Teaching Finance in Entrepreneurship
“When the P&L’s come out, students check out.” – Doan Winkel
We all face this problem when teaching the financial aspect of entrepreneurship. Students aren’t comfortable with the unknown, and often struggle with understanding the application of math or financial topics. This is a huge problem because financial modeling is such a crucial part of identifying and validating the business models students are working on.
So how do we balance creating a robust financial projection for a business model without overwhelming students?
Introducing the first version of ExEC’s Financial Projection Simulator (imagine fireworks going off in the background with AC/DC playing bagpipes and shooting flaming confetti!!!)
Incorporating feedback as we develop engaging lesson plans, we’ve added a fun way for students to experiment with their financial model to our comprehensive curriculum.
The Financial Projection Simulator leads students through an experimentation process so they can find a financially sustainable business model. Along the way, they discover the most important elements of a rigorous financial projection:
- Customer Lifetime Value
- Cost of Customer Acquisition
- Cost of employee salaries (including benefits & taxes)
- Initial capital investments
- Unit costs
- Legal fees
Here is a quick overview of the simulator in action:
With a combination of default values in drop down menus and instructions for researching more detailed estimates, pilot students have reported this is a more approachable way to experiment with assumptions in their financial models. The simulator, “feels more like a game than a spreadsheet”, where they can quickly see the impact of their assumptions on the success of their business.
At each step along the way, we provide short, easy-to-understand tutorial videos so students understand what to input.
The format invites them to more deeply engage in learning about financial models.
No TAM-Based Estimates
ExEC’s financial simulator is also unique because it takes a strictly bottom-up approach to financial projections. Instead of largely inaccurate top-down/TAM estimates (e.g. “This industry is X billions of dollars and if we get Y% of it we’ll be rich”), which don’t take into account real-world difficulties and costs of customer acquisition, ExEC’s financial modeling is purely bottom-up (e.g. “Which channels will you use to acquire customers, what do you hypothesize your conversion rates will be, and how much will that cost?”) to give students a reality check on how viable their business model is.
Here’s more detail on how we approach this, and other areas of financial projections.
As mentioned above, instead of wildly inaccurate revenue numbers based on a TAM / SAM approach, ExEC students estimate revenue based on the product price and how many times per year a customer will purchase that product. This leads to much more accurate evaluation of a business model, and an approachable way for students to get started. As we heard from a pilot student:
“Even though it’s difficult to make our business profitable, this tool gave us ideas of concrete changes we could make in order to make it possible.” – UC Berkeley Student
We offer an extensive set of expenses for students to consider, all of which have suggested default values, as well as instructions on how to calculate more detailed estimates to tailor those values to their business model. We’ve found this combination of default values, with pointers for more information, to make financial modeling much more approachable – allowing students to ease their way in and experiment with different combinations, without overwhelming them.
We’ve tried to make the simulator as comprehensive as possible without becoming anxiety-producing, so your students can feel confident their projections are sound.
Cost of Customer Acquisition
Students are often unsure the best channels to acquire customers, and how costly those channels are. They will want to default to social media channels, but they often do not understand the investment it requires to effectively leverage these platforms. We provide significant guidance so they understand what CAC is and the costs of various channels.
We have done extensive research to offer accurate estimates for CAC from the most likely channels students will choose. These drop-down menus offer students two benefits:
- They don’t get overwhelmed having to calculate complicated customer acquisition costs
- They work with realistic estimates so the conclusions about viability are more realistic
Of course students can also calculate and enter their own Cost of Customer acquisition estimates into the tool to get a more accurate sense of their marketing expenses.
Here we offer an expandable menu that includes accurate salary estimates for a wide variety of the most necessary jobs for a startup.
The tool also automatically calculates benefits and tax information, which are two very important aspects students often forget that have tremendous impact on a financial model.
Real Estate Costs
As with every section, the simulator provides considerable guidance students can use to research particular markets and categories. Our goal is for students to understand the variety of financial inputs but also to understand where those estimates come from.
In every section of the simulator, we provide suggestions for ballpark costs, and also expandable menus with more detailed information and links to resources in case students want to dive deeper into a particular area.
The ExEC financial simulator gives students additional information in a variety of expandable menus, so they learn as they input their assumptions. One student mentioned:
“It makes it extremely easy to calculate various things. Helps you remember things that you may have forgotten.” – Northeastern Student
The power of this simulator is in the simplicity with which students interact with it, and the simplicity of the results. The ExEC Financial Simulator assesses the viability of a student’s business model as either red, yellow, or green. Students can very quickly see where they need to focus! In the example below, the simulator tells us the business model is not viable.
After working hard to provide what they think are accurate assumptions, most students will see red the first time they use this. Literally!
Students will feel disappointed that their business model is not viable.
How to WOW! Your Students
Bring a student up to the front of the class. Pull up his/her simulator on the projected screen. Walk through this example, live, in a couple minutes to turn a non-viable business model into a viable business model. Show your students in real-time how they can turn their business model from from red to green!
Students can quickly experiment by changing inputs to figure out how to achieve a viable business model. This leads to a powerful discussion in class about why they changed certain assumptions, and whether the assumptions are accurate.
Within minutes students understand how a variety of factors impact their financial, and therefore business, model! And it is fun!
This simulation lets students experiment with different revenue models very easily. This is important because it allows them to quickly iterate and identify a potentially viable revenue model in a rigorous way that doesn’t overwhelm them.
If you would like to play with the financial projection simulator, request a preview of our Experiential Entrepreneurship Curriculum (ExEC) today!
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