 Hello, hello, hello everybody and welcome to the financial modeling webinar series for Dubranca Consulting's financial modeling webinar series. And today we're going to be talking about key steps to revenue and cost modeling. So introduction, we talk about profit, revenue, cost, break even analysis, simple steps to revenue cost modeling, and then we do a demo and that is it and we talk about the financial modeling institutes and their certificate program. The next exams is in October. We just have a brief talk about that as well. Right. So why do people go into business? I can see some people have already written that to make profits to create value. Which one more? Is it more to make profit or more to create value? Which one comes first? Do you go into business thinking? I want to make money. That's why I'm going into business. What do you think? Most businesses, owners enter into business to make money, to make a profit, really. Now, one thing is this, even if it's not a business, you have to make a profit. So even if you're an NGO, what they call it is excess of revenue over expenditure. You must make that excess or you'll die. You need funding. And if your expenditure is more than your funding, you can't survive. So even NGOs really need to make a profit. They don't call it a profit. Call it excess revenue over expenditure. They need to invest so that the investment income is what sustains them. The Nobel Prize is mainly the investment income from Alfred Nobel's investment or his net worth then. I mean, he invested it. And is that investment income that sustains the Nobel Prize? Not the main principle of the capital. So yes, you need to make a profit. You need to make a profit. Right. So if you want to really make profit and really make money, you must be solving a problem. So yes, you're into it. You need to make a profit to survive, even if it's not to just enjoy yourself, but you need to make profit to survive. And if you're solving a problem, well, that's your business is very sustainable because you're actually solving a problem. Right. So it's not some fad that would just die off. Like most people in entertainment, they need to make money as quickly as possible because after a while, the next new thing or the next big thing will come across and come along and they stop making money. Yeah. Right. So profit is the main reason. Yes, we agree profit, but there are four types of profit. The profit is in the PNL. So it's the PNL that has profit, but the PNL has various levels of profit. I mean, you have gross profit, you have operating profit, you have profit before tax, you have net profit. So gross profit, we call it the line. In our training to say that's the line. So gross profit is the line you now have above the line and below the line. If you fail at gross profit, you are really almost dead. Now, what I always say is in accounting, right, you start with revenue and revenue is like where money comes in. Then below revenue, everything below revenue is different people eating. Yeah. So you've come to eat. So the company is there and people have to eat in different levels. Why am I using eat you see soon? So you eat before gross profit, there's cost of good sold or cost of sales that eats first. Right. So those things directly related to the sales eat first. Then after gross profit, what do you have eating? You have things like selling general and administrative expenses. You have the depreciation, the portion of the asset you use for that particular year is put in as depreciation. All those directly related stuff or supporting stuff. We just call them SG and A. So those then you now have your EBIT after that, which is also called operating profit. Then you now have after that you have interest income and interest interest income. So interesting, interest expense, really not income, mainly interest expense, usually a net expense of interest. That's when you're paying your financiers, whoever is financing the business, you have to pay them. Then you now have earnings before tax after that. So earnings before tax after you put in interest, then you now pay the government. You pay the government. That's tax. And then you have net profit or earnings after tax or profit after tax. That's the only time that the shareholders can eat. That's why I guess it's called eat earnings after tax. So shareholders can now have their own meal and what do they meal do they get from the PNL, they get dividends. So yes, I know accountants don't write it in the PNL, but really you remove dividends from the net profit. And then what you have after that is called retained earnings. And that's what you retain in the business. But the shareholders have the right to take everything. They don't need to retain a dime. But that's not really good, is it? So they take their dividends and that's it. So this is your PNL, this is your typical structure of your PNL. Right. But so your revenue and your costs. Now the issue with revenue is revenue has different names as well. Accountants call it revenue sales turnover. So if I say turnover or sales or revenue, I'm saying the same thing. That's, accountants have friend names for many things, different names. I mean, we used to call stuff fixed assets in the balance sheet. Now they call it what, non-current assets. So different names, profit after tax is