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Accounting Allah shmoop margin operating profits and oh so much

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more All right yet more case examples and we know

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we know But fewer than twenty people died last year

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from reading case examples or watching them So here we

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go Gary and Carrie have started a salad dressing company

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

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dressing ever to make beets tastes edible has helped them

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with the funding they need to get their little business

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off the ground The first year goes gangbusters for not

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dressing around The company was able to Lisa Bottling facility

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which they came to call their own Will The various

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

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

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year end Fifty store chains are now carrying the dressing

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Getting into fifty store chains was no easy feat Gary

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and Carry only got there because Jerry had those relationships

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and was respected enough by the chain owners to take

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a risk on their new product While that risk paid

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

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enough directly financial because of the newness or the unknown

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nous of the dressing Yeah suddenly became cool to have

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his dressing in your store Very different negotiating powers for

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

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or Hidden Valley or other well known legendary brands that

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are quote must haves unquote in every grocery store Because

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the dressing was not well known and already essentially presold

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

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take a relatively very large cut or percentage of the

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sales of each bottle Will a bottle of the dressing

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cells to Joe six pack for eight bucks The store

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keeps four bucks I mean the stuff inside the bottle

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costs not dressing around like two bucks leaving two dollars

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for overhead And everything else that is overhead comprises things

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like the salaries of Gary and carry marketing shipping delivery

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legal costs insurance and so on to not dressing around

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while they only care about four box that they get

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per bottle from the stores that their revenues If the

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store wants to sell the dressing for eight bucks or

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twelve or twenty Gary and carry on Lee keep four

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

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revenues per unit and the fact that each unit cost

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two dollars implies that not dressing around keeps two dollars

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a unit in profit or gross profit or has fifty

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

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

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profits right You also have offer rating profits which our

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profits after all the salaries of the employees are paid

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and lawyer fees and rent and insurance and other infrastructure

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costs Operating profits are basically all the profits except taxes

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

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operate the company And then there are net profits which

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are the famous bottom line Net profits are profits after

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everything else that is after the cost of goods and

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the cost of overhead in the cost of taxes and

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the cost of dividends and so on Check out the

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performance of not dressing around after the first year Here

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

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point two five million dollars in revenues Yeah not bad

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for a first year startup Note that when Jerry funded

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the company with his half million bucks the company had

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almost no revenues Jerry valued the company at one point

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five million dollars which was at the time well almost

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

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one times revenues Yeah maybe not a huge multiple if

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

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mean almost nothing really Low margin companies trade at low

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multiples of revenue However At first blush it looks like

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not dressing around should be a pretty high margin company

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Over time their gross margins should trend above fifty percent

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because they get bigger they get volume deals and you

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know with scale overhead as a percentage of revenues should

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come down a lot anyway At the moment Jerry is

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

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sail like when they have one hundred million dollars in

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sales and a twenty percent net margin Business that is

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on one hundred million dollars of sales Not dressing around

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should have twenty million dollars of after tax profits Right

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So Jerry notes that the average S and P five

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hundred large public company trades it around have fifteen times

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earnings and that not dressing around is growing much faster

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than almost all of those companies So in theory it

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should trade at a higher multiple But even at fifteen

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times there twenty million dollars of profits well he thinks

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the company could be worth well over three hundred million

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bucks And that would be a huge windfall return on

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his original five hundred thousand dollar investment if they execute

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

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

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less than four bucks a unit Some of the larger

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stores were able to negotiate to keep five dollars on

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the eight dollars selling price And this was a reasonable

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deal for not dressing around to Dio being in a

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phew Wal Mart stores helped with awareness and they were

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happy Teo you know just be there Their expenses were

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a bit mohr than they had originally thought A common

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

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percent instead of fifty percent that they had been modelling

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or guessing anyway Overtime with size and scale and more

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negotiating leverage against the you know mustard makers and kosher

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salt people And you know all the distributors And so

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

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

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a little In one year they lost fifty five grand

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or four cents a share assuming that the company gets

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sold for more than one point five million dollars and

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all the shares convert to being one class So yeah

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a very good start for Gary Carrie and Jerry and

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their world beating salad dressing You know they appear to

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

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