While you don't have to be as quantitatively-minded as an accountant, it's essential to have a firm grasp of your business's financials. As we all know, there is a biased perception of women's quantitative capabilities. That's why it's even more vital for us to pre-empt any doubts by being exceptionally literate in the numbers behind our company. In this lesson, we'll break down the inputs that go into making money as a company, specifically focusing on your income statement.
There are several other financial aspects of your business, from bookkeeping to taxes. We will not be covering those in this lesson. However, note that once you start making and spending money as a company, you will need to either use software like Quickbooks or outsource these tasks to professional CPAs.
The money we make is revenue. There are many ways to make money as a business, and we explore those in the business model section. To calculate revenue, you take the price for a specific product/service multiplied by the number of transactions:
Revenue = Price x Quantity
You may have multiple types of products/services at different prices, in which case your revenue will be the sum of the revenues from each of your products or services.
Total Revenue = Revenue Product 1 + Revenue Product 2 + Revenue Product 3
If you have more complex transactions for a product or service, you will calculate your revenues slightly differently.
For example, if you have a subscription business with recurring revenue, your quantity during each period is the number of customers who are subscribers, and your price is the monthly fee.
Monthly Revenue = Monthly Fee x # Customers
Yearly Revenue = 12 (Monthly Fee x # Customers)
If you are a marketplace, you'll likely charge a fee for a portion of the sales that happen on your platform. Or you may charge a flat fee per transaction. Or you may charge a membership.
Revenue = Transactions ($) x % Fee
Revenue = # Transactions x flat fee
Revenue = # members x membership fee
Timeframe
When looking at our financials, we need to be clear about the timeframe. We typically calculate it at the following segments: monthly, quarterly (3-month period), and annually. This context is important, and financial numbers are useless without it. Just imagine if someone said their revenue is $100,000. That sounds impressive, but what do they mean by that? Is that how much they made in a month, a year, or the lifetime of their company?
That's why you might sometimes see terms like MRR and ARR, which are monthly recurring revenue and annual recurring revenue. We calculate recurring revenue from subscription businesses or ones where you expect to have the same customers to be paying the same price from month to month. And the annual recurring revenue can simply be that MRR multiplied by 12 rather than adding together the actual revenues over 12 months.
ARR = MRR x 12
For a startup founder, start by thinking about your finances monthly. You can annualize it (turn it into a year) by multiplying that number by twelve.