Financial Modeling for a Brewpub

Like all good capitalists, the investors and financial institutions in this case are concerned with the potential of recouping their initial investment in the Roseville Brewing Company and making a healthy profit. Their first question concerned the break-even point. This is the point at which revenue equals expenses and net income is zero. By asking for the break-even point, the potential investors are attempting to determine the strength of RBC’s business model and the point at which they will make a profit.

Making a profit is essential for both RBS to remain in business and for the potential investors to recoup their initial investment and make a profit themselves. Asking the sales dollars required to generate $200,000 and $500,000 centers upon the projected net income of RBC. This question allows the potential investors to gauge the entrepreneur’s understanding of fixed and variable costs and their relation to net income.

Knowing how net income reacts to differing sales levels gives some insight into the fixed and variable cost structures of the financial model. By asking if the product mix is reasonable, the potential investors are focusing on contribution margins. Since beer tends to have a higher contribution margin than food, the financial model must closely predict the product mix in order to accurately project profits. The investors want to make sure that the three entrepreneurs did their homework and studied similar brewing companies before agreeing on a sales mix.

If the product mix shifts, the net income could be greatly affected. Asking these product mix questions insures the entrepreneurs realize the importance of the product mix and have built some leeway into their business model to account for the potential of product mix fluctuation. Answering how changes in price affect operating profit demonstrates the three entrepreneurs’ knowledge of customer demand and price elasticity.

Price elasticity is the effect of price changes on sales volume. If a small price increase caused a large decline in sales, and consequently net profits, demand would be highly elastic. Conversely, if the price increase were met with little or no change in sales, the demand would be highly inelastic. The elasticity of products is essential to making sound managerial decisions and to running a profitable business.

Finally, the question of how much does a pint of beer cost to produce was asked to help the potential investors gauge both the fixed and variable costs of the new endeavor. To answer this complicated question, the three entrepreneurs must be intimately familiar with all costs related to their venture and predict the total number of pints sold. If the three possessed this knowledge, the potential investors would probably regard this familiarity in a positive light and thus be more willing to provide the initial capital.