the same as net profit is the same as earnings after tax. So when you hear earnings is profit. If you hear earnings, also sometimes people call revenue earnings. In fact, they even call it earnings. So accountants, please choose one and stick to it. Then so what is revenue? Revenue really is price times quantity. That's what revenue is. So when you're building a model, when you're building a model and you want to build a model for revenue, you need to understand what is price and what is quantity. And then also say, okay, for price going forward for the next five years, how will price change for each and every product? So a simple company, let's just say, has one product. So this price, how's it going to change over time? Is it going to grow by inflation? But really, competition will have something to do with it. I mean, if your competitors are charging cheaper than you, you probably need to drop your price. And if you have to drop your price, you probably need to improve your processes so that you can have a better, cheaper price, but you still they making money because you have to make money. Now you hear about price wars. Price wars are maybe a very, very strong competitor who has some cash, maybe some cash reserves. We decided to crash the price so that everybody else in the market will die of complete asphyxiation here. So yeah, if you've crashed the price, let's assume you're selling bread and you are such a powerful supply of bread. And typically the cost of producing bread is five Naira. Let's just say five Naira is the cost. And you have crashed your selling price to four Naira. What that means is you are losing one Naira for every loaf of bread. Now if you have enough cash reserves, you probably can survive that for a couple of months. Maybe other people can survive it. So what you're hoping is I will try and survive it for five months, but everybody else won't survive it and they will all die as a business. And then guess what you do when they all die? You now hike the price up to 10 Naira and make a killing. So those are price wars and it's really unethical, but well, there's business, right? Some people do it. So that's price. So price times quantity. So price modeling price. What are the drivers for price? I've just given you so many drivers. There's inflation, there's competition, there's costs, different drivers. So you decide what the drivers are going to use in your model and then you model what price will be for each of your products going forward. So what is my price per unit? Quantity on the other hand also has to be modeled. How do you model quantity? So someone has a question. How do you model quantity? So how do you model quantity by say, okay, I am producing. Let's assume you're a producer actually manufacturing. How much can my machine produce? So there's a capacity utilization issue there for a manufacturing company. What about if you're not manufacturing and you're trading? So the trading, who is your supplier? Who is supplying you this quantity of stuff you're selling? Can you increase the quantity of that you buy from the supplier so that you can sell or is it scarce? Is it a scarce good that you can't increase? So no matter what you can't grow. So when it comes to growth in a business really, I don't really check revenue to check growth. It's better to check quantity because if you check revenue growth, revenue growth could just be a matter of price. They've just increased price and then you're growing. So you increase price from 10 hours to 20 an hour with the same quantity, you definitely have revenue growth. But your business really hasn't grown. You just increased the price. Yes, revenue has grown. So quantity is a very good determinant of growth. Are you selling more? Then you're growing. But of course, price, a lot of things affect price. Quite a few things also affect quantity. So price and quantity is the mix. Your costs are very, very critical and what determines their cost? Very importantly, your costs are determined. If you want to really model accurately, you don't model for the P&L sake where you have your costs of goods sold and then you're selling on general expenses, you should model based on fixed and variable cost. So yes, it's very important. Fixed and variable cost modeling is very critical. So your fixed costs, these are costs that you incur regardless of whether you produce anything. So if you really, someone says, how do I identify my fixed costs? To me, the simplest thing is this. Have a brainstorming session and ask yourself, if we sell zero, if we make zero revenue next month, we make absolutely no revenue next month, what cost will we still have? So as a business, what cost will you still have if you make zero revenue? So just check. You definitely pay salaries. I mean, you still have to pay salaries. Maybe there's a bonus aspect of salaries related to revenue or related to sales. You would pay that bit, but you pay salaries. Your generator or your light will still be on. For those joining us from abroad who use generators, we don't have power that much. So yes, you either pay the power, whatever source of power you have to pay for that, you need power regardless of whether you sell. So the various costs that you will have, maybe you won't go with your car, you won't do, well, you may do marketing because obviously