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Including investors in your business model [Business Models
Posted on February 12, 2013 @ 09:05:00 AM by Paul Meagher

I added some new features to the monthly linear growth business model I discussed in my last blog posting. In the newest version of that business model, I have added the idea of investor involvement. Including an investor in the business model has the benefit of clarifying the timeframe in which an investment might be paid back. The investor is assumed to receive, on a monthly basis, some percentage of the overall profit the company makes in that month. These profits will be paid out, or at least calculated, on a monthly basis and at the end of the projected time period, we can determine if the investor has recouped their original investment yet. If they have, we can calculate how much profit they have earned so far.

I developed a script called monthly_growth_with_investor.php to model investor involvement.

I configured this model with the same settings I used in the monthly_growth.php business model discussed in my last blog posting (Implementing a business model in PHP). I added two new settings, one for the size of the investment made in the company ($investment_size) and a second for the percentage of profits the investor will earn in return for their investment ($investor_profit_percentage). Given these additional settings, this is the report that the monthly_growth_with_investor.php script generates.

YearMonth# Customers RevenuesCostsProfits Company ProfitsInvestor Profits
2013 2 10 $300.00 $1,100.00 -$800.00 -$800.00 $0.00
2013 3 20 $600.00 $1,200.00 -$600.00 -$600.00 $0.00
2013 4 30 $900.00 $1,300.00 -$400.00 -$400.00 $0.00
2013 5 40 $1,200.00 $1,400.00 -$200.00 -$200.00 $0.00
2013 6 50 $1,500.00 $1,500.00 $0.00 $0.00 $0.00
2013 7 60 $1,800.00 $1,600.00 $200.00 $160.00 $40.00
2013 8 70 $2,100.00 $1,700.00 $400.00 $320.00 $80.00
2013 9 80 $2,400.00 $1,800.00 $600.00 $480.00 $120.00
2013 10 90 $2,700.00 $1,900.00 $800.00 $640.00 $160.00
2013 11 100 $3,000.00 $2,000.00 $1,000.00 $800.00 $200.00
2013 12 110 $3,300.00 $2,100.00 $1,200.00 $960.00 $240.00
2013 Totals $19,800.00 $17,600.00 $2,200.00 $1,360.00 $840.00
2014 1 120 $3,600.00 $2,200.00 $1,400.00 $1,120.00 $280.00
2014 2 130 $3,900.00 $2,300.00 $1,600.00 $1,280.00 $320.00
2014 3 140 $4,200.00 $2,400.00 $1,800.00 $1,440.00 $360.00
2014 4 150 $4,500.00 $2,500.00 $2,000.00 $1,600.00 $400.00
2014 5 160 $4,800.00 $2,600.00 $2,200.00 $1,760.00 $440.00
2014 6 170 $5,100.00 $2,700.00 $2,400.00 $1,920.00 $480.00
2014 7 180 $5,400.00 $2,800.00 $2,600.00 $2,080.00 $520.00
2014 8 190 $5,700.00 $2,900.00 $2,800.00 $2,240.00 $560.00
2014 9 200 $6,000.00 $3,000.00 $3,000.00 $2,400.00 $600.00
2014 10 210 $6,300.00 $3,100.00 $3,200.00 $2,560.00 $640.00
2014 11 220 $6,600.00 $3,200.00 $3,400.00 $2,720.00 $680.00
2014 12 230 $6,900.00 $3,300.00 $3,600.00 $2,880.00 $720.00
2014 Totals $63,000.00 $33,000.00 $30,000.00 $24,000.00 $6,000.00
2015 1 240 $7,200.00 $3,400.00 $3,800.00 $3,040.00 $760.00
2015 2 250 $7,500.00 $3,500.00 $4,000.00 $3,200.00 $800.00
2015 3 260 $7,800.00 $3,600.00 $4,200.00 $3,360.00 $840.00
2015 4 270 $8,100.00 $3,700.00 $4,400.00 $3,520.00 $880.00
2015 5 280 $8,400.00 $3,800.00 $4,600.00 $3,680.00 $920.00
2015 6 290 $8,700.00 $3,900.00 $4,800.00 $3,840.00 $960.00
2015 7 300 $9,000.00 $4,000.00 $5,000.00 $4,000.00 $1,000.00
2015 8 310 $9,300.00 $4,100.00 $5,200.00 $4,160.00 $1,040.00
2015 9 320 $9,600.00 $4,200.00 $5,400.00 $4,320.00 $1,080.00
2015 10 330 $9,900.00 $4,300.00 $5,600.00 $4,480.00 $1,120.00
2015 11 340 $10,200.00 $4,400.00 $5,800.00 $4,640.00 $1,160.00
2015 12 350 $10,500.00 $4,500.00 $6,000.00 $4,800.00 $1,200.00
2015 Totals $106,200.00 $47,400.00 $58,800.00 $47,040.00 $11,760.00
2016 1 360 $10,800.00 $4,600.00 $6,200.00 $4,960.00 $1,240.00
2016 2 370 $11,100.00 $4,700.00 $6,400.00 $5,120.00 $1,280.00
2016 Totals $21,900.00 $9,300.00 $12,600.00 $10,080.00 $2,520.00
Overall Totals $210,900.00 $107,300.00 $103,600.00 $82,480.00 $21,120.00

