The Biz Numbers You Need to Know When Looking For Investors

The Biz Numbers You Need to Know When Looking For Investors

For six years, a growing number of Americans have sat down in front of their televisions on Friday evenings to watch hopeful entrepreneurs ask for investment money from wealthy investors to help them continue to grow their businesses on the show Shark Tank. To some viewers, the program gives fascinating insight into how private investing works or inspiration that the “American Dream” is still alive and well. But for us entrepreneurs, it is an opportunity to find out how successful business people think, what questions they want answered, and why the answers to those questions are important.

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oleary-main<strong>Words of Wisdom

"The only reason to do business is to make money; that's the only reason for doing business."

- Kevin O'Leary, Shark Tank Investor

With that in mind, let’s first look at the questions that the panelists (referred to as “Sharks”) ask, then consider what they ultimately need to know.

The Questions

The Sharks typically start off wanting to know about Sales (or sometimes used interchangeably with Revenues or Gross Revenues), which is the top line amount you make from selling your product or service.  Since this number is based on how many items were sold (volume) times the price, the panelists sometimes ask questions to understand how the presenter arrived at that number. “How many customers do you have?” “What is the territory you are selling in?” “How many households fit your target demographic?” are all questions related to the volume component.  “What is the price?” “How much are you selling them for?” “What is your markup?” are tied to the rate.

Then they want to know about Cost of Goods Sold or Cost of Product: how much it costs to produce the product, including raw materials, finished components, labor, and shipping. When the Sharks ask questions about costs, they need to dig deep to make sure that the presenters account for all costs—otherwise, the business could be losing money due to unreported expenses including shipping costs, duties, and other costs that are on top of the per-unit cost.

But what the panelists ultimately are looking for is Gross Profit, which is total sales minus total cost of goods sold.  However, when you watch the show, what they often ask for are the figures for the sale and production of only one item. “How much do you sell it for, and how much does it cost to make?” informs them about the Profit Margin on one item (price minus the cost), and then they can take that number and multiply it times the number of items sold to come up with the gross profit. Furthermore, by thinking about the potential market size (volume) and increases to price, the Sharks are thinking about Estimated Revenues and Estimated Gross Profit.

A great example of these numbers in action comes in Season 5, Episode 7, where orchard irrigation specialist Johnny Georges pitched the Tree T-PEE, a product to water saplings and protect them from harsh weather. In the show, he said that his average price was $4.50, and that it cost him $2.95 per item to make, meaning that his profit margin should be $1.55. However, he went on to say that he made about $1.00 each, which suggests that he had additional costs to factor in to the equation. Elsewhere in the presentation, Johnny said that he manufactured 127,500 units that he sold and was selling in only a five county territory in Florida. So if we assume that he sells all units, his numbers would be:

Sales 127,500 units x $4.50   $573,750
Per unit Cost of Goods Sold 127,500 units x $1.55 - $376,125
Shipping, other Costs of Goods Sold -   $70,125
Gross Profit = $127,500


What the Sharks Want to Know

So why is gross profit so important to the Sharks?  Because they know that is where they can make money on their investment. Well, almost. After gross profit, they expect that a portion of money will be paid out for administrative expenses, marketing and advertising, all of which can be generally described as Overhead.  But those overhead costs are quite manageable and can be minimized.

Also, the Sharks are aware that with good management, the financial impact will result in changed numbers to show an increase in Net Profit, which is the profit remaining after paying out all expenses. For example, if 100,000 units of product were sold at $20 to reach $2,000,000 in revenues, then they might work with the entrepreneur to increase sales to 105,000 units at $21, which would mean sales would be $2,205,000—an increase of $205,000 just by increasing the price by $1 and increasing sales 5%. Likewise, costs could be contained, making it possible for most of that $205,000 to hit the bottom line. And increasing that bottom line is what the Shark wants to ensure that they will be rewarded by receiving their initial money back, plus multiple times more.

Whether you are looking for an investor or not, these questions and numbers are critical to know. Our ultimate goal is to see an increased net profit to put in your bank month after month. Become your own Shark: ask yourself these questions today, and you’ll start to see results that these famed entrepreneurs had in their early days too!