you still want to make future sales. You probably do marketing, but quite a few costs in your business will still, you still have to pay those things. So obviously production costs, you're not producing anything. So if you're not producing anything, then you're not increasing to your stock, you won't have those costs. So the fixed costs are the ones that will still remain if you make zero revenue. What about your variable cost? So your variable cost, well, those are the ones tied directly to the quantity of stuff you're selling. That's the goods or services. You're selling a service. If you sell a lot of that service, yes, there's costs related to that sale. That cost is variable costs. So if you don't sell, you don't pay anything, that's what we call fixed costs. But if you are selling and there's a cost to that sale, it's a variable cost. So it's tied to the quantity of goods or services you are selling or producing. So that's variable costs. Now, you need to understand the formula. So if your total cost is fixed cost plus variable cost, then that's your total cost. Now let's determine how we can calculate like a break-even point. How do we calculate a break-even point, for example? There is UVC. What's UVC? UVC is unit variable cost, unit variable cost. So your unit variable cost and your quantity, if you multiply your unit variable cost times the quantity that you actually produced, that's what you get as your total variable cost. Right? So that's your total variable cost. So what's break-even? But there's a formula to it. And the nice thing about modeling is you need to kind of break things down into formulas. And once you have the formula, you can now use it in the model, which we're going to demo. So we're going to do this together, guys. And there's break-even price and then there's break-even quantity. So how much do I need to produce so that I make zero? So that I can pay all my expenses. Everything is fine. I make zero. Then I know from then on I'm now making money. Yeah? Right. So let's see. Break-even analysis. Representing the level of sales needed to cover costs or total costs. Fixed and variable. You're covering two types of costs. The fixed and the variable cost. So in a nutshell, break-even is when profit is zero. Exactly. When profit is equal to zero, you have broken even. And depending on how much fixed cost or how much variable cost you have, it depends on how well you're going to make profit after breaking even. So the speed at which you're profitable after breaking even is dependent on how much what is the proportion of fixed variable cost you have. There is something called operating leverage. Operating leverage. You guys should check it out. It's very, very key. Now, everybody knows about leverage when you buy and you only go to the bank and get a loan and so on. But operating leverage is one of the best kept secrets of making a lot of money and also best kept secrets of losing a lot of money. If you have high operating leverage and you're a profitable company, you'll be more profitable than a company with low operating leverage. What am I talking about? High operating leverage means the proportion of cost fixed to variable. Fixed is more than variable. Fixed has a higher proportion of your cost than variable cost. So that means you have high operating leverage. So you make far more money when you're profitable, when you cross break even, you make far more money than someone else who has more variable to fixed cost. Yes, so here is proportional fixed variable cost. Nice. Okay, let's move on. Break even quantity. How do we derive it? So if your profit is zero, then profit equals to revenue minus total cost. Yes, profit is equal to revenue minus total cost. That's the first basis, right? Your profit is zero means that profit is equal to revenue minus total cost. Now, if your profit is zero, that means profit equals to rev minus TC. We just summarized it like that, isn't it? Therefore, rev is equal to total cost. So this just we're deriving break even quantity. So if your rev is equal to total cost, that means your rev is equal to price times quantity. Remember your total cost will be the price of cost price, right? Times your quantity. So your price at break even is your break even price as well. So it's like your break even price times quantity. That's what your revenue is, that price, your break even price. And break even price is the price at which you break even, isn't it? So let's see. So if your revenue is pre times Q and your total cost is your fixed cost plus your variable cost, right? Your total cost is your fixed cost plus your variable cost. Then we're saying that your variable cost has to be your unit variable cost times Q because we've already said your variable cost is UVC, unit variable cost times quantity, isn't it? Because your revenue is price times quantity, right? And you're saying your total cost, if you look at the top here, we see revenue equals to total cost. And if your revenue is price times quantity, and then your total cost is equal to fixed cost variable cost and your variable cost is equal to unit variable cost times quantity, then your price times quantity will be equal to that is your rev, right? Your price times quantity is equal to your fixed cost plus your unit variable cost times quantity. What we've just written