The investor has not recouped their $50,000.00 investment yet. You still owe the investor $28,880.00.

So, after three years the investor has not earned back her initial investment of $50,000. If we ran the model out to 5 years with all the other configurations staying the same, you might have a situation where the investor has recouped their investment and made some profit. Alternatively, if we offer the investor a greater percentage of the profits, we can pay back the investor (with a profit) in a period of 3 years or less. The benefit of a formalized business model is that it puts relevant decision making information on the table for an entrepreneur and an investor to inspect, jointly understand, and hopefully agree upon as to the exact arrangement that might work.

For those more technically inclined, below is the PHP script implementing a simple linear business model with an investor.

<?php 
/**
* Prototypical business model involving the generation of monthly 
* revenue based upon the number of existing customers plus new 
* customers per month with each customer paying a monthly fixed fee.  
* Costs based upon monthly fee for servicing "rents" and a cost per 
* customer (variable cost) for providing the service to the customer.
*
* The involvement of an investor is assumed in this model.  The 
* investor is represented with two variables.  An "investment size"
* variable and an "investor profit percentage" variable.
*
* Assumes simple linear growth with an investor. 
*
* @script: monthly_growth_with_investor.php
* @author: Paul Meagher
* @sponsor: Dealflow Solutions Ltd. & PlanetDealflow.ca
* @url: http://www.planetdealflow.ca
* @version: 0.2
* @modified: Feb 11, 2012
*/

// PART 1: CHANGE THESE SETTINGS

// Set number of years for your projections.
$num_years 3;

$num_new_customers_per_month 10;
$monthly_fee_per_customer 30;
$monthly_cost_per_customer  10;

// Cost of "rents" per month.
$fixed_cost_per_month 1000;

// Starting number of customers customers - default 0.  
$num_customers 0;  

// New variables added to model investor involvement
$investment_size 50000;
$investor_profit_percentage .20;

// Set money formatting according to a locale setting.
setlocale(LC_MONETARY'en_CA');

// Starting month - defaults to current month.
$start_month date("n");

// PART 2: DO NOT CHANGE THESE INITIALIZATION SETTINGS

// setup year number to year date mapping for reporting purposes
$year_num_to_year_date[1] = $next_year date("Y");
for(
$n 2$n <= $num_years+1$n++) {
    
$next_year $next_year 1
    
$year_num_to_year_date[$n] = $next_year;
}

// Zero the parameters we will be estimating
$costs    = array();
$revenues = array();
$profits  = array();
$company_profits  = array();
$investor_profits = array();

// Zero the accumulator variables
$total_profits 0;
$total_costs 0;
$total_revenues 0;
$total_company_profits 0;
$total_investor_profits 0;

// PART C: GENERATE REPORT PROVIDING ESTIMATES OF COST, 
// REVENUES, & PROFITS
?>

<table border='1' cellpadding='5' cellspacing='0'>
  <thead>
    <tr>
      <th>Year</th><th>Month</th><th># Customers</th>
      <th>Revenues</th><th>Costs</th><th>Profits</th>
      <th>Company Profits</th><th>Investor Profits</th>
    </tr>
  </thead>
  <tbody>
  <?php
  
if ($start_month == 1
    
$y_end $num_years;
  else
    
$y_end $num_years 1
  
  for(
$y=1$y<=$y_end$y++) {
      
      if (
$y == 1
        
$m $start_month;
      else
        
$m 1;
    
    for (
$m$m<=12$m++) {
      
      
$num_customers $num_customers $num_new_customers_per_month;
      
      
$year_date     $year_num_to_year_date[$y];
      

      if ((
$y == $y_end) AND ($m == ($start_month+1)))
        break; 
      else {
          
          
// The data structures don't have to be this complicated
        // but they can be used in downstream calculatios more  
        // easily in this format.
        
