Accounting: Margin, Operating Profits, and More
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Language | English Language |
Transcript
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