up here, down here, is the exact same thing we wrote at the top. If you look at it, revenue equals to total cost. But if you're in the break even, your revenue is equal to total cost, that means you've broken even, but your revenue is price times quantity. And your total cost is fixed cost plus variable cost. But your variable cost is unit variable cost times quantity. So this is the formula, this is the main formula, p times qe cost of fixed cost plus unit variable cost times quantity. Let's keep deriving. So if you put fixed cost to the left, you know all this you did in primary school, subject of the formula kind of stuff, fixed cost to the left, that means what you have to the right would be price times quantity minus unit variable cost times quantity. You can see quantity is there twice, isn't it? So your fixed cost, you can take quantity out and you now put your price minus unit variable cost in bracket because quantity is in both sides, isn't it? So fixed cost equals to quantity open bracket price minus unit variable cost. Continuation, quantity equals to fixed cost divided by price minus unit variable cost. So your break even quantity, that's what it is, isn't it? Break even quantity is fixed cost divided by price minus unit variable cost. Does that make sense? How does that make sense? You could take a picture if you like of it, it makes sense, take picture of your screen and see if you can break this down and understand how you derive your break even quantity. So I'm going back to maths for you guys. Modeling has so many, modeling has maths, different different things that you get to be in a modular. It's not that, in fact, I had a very short video maybe I played for you about who really is a financial modular, right? Let me play that video for you. So who is a modular? I'm a financial modular and I've been building models for deals for quite a long time. Over these years, over these years working as D Brown Consulting, we've basically built up a methodology, detailed methodology on how you build models. How do you consider yourself a modular? For example, I mean, if someone wants to build a model for a telco or you want to build a model for an oil and gas firm, it doesn't matter what organization, what industry it is. As long as you understand the mechanics, as long as you understand how to sit down with the financial controller, for example, and understand the drivers of this deal, you will be able to build any model. So you're going to build models from scratch in our courses. You build model from scratch, from a blank spreadsheet all the way to a detailed model with sensitivity analysis, scenario analysis, all the ratios you can think of, DuPont ratios and the likes, detailed analysis that helps management make decisions on whether or not to go in with this deal or whether or not the firm needs to kind of change their strategy, all sorts of decisions are made with your model. And guess what? There's also a certification, an internationally recognized global certification now. Yes, you can get advanced financial modeling certificate, and you do the course, you do the course, you get ready for the certificate, you do the international certification, and you have your certificate, which is recognized worldwide. So come on over, you could send us an email at training at dbronconsulting.net, we could go to our website dbronconsulting.net or just call us on 0700 training. That's plus 234 700 training or in Nigeria 0700 training. So we're looking forward to seeing you. See you in the next class. So let's move on. Let's derive break even price. Okay, let's derive break even price. So if break even price, so your profit is equal to zero, that's break even profit equals zero. Revenue is equal to total cost, that's when you break even. So what's our break even price? Price times quantity is equal to total cost. If your revenue is price times quantity. So price is quantity equals to total cost. Now your price is equal to total cost divided by quantity. That's it. Simple, right? Price equals to total cost divided by quantity, that's your break even price. Well, so simple steps for revenue cost modeling. Now I think it's time for demo, really. So time for demo. Let's see if we can jump into demo. Okay, so I'm gonna, we need to first thing we need to do is read this thing and extract the main information. So let's go there. Let's go there incorporated is a consumer electronics company. In 2016, it sold 1000 stereo systems for a total cost of sales of 4,500 stereo systems for a total cost of sales of 4.5 million dollars. During that year, 30% of cost of sales were classified as variable cost and the remainder as fixed cost. Right. Assume that over the next five years, cost inflation is going to be 2% per annum and sales volume growth or sales volumes grow at 3% per annum. So cost inflation is 2% and sales volume, that is the quantity we are selling, is going to grow at 3% per annum. Also assume that sales price per unit is $5,000 price inflation that is for the price is going to be flat at 3% per annum and the factory's maximum capacity is 1,150 units per annum. So all this interesting information we're asked to what is the current break even quantity of the company? What is the current break even price? What is the total cost of sales in the fifth year? What is the profit