Accounting: Margin, Operating Profits, and More

a venture capitalist Jerry who claims it's the only salad

dressing ever to make beets tastes edible has helped them

with the funding they need to get their little business

off the ground The first year goes gangbusters for not

dressing around The company was able to Lisa Bottling facility

which they came to call their own Will The various

supplies red wine vinegar Dijon mustard Shall It's kosher salt

Yet they're all kept under tight lock and key at

year end Fifty store chains are now carrying the dressing

Getting into fifty store chains was no easy feat Gary

and Carry only got there because Jerry had those relationships

and was respected enough by the chain owners to take

a risk on their new product While that risk paid

off handsomely the store's benefited in other ways too That's

enough directly financial because of the newness or the unknown

nous of the dressing Yeah suddenly became cool to have

his dressing in your store Very different negotiating powers for

not dressing around versus a one off craft or Newman's

or Hidden Valley or other well known legendary brands that

are quote must haves unquote in every grocery store Because

the dressing was not well known and already essentially presold

while the grocery store stocking the product we're able to

take a relatively very large cut or percentage of the

sales of each bottle Will a bottle of the dressing

cells to Joe six pack for eight bucks The store

keeps four bucks I mean the stuff inside the bottle

costs not dressing around like two bucks leaving two dollars

for overhead And everything else that is overhead comprises things

like the salaries of Gary and carry marketing shipping delivery

legal costs insurance and so on to not dressing around

while they only care about four box that they get

per bottle from the stores that their revenues If the

store wants to sell the dressing for eight bucks or

twelve or twenty Gary and carry on Lee keep four

That's it No matter what those four bucks are their

revenues per unit and the fact that each unit cost

two dollars implies that not dressing around keeps two dollars

a unit in profit or gross profit or has fifty

percent gross margins And Gross isn't a pejorative word here

about spilled bottle Rather it's one of the delineations of

profits right You also have offer rating profits which our

profits after all the salaries of the employees are paid

and lawyer fees and rent and insurance and other infrastructure

costs Operating profits are basically all the profits except taxes

and dividends and they're operating the cost it takes to

operate the company And then there are net profits which

are the famous bottom line Net profits are profits after

everything else that is after the cost of goods and

the cost of overhead in the cost of taxes and

the cost of dividends and so on Check out the

performance of not dressing around after the first year Here

is the income statement for Year one Well that's one

point two five million dollars in revenues Yeah not bad

for a first year startup Note that when Jerry funded

the company with his half million bucks the company had

almost no revenues Jerry valued the company at one point

five million dollars which was at the time well almost

infinite times revenues Now after your one well it's just

one times revenues Yeah maybe not a huge multiple if

it's growing really fast and revenue multiples in a vacuum

mean almost nothing really Low margin companies trade at low

multiples of revenue However At first blush it looks like

not dressing around should be a pretty high margin company

Over time their gross margins should trend above fifty percent

because they get bigger they get volume deals and you

know with scale overhead as a percentage of revenues should

come down a lot anyway At the moment Jerry is

guessing that there are thirty percent operating margin business that's

sail like when they have one hundred million dollars in

sales and a twenty percent net margin Business that is

on one hundred million dollars of sales Not dressing around

should have twenty million dollars of after tax profits Right

So Jerry notes that the average S and P five

hundred large public company trades it around have fifteen times

earnings and that not dressing around is growing much faster

than almost all of those companies So in theory it

should trade at a higher multiple But even at fifteen

times there twenty million dollars of profits well he thinks

the company could be worth well over three hundred million

bucks And that would be a huge windfall return on

his original five hundred thousand dollar investment if they execute

Okay So let's note some other important elements in the

first year's income statement here Well they made a bit

less than four bucks a unit Some of the larger

stores were able to negotiate to keep five dollars on

the eight dollars selling price And this was a reasonable

deal for not dressing around to Dio being in a

phew Wal Mart stores helped with awareness and they were

happy Teo you know just be there Their expenses were

a bit mohr than they had originally thought A common

problem with startups so they're gross Margin was forty two

percent instead of fifty percent that they had been modelling

or guessing anyway Overtime with size and scale and more

negotiating leverage against the you know mustard makers and kosher

salt people And you know all the distributors And so

on Then they presume they'll be able to garner more

favorable pricing So yes they're losing money right there Just

a little In one year they lost fifty five grand

or four cents a share assuming that the company gets

sold for more than one point five million dollars and

all the shares convert to being one class So yeah

a very good start for Gary Carrie and Jerry and

their world beating salad dressing You know they appear to

be headed for fabulous financial success but well we wouldn't 00:05:53.736 --> [endTime] bet the you know ranch on it