Hi everyone! I hope you are having a fantastic morning, afternoon, or evening from wherever you are reading this blog! My name is Rizwan Tahmeed, a Grade 12 student at Woburn Collegiate Institute. Today, I had the pleasure to attend Illuminate Leadership Academy Lecturer Raaj Chatterjee’s presentation on money modeling and what makes an effective model for a business.
Before getting into the highlights, it was an honor to attend Raaj’s lecture. The session got me engaged and provoked critical thinking. I love numbers and have a strong interest in finance and math. I like to work on data, numbers, equations, and documents where numbers are the backbone or the foundation of a business. I certainly loved his approach to keeping us engaged and matching our vibe or mood. He gave us a mini case study to work on as he presented his information.
One of the key takeaways was utilizing the eight-step core model used in business to help determine whether the current approach effectively generates money while saving on expenses. This model helps business owners or the finance team of a company start with a rough idea, refine their tactics, tell a story through their numbers, and assist in market validation. For simplicity, we will call the individual conducting the core money model the “opportunity analyzer.” The steps for the core money model is as follows:
Step 1 - Unit Economics: This step is where the opportunity analyzer defines what the outcome should look like for a business venture or idea and the impact of a single transaction. In other words, we are looking at the ability to make a profit in a single transaction. For this step, the opportunity analyzer looks at the revenue, gross margin, and direct and indirect costs.
Step 2 - Repeatable Opportunity: Once the opportunity analyzer has determined what a single transaction can generate, he or she focuses on creating a repeatable transaction so that the business can sustain itself long-term. In other words, he or she is looking for methods that can make the product repeatable, recurring, or replicable.
Step 3 - Positive Earnings: This portion focuses on determining the customers this product can attract in three distinct groups: TAM, SAM, and SOM. Total Available Market (TAM) looks at the revenue opportunity available. Serviceable Available Market (SAM) looks at how many customers are reachable in the market. Serviceable Obtainable Market (SOM) focuses on the percentage of the SAM a business can obtain with a product idea in a given timeframe.
Step 4 - Growth and Scaling Mechanisms: The opportunity analyzer focuses on determining a reasonable growth unit and what techniques can be used to achieve that growth. The units of growth are the extra number of units of a product sold over a given period compared to the previous period. In addition, the individual also determines strategic mechanisms that can grow the product on a rapid scale.
Step 5 - Capacity Considerations: This focuses on the possible capacity constraints the product can face and how we can treat our next five hundred customers better than our first fifty customers. Through this, the individual finds opportunities where the customer will be convinced to buy the product or services again.
Step 6 - Cash-funding Requirements: The opportunity analyzer for this portion looks at how much money needs to be allocated to develop the product, how long, and where the money will be utilized. Also, he or she looks at what the business wishes to achieve at each milestone of the spending process.
Step 7 - Terms, Timeframe, and Return: This step focuses on the return the business is looking to achieve, what timeframe it wants to achieve it by, and the benefits investors receive in exchange for investing.
Step 8 - Impact on Society: This step focuses on the why and the impact the business is looking to create. This is when the opportunity analyzer focuses on why the product is being made and how it contributes to the mission and vision. In addition, he or she looks at how the product can tell a story.
Another one of my key highlights was the Pro-forma aspect of money modeling. This aspect focuses more so on the quantitative areas of money forecasting. Initially, I had no idea about these three documents that investors use to determine the value of a company. At my day school, we only focus on the income sheet. Thus, I did not have any knowledge about the other two documents. However, Raaj’s perspective on them and a brief overview of the balance and cash-flow sheet helped me understand what it is and its usage. The Pro-forma portion focuses on three critical statements to convey the financial state of a business, which is as follows:
1. Income sheets: The income sheet is the first financial document that sheds light on the expenses and revenue of the business. The income is determined by subtracting the revenue from the expenses.