in the fifth year? Are we ready to go through this case study guys? The first thing is let's get our input. So let's let's see what are these inputs? Bayes, salary, let me say, we have your Bayes, or Bayes, what's our Bayes here? I think it's 2016, Bayes units sold, Bayes units sold is, let me just let me type all the key things that I think we need total, cost of sales, we need to know the percentage that's variable cost VC percentage. Then if we know VC percentage, you obviously know fixed cost percentage, but then let's say cost inflation. What else do we have? We have sales volume, sales volume growth, yeah, sales growth. So but that's just the volume growth. Then what else do we have? What else we have? We have sales price. Then we have price inflation. Then what else do we have? What am I missing? Taking everything all done. What else do we have? Let me read it again. Price inflation, I have price inflation, I typed it just now. What is missing? Capacity, yes, exactly capacity. Thank you. Capacity, so let's just say the maximum capacity we have, capacity, excellent. So now let's bring in all this. These are inputs. Okay, these are inputs. I'll make this a general input. Okay, general inputs, shortcut is contrast ship tilde, you know, Bayes units sold, what's Bayes units sold, Bayes units sold, 1000 stereo systems, 1000. Total cost of sales is 4.5 million, 4.5 million. Let me make this currency so I can differentiate what's currency and what's not. Set is dollars, make it dollars. What's this variable cost percentage? 30%. What is the cost inflation? 2%, I think. Take these percentages. I think all of these are percentages. Cost inflation is 2%. Sales volume, what's that? 3%, I think, yep, 3%. Sales price or sales price, 5000. That is not a percent, that is the format is dollars, let's see. So that's 5000. What else? The price inflation is 3%. I'm just going to copy this here, inflation is 3%. Maximum capacity is 1150 units. So this is units. So let me just do a trick for you guys. This is units. So I'm going to do a conditional format so you see what units it is. So in our conditional format, an advanced format. So in conditional, I'm just going to put units at the end of this so people know it's units and make its whole number, double quotes, units, double quotes. So it's a trick, but it's actually still a number in that cell by showing us units. So percent, percent, money. I can brush this here, Bayes units, and this is Bayes here. All right, call this one with the custom for that one and say it's put here, double quotes, yeah, YR, double quotes. So we have everything we need. These are all inputs. Again, I always like to follow best practice. So I'm just going to come here and make this an input style. It's not a flag style. It's an input style. Where are you? Inputs. Okay, I made it a flag style by mistake. Let me undo. Do come back and let's make you input style. So styles are very important when you build a model. Okay, so now that I have that, we're ready to build our model. We'll start with the calculations. There's some small calculations. The set we should do. The set we should do the variable cost calculation, variable cost, variable cost. What else did I say we should do? We need to know the current break even quantity and price. We need to know the variable cost. Obviously, we need to know the unit variable. You remember the formula, unit variable cost, unit variable cost. And we need to know the fixed cost. All right. Fixed cost. Fixed cost. I'll start with the fixed cost. I mean, simple enough. Fixed cost should be equal to, what's our total cost? So total cost minus the variable cost, whatever we get as our variable cost, we have fixed cost, right? So currently, if there's no variable cost, fixed cost is everything. All this cost is fixed cost, but that's not the case. So what is our variable cost? But they said that as this case study, as of now, right now, the variable cost is 30% of the fixed cost. I mean, 30% of the total cost. So this is our variable cost. So if that's our variable cost, that means our fixed cost is 3.1 million. So what is our unit variable? This is a very important calculation you need to do. Unit variable cost. So the unit variable cost is equal to your variable cost divided by, what did we produce? What did we produce? We produced base units sold. It's 1,000 units that made that. So this is your key value here. You're saying it costs you $1,350 to produce one unit. So produce one unit is $1,350. But your fixed cost remains fixed cost for, depending on how long it will remain fixed cost. Your fixed costs only go up based on steps. It goes up in steps. Maybe after six months, maybe some of those costs price go up. Sorry for that. So this is variable cost, unit variable cost. This is all money, right? I think. So let's make it money. Currency dollars. There we go. Great. So now to quickly build our model. Let's just create some structure to this. So structure for our model, we'll make it 2016. Let's say we're starting out at 2016. And then I'll go and say equals to this plus one equals to this cell plus one. I'll make this, let's just stop at 2021. And I'll just highlight this and make it just a normal style. And I need to reduce the size a bit so you can see everything. Great. So what are the fields I need? I need to know what