Introduction
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Below is a link to the Knowledge Base from Breaking Into Wall Street. It contains detailed tutorials on most of the things related to finance you'll need to know for investing. They also have Excel worksheets that you can download and work with as you watch the videos.
Revenue
- Breaking down to its simplest parts
- Units x Price
Units
- Is it something that can only be sold once (e.g. physical good) vs. sold over and over again (e.g. piece of software)
- This is recurring revenue when something can be sold over and again
- Looking at the costs associated with each unit is unit economics
- Just think of Shark Tank when they ask "how much does it cost to make one of these?"
- Then you need to consider other costs. How much does it cost to ship? How much does it cost to pay people? Rent buildings? How much of that can be attributed to each product?
- This is an extremely important question because it has the potential to kill a business. Even if something is great, if it costs me 99 cents to make one dollar, then it doesn't matter how cool it is or how good the market is.
Price
Simple explanation of "willingness to pay" and the difference between a premium good vs. a commodity
- Explanation of how price shows how flexibly value can be defined
- Price deals with value, which depends on people's situation, preferences, and even nothing at all. It has little to do with intrinsic worth. Value is something that people simply decide on.
- Situation - how much would you pay for a bottle of water while you sit at home? Probably not much. But how much would you pay for a bottle of water if you were stranded in the desert? Probably a lot. The same good in different situations had different value to you.
- Preference - you probably have a favorite place to eat. Wherever you eat, there is probably another place (Taco Bell or McD's) that sells food for cheaper, and maybe even more of it! Why are you willing to pay more for your favorite food when you could eat cheaper there? Preference. You place higher value on your favorite food just because you like it.
- Nothing At All - this happens at auctions. People bid up higher just to win. If someone is really challenging them on the bid, then they don't even care about the item anymore. They are paying more just to pay more.
Value Creation (aka Pre-Revenue)
- What about if you're evaluating a company before they have lots of customers? How can we measure their performance without historical revenue figures?
- Well how do you evaluate a new medicine before it's distributed to lots of people? You approach it like an experiment.
- What is the problem they're solving? What is the user currently using to solve the pain? How much does that cost?
- What is your new solution? How does it solve the pain better than the next alternative?
- How much does your solution cost? How much is the user saving?
- Does your user accept your solution? Do you have evidence that they'd be willing to actually use this?
Costs
You want to be able to isolate each expense and understand why it happened, what the desired outcome is.
Fixed vs. Variable Expenses
You don't spend $1M on customer service reps and customer service software because it's sexy. You do it because you hope that the investment in that function yields a "return;" a positive outcome in the form of better customer experience
Turning expense line items into revenue generating activities:
Recognizing the value each cost creates
Customer Acquisition Cost (CAC)
Profit
Everything in finance is a measure of efficiency.
If I spent $1 on sales and marketing, do I generate $1+ in new revenue? Then that's efficient. Below that and it's less efficient.
The purpose of every business is to generate a profit, because that means that it creates value for people.
Contribution & Breakeven