Accounting: Margin, Operating Profits, and More

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Transcript

00:20

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

00:23

dressing ever to make beets tastes edible has helped them

00:27

with the funding they need to get their little business

00:29

off the ground The first year goes gangbusters for not

00:32

dressing around The company was able to Lisa Bottling facility

00:35

which they came to call their own Will The various

00:38

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

00:41

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

00:44

year end Fifty store chains are now carrying the dressing

00:47

Getting into fifty store chains was no easy feat Gary

00:50

and Carry only got there because Jerry had those relationships

00:54

and was respected enough by the chain owners to take

00:57

a risk on their new product While that risk paid

00:59

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

01:03

enough directly financial because of the newness or the unknown

01:07

nous of the dressing Yeah suddenly became cool to have

01:10

his dressing in your store Very different negotiating powers for

01:14

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

01:18

or Hidden Valley or other well known legendary brands that

01:22

are quote must haves unquote in every grocery store Because

01:25

the dressing was not well known and already essentially presold

01:29

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

01:32

take a relatively very large cut or percentage of the

01:36

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

01:44

costs not dressing around like two bucks leaving two dollars

01:48

for overhead And everything else that is overhead comprises things

01:52

like the salaries of Gary and carry marketing shipping delivery

01:56

legal costs insurance and so on to not dressing around

02:00

while they only care about four box that they get

02:02

per bottle from the stores that their revenues If the

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store wants to sell the dressing for eight bucks or

02:07

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

02:14

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

02:25

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

02:43

costs Operating profits are basically all the profits except taxes

02:48

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

02:55

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

03:07

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

03:16

for a first year startup Note that when Jerry funded

03:19

the company with his half million bucks the company had

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almost no revenues Jerry valued the company at one point

03:26

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

03:45

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

03:54

know with scale overhead as a percentage of revenues should

03:58

come down a lot anyway At the moment Jerry is

04:00

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

04:04

sail like when they have one hundred million dollars in

04:08

sales and a twenty percent net margin Business that is

04:11

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

04:20

hundred large public company trades it around have fifteen times

04:23

earnings and that not dressing around is growing much faster

04:26

than almost all of those companies So in theory it

04:29

should trade at a higher multiple But even at fifteen

04:32

times there twenty million dollars of profits well he thinks

04:35

the company could be worth well over three hundred million

04:38

bucks And that would be a huge windfall return on

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his original five hundred thousand dollar investment if they execute

04:45

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

04:56

the eight dollars selling price And this was a reasonable

04:58

deal for not dressing around to Dio being in a

05:01

phew Wal Mart stores helped with awareness and they were

05:04

happy Teo you know just be there Their expenses were

05:07

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

05:13

percent instead of fifty percent that they had been modelling

05:16

or guessing anyway Overtime with size and scale and more

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negotiating leverage against the you know mustard makers and kosher

05:23

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

05:29

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

05:33

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

05:40

all the shares convert to being one class So yeah

05:44

a very good start for Gary Carrie and Jerry and

05:47

their world beating salad dressing You know they appear to

05:49

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