my price inflation is so that I can get my price. That's very first step. I need my price. Can't do anything without price, right? So I need to know my price inflation so I can get my price. And we'll start with our base year. So our base year is, in fact, I think I could just put this to the left. Let's just start off here so that this just becomes our base year, right? So this is our base year. So our base year's price is equal to this cell, right? So this is our base year. So if that's our base year, and then the set price inflation is equal to where are we? Where is price inflation? Price inflation is price 3%, price inflation. So you need to lock this. So we can just do a permanent lock since it's just one single cell. Make this a percentage style, percentage style, and we drag this to the left to just highlight contour R. That will give us our price. So our price will grow by equals to whatever the price is to the left times 1 plus our price inflation, right? So this is our price. We grow that to the right contour R. Yeah. Are we all good so far? So then we need to know volume. So the next calculations are for volume. So let's say volume growth. And if you have volume growth, then we have volume. And there's a very important thing. I'll tell you how we have volume growth to be able to calculate volume. But your volume should kind of be restricted by capacity. So there's a capacity restriction here. So we can have something like capacity volume or capacity restricted volume. I don't know what to call that. Let's just call it capacity for now, capacity, right? It can be maximum capacity. Can be maximum capacity. I'll explain that. The capacity, you have capacity showing that they said in the case study, if you look at the case study, it says that the factory's maximum capacity is 1,150 units per annum. So you can sell more than that. So when we look at the volume, if volume grows more than that, then we have to restrict it. We have to restrict the volume sold to what it's actually possible to produce. If you can't produce more than, you can sell more than you produce. It's a logic we're going to put there later. All right, let's move on, guys. So here we have volume and growth, volume growth. Click, click, come on, click. So what's our volume growth? Volume growth is equal to, where do we have volume growth? Sales volume growth. There we go. I think price inflation. I hope I picked the correct 3% for price, did I? Yes, I did. So we can lock this. I'm going to F2 and F4. And then we take this to the right. And I make it a percentage style. So if that's our volume growth, what was our base volume? So our base volume was, how much did we sell? 1,000, I think, 1,000 units. Yep, there we are. So if that's our base volume, then our volume, based on the growth, should be equal to this, times 1 plus, in brackets, 1 plus this. And it's relative reference, and we drag right control R, right? Now, what is our capacity? Let's check. Can you see that capacity is 1,150. Now, in the exam, quite a few people forget about capacity. And if you're doing the AFM exam, and you forget that, that's most likely you won't pass. So 1,150. So you can see that the 2021 is exceeding capacity. So we need to write a formula here to kind of stop it exceeding capacity. So you write a formula that says you need to give us the minimum, right? Give us the minimum of the actual volume, based on growth, comma, the actual capacity, which is in our inputs. Now, it's a good idea to take this capacity and put it here, right? So the answer put the capacity by the side, then the formula is better. So I think let's bring in the capacity down here. All right, we link it here. And then we write our formula saying it's equal to the minimum of this sales volume and the capacity here. So this is a relative reference and this has to be an absolute reference, or it can be a column constant. Well, absolute is fine. Right. So if you say the minimum, that's what we're getting. Now, another thing you should do probably is because I don't think you can sell fractions of units, like see this 1092.73. So I'll add something else and make it just rounded, right? So we get the minimum and then we're going to round that minimum down. So we just round down. Okay. So we're going to round down. We're rounding down the minimum. And we're going to round it down to zero decimals. So I'm just doing two things there. I'm both giving the minimum and rounding it down because we can't sell a fraction of a product. At least I don't think we can. So here we see we rounded it down. Since we couldn't reach one unit, we rounded it down. 125.5 and rounded it down. And this is maximum 1150. So if I change my units for some reason to maybe reduce my capacity to a thousand units capacity, that means that we can't produce everything is, in fact, everything is just a thousand, which is ridiculous. We're not growing at all. So that's fine. So here we are. Next step for us is the key outputs. Key outputs. I'm going to put the key outputs here. Key outputs. What are our key outputs? And remember, this is the model. So what are our key outputs? Let's start with, if we have your cost, we have our price, then we can calculate, actually, the revenue is what we just have there. So we can't even put key outputs yet. So what am I doing? Key outputs are down