Understand your price during a startup acquisition
The end result is sometimes confused with another profitability statistic which is the typical thing you would deal with in fundings when investors are discussing an investment with you through safety notes.
On an income statement, EBITDA, or earnings before interest, taxes, depreciation and amortization, may or may be present. Whether or not the startup publishes an EBITDA, according to US GAAP, this is not a requirement.
EBITDA is a measure of profitability separate from net income. All expenses are subtracted from net income to get net income. All expenses are deducted from EBITDA, excluding interest, taxes, depreciation and amortization.
When some organizations report EBITDA, it may be the last item in the income statement.
Net income and EBITDA are not the same. Interest, taxes, equipment depreciation and loan amortization are not included. All of these, however, must be paid for from earnings. It does not help an investor determine the net worth of a stock.
Calculation and formula for the final result
Gross income is used to calculate the bottom line, which is net profit, and all expenses and costs are deducted, including overhead. The final amount received is called net profit.
The measurability of the organization’s basic profit is called net profit.
It is a common misconception that if the target is exceeded, the profit will also increase. The example below can be used to help explain this:
How to increase the bottom line
Because bottom line is used by organizations to represent growth, profitability, sustainability, and value, management can use a variety of tactics to increase bottom line. Increases in income, or bottom line, should, to begin with, trickle down and benefit the bottom line.
This can be accomplished by increasing production, improving product yields, expanding product lines or increasing prices. Other sources of income, such as rental or roommate costs, interest or the sale of goods or equipment can also contribute to the bottom line.
This profit must also be recorded in the books of account for investors and shareholders.
Lower the costs
When the market is well established and there are multiple competitors, or when the economy slows down, the startup will use this method to maintain profits. The startup seeks to reduce costs to preserve or improve profitability, thus positively impacting its results.
To maintain profitability, many companies minimize employee expenses such as annual bonuses or salary increases, which are typically paid at the end of each year.
Another cost-saving technique would be to use cheaper raw materials compared to production, which would naturally reduce costs.
In addition to reducing employee compensation and benefits in exchange for using lower-cost raw materials, some startups may use the strategy of operating in relatively inexpensive premises or moving away to reduce costs of business. ‘investment.
Increase in income
Management can encourage sales staff to achieve better numbers by offering additional incentives and bonuses when they reach the goal.
Another method to increase revenue is to expand the startup into new territory. Many startups are expanding internationally to generate more income in various fields. They can promote their products or services for little money through digital marketing and additional profits.
On the other hand, if startups use traditional marketing methods, they may need to make a significant upfront investment and results are not always predictable.
During the expansion or growth phase of their products, the majority of organizations use a revenue growth strategy when the startup is a relatively new entry to the market and there are no other competitors with which to compete.
It can be difficult to track and implement for a well-established startup in a crowded market.
The price of a product is one of the most important decisions of a startup, and it can make or destroy the product. This has a direct impact on the profitability of the startup. When a startup expects their results to change, one of the first things to change is pricing.
It’s a delicate balance. Lower prices can increase sales volume. Higher prices could burn loyal customers and kill the business quickly.
Effective marketing campaigns
Investing in marketing is one of the best decisions a startup can make. Traditional marketing strategies are expensive for any business. Combining traditional and digital marketing strategies can help you reach and target the right customers.
Due to the laser targeting provided by digital marketing, the cost is significantly lower than traditional marketing and the efficiency rate is much higher.
If the marketing strategy is successful, you will be sure that the business will grow which will result in a higher result.
Focusing on collections can increase results instantly. Many customers pay late due to financial constraints for various reasons. Or because they’ve been given a free pass to do so in the past. The cash flow can be seriously affected by these late payments.
After a transaction, employees can update the payment schedule and successfully track customers to collect payment.
Alternatively, the startup can reward consumers who pay early with special programs, bonuses or reward points, enticing them to pay even earlier.
If connections are made quickly, the bottom line will increase significantly, making the bottom line more profitable.
Triple bottom line concept
There is a tendency to evaluate a startup holistically taking into account its influence on society and the environment, in addition to analyzing its bottom line for profitability. The triple bottom line (TPL) is a concept that focuses on profit, people and the environment.
In 1994, John Elkington proposed the concept of the triple bottom line. Two additional results, social and environmental, are added to the usual profitability result under this paradigm.
There are no mandatory measures, and there is no agreement between startups on measuring performance in these areas. Consequently, it remains above all subjective. Some propose that social capital and environmental safeguards be converted into monetary values, while others suggest that the triple bottom line be quantified via an index.
Regardless of how it is measured, it is essential to pay attention to it, as the focus is more on maintaining and sustaining the environment while contributing to society.
How the end result can be used
On the income statement, a startup’s net income, or net income, does not necessarily carry over from one accounting period to another. At the end of the period, accounting entries are made to close all temporary accounts, including income and expense accounts. The net result is allocated to retained earnings when these accounts are closed, which appears on the balance sheet.
A startup can then choose to use the net income in different ways. It can be used to make payments to shareholders to encourage them to keep their shares; this is called a dividend. Net income can also be used to buy back shares and withdraw equity. A startup can keep all of its profit on the bottom line to invest in product development, geographic expansion, or other ways to improve the business.
The limits of basic numbers as a performance indicator
Profitability numbers are key indicators of a startup’s current success and can be used to compare past periods, but they don’t tell the whole story. They do not reveal what worked and what did not work to management, directors, shareholders or staff. They are not a crystal ball in the future.
Bad profitability figures indicate that something is wrong, ranging from:
- Fierce competition
- Difficult economic conditions
- A failing strategy
- Spiral costs
On the other hand, the positive numbers don’t reveal what aspects of the startup’s larger strategy are working. Great economic conditions or the failure of a competitor can increase revenues and improve profits despite poor cost control or a weak long-term plan.
Financial reporting for publicly traded companies explains assumptions, accounting policies and the ultimate derivation of net income to management and other stakeholders.
There are a few things to keep in mind when looking at the top and bottom earnings data. It is possible that a startup’s turnover, or sales, increases while its turnover, or net profit, decreases. This can happen when expenses exceed income growth.
It is also possible for a startup’s revenue to fall while its revenue increases. Profits can be made by lowering costs, automating processes and changing the structure of a startup.
In many cases, the ideal scenario is that the upper and lower results develop in parallel. This demonstrates that the financial performance and operations of the startup improve over time. If income and profits fluctuate erratically, this could be a red flag.
Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a preface by “Shark Tank” star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide on how entrepreneurs are fundraising today.
Most recently, Alejandro started and left CoFoundersLab, one of the largest online founding communities.
Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the largest investment arbitration cases in history ($ 113 billion at stake).
Alejandro is an active speaker and has lectured at the Wharton School of Business, Columbia Business School, and NYU Stern School of Business.
Alejandro has been involved with the JOBS Act since its inception and has been invited to the White House and the US House of Representatives to comment on new regulatory changes regarding online fundraising.