Per Unit Analysis

How to Analyze a Pro Forma Per Unit Report:

Rarely does an investor pitch include a detailed analysis of the cost components associated with the sale of a single product. The primary purpose of the per unit analysis report (aka cost component based analysis report) is for you to fully understand the contribution that each product in your portfolio makes to your bottom line and to understand the sales volumes you must obtain for each product in order to break even. Nonetheless, it is possible that a savvy and delving investor could ask a specific question during an investor pitch that could be answered with this report. Offtoa performs an analysis of the report to help you understand what you should be looking for and to correct any underlying problems as early as possible.

Here is a partial list of the kinds of problems that Offtoa looks for

• Gross Profit Per Unit Is Negative After First Year
• Gross Profit Per Unit Is Low in Later Years
• EBITDA Per Unit Is Negative

Whenever Offtoa finds a potential problem, it highlights the symptom for you on the report, and offers a list of suggested solutions, each of which describes exactly which assumptions you need to change to fix the problem. However, don't just “fix” the problem by blindly selecting one of the suggestions. That will result in you having a set of financial statements that look good but have no basis in reality. Instead, make changes to assumptions that you believe are feasible and then change your business strategy to reflect the new plan. If none of the suggestions are feasible in your mind, then perhaps you don't have a viable company :).

Questions:

What's so terrible about having low gross margins?

Many new entrepreneurs think they will succeed against the “big boys” by offering lower prices to customers. The secret to low prices, however, is lowering your costs! It is not generally trying to survive on lower margins. Wal-Mart maintains extremely low gross margins on all its products; it succeeds because it squeezes out all its COGS and passes the savings on to customers. Only naïve entrepreneurs think they can survive on low margins as their primary business strategy. Yes, you can have low overhead when you are working for no salary and in your basement, but that model does not scale!

What if my EBITDA per unit is negative?

The best test is to make a copy of your company and try increasing sales volume for this product. Does EBITDA per unit become positive? If so, that tells you that you have a sales volume problem, i.e., you need to find a way to increase your volume, increase prices, or lower your fixed costs, or you don't have a viable business. If EBITDA per unit never becomes positive no matter how high sales volume becomes, then you need to increase prices, or lower your fixed costs, or you don't have a viable business.