there. So after capacity, I think we can call it sales units. Let's just calculate sales units, right? Sales units, even though we have capacity, this is really capacity itself or sales units. This is really sales units, capacity restricted or something. That's what this is. So if we have our sales unit, then we can have our revenue. Yeah, we can have our revenue. But some people want very clean modeling. So if you want really clean modeling, you may decide, you know, let's just have it a row. Some people are very, you know, want to have capacity in one single place because capacity can change every year, which is true. So your capacity could change. So we just want to fix our capacity. Don't give me many things inside one formula. Make your formula simple. So we just link our capacity here. Where is it? That's this guy, right? And I'll just have the same capacity figure all the way. Because another model, your capacity could change. Every year, your capacity could change. So to add that flexibility, let's just paste it all here. I'm going to paste special formulas. So I'm going to modify our formula a bit here. So instead of looking at this capacity figure, I'm going to look at this capacity here. And it's definitely not going to be locked. It's just going to be a simple relative reference, right? That way, we don't need this one. I don't need this. I'm just going to delete this. And then I take this to the right. So this is, this is better. It's cleaner, nicer, better. Right. So next step is the revenue. What is the revenue then? I mean, if you have all these figures, revenue is simply equal to, if you have your, what we call the, the price, where's your price, if you have your price up here, the price, and then you multiply that by your quantity, which the quantities are sales units capacity, your revenue should give you a figure as you need to increase our size, increase the size of our columns. Here we go. Yeah. Uh-oh. Not enough space. Too much money. And more size. You can just double click it, right? That's fine. So revenue is there. Five, three, four, five hundred. Yeah. Like you can even calculate the historical revenue if you like. And you see that that's what gives it, let's make this equal to this. How much did we sell? So one thousand. So now we go to costs. This is our revenue. We go to costs. Cost is where it's really tricky. Cost, you need to have cost inflation. You have cost inflation. What other variable do we need? With cost inflation, we can now calculate like fixed costs. And that cost inflation also affects fixed costs. Costs, fixed costs, we grow only by inflation. It's still fixed, but it's just growing by inflation. Then you have, you need variable costs. And then you have variable costs. Then after variable costs, then we can calculate our total cost, right? So this is where operating leverage comes in. So let's quickly do that. So we have our cost inflation. So I'll just link it. Sorry for my slow system. Cost inflation, go up. Where's cost inflation? Cost inflation. Here we go. So I can lock that. Then again, of course, cost inflation can change every year. So this could be inputs. Well, I call an annual inputs. It's not going to be fixed. It could be an annual input. But right now, let's keep it fixed. Then we have our fixed cost itself. So let's get our historical fixed cost. What was our historical fixed cost? Scroll up. It's historical fixed cost. Yeah, we calculated it. So these are fixed costs that we calculated based on the current model. So if that's our fixed cost, then going forward, our fixed cost is going to grow by inflation. So the growth formula, the standard growth formula, right? And then we grow that going forward over the years, right? To do the mouse thing. All right. Then what about our unit variable costs? So we had a unit variable cost calculation already at the top. So my unit variable cost is this guy. Oops, sorry, this guy. Enter. If that's my unit variable cost, then my unit variable cost, that's my cost for every unit, will also grow by inflation. All right. So that unit variable cost will also get bigger by inflation. So I take that, drag that to the right. Click and drag to the right. Here we go. Then if that's my unit variable cost, then what is my variable cost? If my variable cost be what exactly did I produce, right? So for this base here, if this is my unit variable cost multiplied by what we produce, what did we produce? Sales units. That's what we produced, right? So I can drag this to the right. So then if that's what I produced, no, this is my total variable cost, then what is my total cost? So my total cost is simply equal to your fixed cost plus your variable cost, isn't it? Your fixed cost plus your variable cost. And if you look at the case study, the total cost was 4.5. So let's just check. Let's check up here. What is the case study saying? Total cost, where is total cost? Total cost was 4.5 million, right? 