$costs[$year_date][$m]    = ($num_customers $monthly_cost_per_customer
                                    + 
$fixed_cost_per_month;
        
$revenues[$year_date][$m] = $num_customers $monthly_fee_per_customer;
        
$profits[$year_date][$m]  = $revenues[$year_date][$m] - $costs[$year_date][$m];
        
        
// Allocate perentages of the profit to the investor or the company
        // when profits are negative investor makes 0 and company takes 
        // the loss
        
if ($profits[$year_date][$m] < 0) {      
          
$investor_profits[$year_date][$m] = 0;
          
$company_profits[$year_date][$m] = $profits[$year_date][$m]; 
        } else {
          
$investor_profits[$year_date][$m] = $profits[$year_date][$m] * 
                                              
$investor_profit_percentage;
          
$company_profits[$year_date][$m] = $profits[$year_date][$m] * 
                                              (
1-$investor_profit_percentage);          
        }
      
      }      
      
?>
      <tr>
       <td><?php echo $year_date ?></td>    
       <td align='center'><?php echo $m ?></td>    
       <td align='center'><?php echo $num_customers ?></td>           
       <td align='right'><?php echo money_format('%n'$revenues[$year_date][$m]) ?></td>    
       <td align='right'><?php echo money_format('%n'$costs[$year_date][$m]) ?></td>    
       <td align='right'><?php echo money_format('%n'$profits[$year_date][$m]) ?></td>    
       <td align='right'><?php echo money_format('%n'$company_profits[$year_date][$m]) ?></td>    
       <td align='right'><?php echo money_format('%n'$investor_profits[$year_date][$m]) ?></td>    
      </tr>
      <?php
    
}
    
$profits[$year_date]['total']          = array_sum($profits[$year_date]);
    
$costs[$year_date]['total']            = array_sum($costs[$year_date]);
    
$revenues[$year_date]['total']         = array_sum($revenues[$year_date]);
    
$company_profits[$year_date]['total']  = array_sum($company_profits[$year_date]);
    
$investor_profits[$year_date]['total'] = array_sum($investor_profits[$year_date]);    
    
    
$total_profits +=  $profits[$year_date]['total'];
    
$total_costs += $costs[$year_date]['total'];
    
$total_revenues +=  $revenues[$year_date]['total'];
    
$total_company_profits += $company_profits[$year_date]['total'];
    
$total_investor_profits += $investor_profits[$year_date]['total'];
    
?>
    <tr>
        <th colspan='3' align='right'><?php echo $year_date." Totals"?></th>
        <td align='right'><?php echo money_format('%n'$revenues[$year_date]['total']); ?></td>
        <td align='right'><?php echo money_format('%n'$costs[$year_date]['total']); ?></td>
        <td align='right'><?php echo money_format('%n'$profits[$year_date]['total']); ?></td>
        <td align='right'><?php echo money_format('%n'$company_profits[$year_date]['total']); ?></td>
        <td align='right'><?php echo money_format('%n'$investor_profits[$year_date]['total']); ?></td>
    </tr>
    <?php
  
}      
  
?> 
  <tr>
    <th colspan='3' align='right'><?php echo "Overall Totals"?></th>
    <td align='right'><?php echo money_format('%n'$total_revenues); ?></td>    
    <td align='right'><?php echo money_format('%n'$total_costs); ?></td>
    <td align='right'><?php echo money_format('%n'$total_profits); ?></td>    
    <td align='right'><?php echo money_format('%n'$total_company_profits); ?></td>
    <td align='right'><?php echo money_format('%n'$total_investor_profits); ?></td>
  </tr>
  </tbody>   
</table>

<?php
$amount_owing 
$investment_size $total_investor_profits;
if (
$amount_owing 0) {
  
?>
  <p>
  <b>The investor has not recouped their <?php echo money_format('%n'$investment_size?> 
  investment yet.  You still owe the investor <?php echo money_format('%n'$amount_owing?>.</b>
  </p>
  <?php
} else {
    
$profit_earned $amount_owing * -1;
    
?>
    <p>
  <b>The investor has recouped their <?php echo money_format('%n'$investment_size?> investment.
  The investor has earned <?php echo money_format('%n'$profit_earned?> in profits so far.</b>
  </p> 
  <?php
}
?>

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