr. Takeru Ohe

  11. QB Net Co.,Ltd. • QB" = "QuickBeauty" • "QB House" was born in Tokyo Japan since year of 1995.has revolutionized the way to cut your hair. Our innovative concept, combined with the latest technology and well trained and polished stylists, enables us to complete a haircut in just 10 minutes for SGD $10 / HKD $50- only! QB offers high quality, seamless services to consumers on the move, who can now experience the innovative concept of SAVE your time & money –for everyday people! (C) Dr. Takeru Ohe

  12. New Business from Old Business • Select one of traditional business, and identify the current unit of business, then try to find a new unit of business (C) Dr. Takeru Ohe

  13. New Unit of Business for the main business • Develop at least two“unit of business” for the main business of the assigned company (C) Dr. Takeru Ohe

  14. 3. Reverse Financials(Revenue stream and cost structure) (C) Dr. Takeru Ohe

  15. Relationship between Reverse Financials and Business Model Reverse Financials (C) Dr. Takeru Ohe

  16. Reverse Financial Statements • Do the financials from the bottom line up rather than from the top line down. • Start at the bottom line with target profits, target return on assets, and subsequent sales required. • Determine the required level of revenues and finally allowable costs and allowable investment. • Required profits= required revenue minus allowable costs • Required rerun on assets=required profits divided by allowable assets • Required unit volume=required revenue divided by allowable price The concept of Reverse Financials is developed by Prof. Ian MacMillan (The Entrepreneurial Mindset, HBR 2000) (C) Dr. Takeru Ohe

  17. Is this return worth for risk and effort? 4. PERFORMANCE OF THE CURRENT BUSINESS (C) Dr. Takeru Ohe

  18. Performance of Current Business Model 2. Calculated Current profit rate 3. Current revenue 1. Current profit 4.Current expense 8.Calculated return of asset 7. Current Asset 5. Estimated current market share 6. Calculated Market Size (C) Dr. Takeru Ohe

  19. Performance of Current Business Model (C) Dr. Takeru Ohe

  20. Is this return worth for risk and effort? 5. PERFORMANCE REQUIREMENTS FOR NEW BUSINESS (C) Dr. Takeru Ohe

  21. “Profits must be appropriate for efforts and risks” • Profit: (how much?) • Profit rate: (higher than industry average?) • Revenue: (calculated) • ROA : (higher than industry average?) • Assets: (calculated) • Market share (higher than 20%?) • Market size (calculated) Is the market large enough to allow the desired market share? Is the industry attractive enough to give the desired profits? (C) Dr. Takeru Ohe

  22. PerformanceRequirement for New Business Model 2.The minimum Profit Rate Target 4. Allowable Expense 3.Calculated Revenue 1.The minimum Profit Target Does the market exist? Is market large enough to guarantee the profit and profit rate? 6.Calculated Market Size 5.The minimum Market Share Target 8．Allowable Asset 7.The minimum Return of Asset Target (C) Dr. Takeru Ohe

  23. Performance of New Business Model (C) Dr. Takeru Ohe

  24. ExerciseReturn from New Business • Estimate how much profit is the assigned firm is going to earn from this new business. • Estimate the profit rate of this new business (at least equal to the industry average) • Calculate the revenue from the profit and the profit rate. • Estimate the market share of this new business (at least 20%) • Calculate the total market size from the market share and the revenue of this business. • Estimate the ROA for this new business (at least equal to the industry average). • Calculate the allowable asset of this new business.. (C) Dr. Takeru Ohe

  25. Is this return worth for risk and effort? 6.PERFORMANCE REQUIREMENTS OF NEW BUSINESS (2) IN RELATIONSHIP TO THE MAIN BUSINESS (C) Dr. Takeru Ohe

  26. Example: Is market large enough to guarantee the profit and profit rate? • Profit to be twice of your current business • Profit Rate to be twice of your current business • Revenueis calculated from profit and profit rate. • Market share to be 20% • Required market sizeis calculated from market share and calculated revenue • Calculated market size to be compatible to actual market size (C) Dr. Takeru Ohe

  27. Example Reverse Income Statement (C) Dr. Takeru Ohe

  28. Performance in relation to Current Business Profit Rate of Current Biz 2.The minimum Profit Rate Target 4.Allowable Expense 3.Calculated Revenue % of Current Biz’s profit rate 1.The minimum Profit Target % of Current Biz’s profit 6.Calculated Market Size 5.The minimum Market Share Target Profit of Current Biz 7.The minimum Return of Asset Target 8.Calculated Allowable Asset (C) Dr. Takeru Ohe

  29. ExerciseIs this new business worth for the assigned company • Estimate how much profit is the firm is going to earn from this business model. • Estimate the profit rate of this business model (at least equal to the industry average) • Calculate the revenue from the profit and the profit rate. • Estimate the market share of this business model (at least 20%) • Calculate the total market size from the market share and the revenue of the company. • Estimate the ROA for this business model (at least equal to the industry average). • Calculate the asset of this business model. (C) Dr. Takeru Ohe

  30. Is this new business worth for the assigned company? (C) Dr. Takeru Ohe

  31. 7. PROFIT MODELSREVENUE STREAM AND COST STRUCTURE (C) Dr. Takeru Ohe

  32. Profit Model　１ Return of Asset (ROA) － Profit Revenue ÷ Profit Asset Cost Return of Sales (ROS) ÷ Profit Revenue (C) Dr. Takeru Ohe

  33. Profit Model　２ － X Profit Revenue Quantity Unit Price Variable Cost Purchase Price ＋ X Cost Fixed Cost Quantity (C) Dr. Takeru Ohe

  34. Profit Model　３ － X Quantity Profit Revenue Av. Sales Quantity per year for one contract Commission Rev/ day X Purchase Price ＋ Commission rate Av. Open days/Year Av. # of Students Cost (C) Dr. Takeru Ohe

  35. Exercise 31-6Profit Model • Draw the profit model of the current business of the assigned firm (C) Dr. Takeru Ohe

  36. Exercise Write down a new business idea for the assigned firm • The idea must be satisfied your risk & return framework! • Who are the customers for your business? • What kind of problems do the customers have right now? • What kind of solutions which you are going to offer to the unsatisfied customers? • What are the difference from your competitors? (C) Dr. Takeru Ohe

  37. ExerciseProfit Model of a new business idea for the assigned firm • Draw the profit model of the new business idea which you mentioned in Exercise 31-7 (C) Dr. Takeru Ohe

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