4.5 million. That's total cost. So we're fine so far, right? So far, we're fine. So I can drag this all the way to the right. Now, once you have that, then what exactly is our profit? What profit did we make? All this work, what did we make money? Are we making money or not? So our profit should be equal to our costs. In your modeling, you should use this fixed and variable cost process. So simply revenue minus your cost and enter. And I drag that to the right. And now, if you remember your break even quantity, can you remember the formula for break even quantity? Cost to your total fixed cost, which is, where is our fixed cost? This guy. So fixed cost, 100% right, divided by, when you put a bracket, you take your price and subtract your unit variable cost. That's your UVC minus, where is it? Where is your unit variable cost? Unit variable cost, right? So this is the break even quantity. At this quantity, 633, 863.01, right? But it's just 863 kind of. So we drag, right? So these are not exactly rounded, but that's what it is, 851. So if your break even quantity, just take it that you're going to round this down. You will not, you have a tiny, tiny, tiny loss, maybe 0.00 something, but you round it down. So 851, 840, 829, 818, 817. These are break even quantities that you have, right? What about break even price? Who remembers the last formula and we're done? What is our break even price? It's total cost divided by what? Total cost. So equals to price will be your total cost, where is total cost? Total cost divided by sales units. People have given up on me. How much did you sell? So how much did you sell needs to cover your total cost? If it covers it exactly, that is your break even price. At what price can you cover your cost precisely? So that's your break even price. So your break even price is this. So 4492. So you can imagine a very objective question. What is the break even price for 2020? What is the break even quantity for 2019? You need to build this entire model for you to answer that question, which is this and this, right? So that is how you incorporate revenue and cost modeling. And this is very important when you're building a financial model, because now you can tweak it to do all sorts. You can decide for some reason that I want to make, I don't know, you want to make a profit of 2 million here. So you could do a goal seek. You could do an OTG. This goal seek. I want to make a profit of 2 million. It may not be exact, 2,000. So what can I change? Now that's where sensitivity analysis comes in. If you're interested, go to our YouTube channel and go and check for sensitivity analysis. We did a detailed webinar on sensitivity analysis. So let's see which one can we control here? Total units sold. Not really. Total cost, variable cost, cost inflation we can't control is the country. Sales volume, growth we can't really control that. Sales price, technically we can if our competitors are not too... Well, let's see. So let's say that click okay. And let's see what it gives us so that we can have a profit of 2 million in year. So it's given us a profit of 2 million in the last year. How... What... If you look at it, come down. See, we have a profit of 2 million. It saves for that to happen. Our current price in year one or year zero should be what? What should our current price be? If I come up there, what did it change it to? So price should be 5,394.64. If you start at that price in the obeisier and start growing your price by 3% every single year and you make this your price with this price and all the other variables, you will make a profit of 2 million dollars. And really that's how you build a model and that's how you incorporate revenue and cost modeling. Hope you guys enjoyed this webinar. Any further questions? Well, your capacity. Someone says you could increase your capacity. Yes, exactly. So beautiful because you have so many variables you could tweak. Tweak your capacity and see how profitable you are. All sorts of stuff you could do. But this is the basis. So you have your inputs relations and then based on how... You can even test your operating leverage. How... If your operating leverage is less, if you change the leverage, if your variable cost... As we said, if your variable cost is less, just by a 10% reduction in variable cost. Remember we had 2 million in the end of the year. A 10% reduction in variable cost means this goes down by to 2.27. This is the 10% reduction in variable cost to 2.27. 10% reduction in variable cost, that means your fixed cost went up. Or a fixed cost, let me just say... Let's make it easier. Fixed cost is 70% of the total cost. Fixed cost. If my fixed cost is 70% of my total cost and I do a 10% increase in fixed cost, that means fixed cost goes from 70% to 77%, which means my variable cost will reduce by 7%. So let's say my variable cost reduces to 23%. This is a 10% increase in fixed cost. Now let's see what happens to profitability. So your profitability moves up by 2... Profit goes up to 252.167.82. So you have more fixed cost because... I mean, you're really not making so much money. But if it reduced... This is what leverage... If it reduced, if your fixed cost was 70% and then you could do a sensitivity, but actually it'd be nice to do another webinar with sensitivity analysis and see how the effects are. But you tweak your operating leverage, you tweak your capacity, you tweak everything else, and it's very interesting what your model would tell you about your business. So maybe instead of having lots of fixed costs, maybe instead of having property, you could decide to go and lease and then do that leasing. Leasing would mean maybe your variable cost would go up. So all sorts of structures you could build.