Ways to build a financial model for a Mobile Application
For a mobile application building, a financial model is somewhat a difficult task. Let me explain how user-friendly and straightforward a financial model for a mobile app can be built and how it can be structured. Consider the following aspects when building a financial model.
Mobile app specific revenues and Cost drivers
The very first step in building the financial model for a mobile app is where the revenues from the mobile app originate. App revenues usually originate from the following sources,
- In-App advertising
- Mobile app Downloads of a paid versions
- In-app subscriptions
On the cost drivers side, we have two cost factors that are the commissions of the revenue that are paid to the mobile app stores such as Google Play and iTunes and (CAC) Customer Acquisition cost.
Customer Acquisition Cost (CAC) is the cost made to inspire people to download the mobile app. This will be either the advertisements inside other mobile apps or on the internet, where the app owners have to pay for each and every click made to reach customers on the application download page. CAC is calculated by the CPC) Cost per click ) divided by the conversion rate ( percentage of people those who decide to download). Other forms of marketing like Internet Marketing, App Store Optimization, Search Engine Optimization can also estimate the Cost Per Click. This will be the easiest way to calculate. Around 30% of the commissions are normally paid to the app stores.
Now we can have a detailed look at the financial model for a mobile app
Monthly Estimations of the key mobile app metrics
Mobile app developers in India will need to follow a monthly plan in order to develop their mobile app ( development period may be 1–3 months) and market the mobile app. For this reason, we design a monthly financial model, estimating the income and the expenses on a monthly basis. In order to make the financial mode consistent we built it for the whole development period.
The model logic that we need to focus is,
- The total period for the development of the app
- Total number of downloads OUTPUT — made by the marketing budget INPUT — for customer acquisition through CPC (Cost Per Click)
- Splitting of downloads free and paid
- Mobile app installs calculation, calculating new downloads and uninstalls
- Inactive users estimation
- Projection of advertisement revenues.
Development and Maintenance estimation of the app
- By multiplying the customer acquisition cost we link acquisition cost to no. of downloads.
- The fees paid to the app store will be linked to subscription revenues and paid app downloads
- Other operating costs are broken down into the monthly basis
Estimation of Monthly Income
Monthly income statement can be arranged by adding the 3 different revenue to the total revenue and subtracting all the indirect and direct cost till Earnings Before Interest, Taxes, and Depreciation (EBITDA).
- Subscription revenues are equal to the monthly revenues
Monthly Balance sheet Projection
To make our financial model better we need to have a consistency between the monthly and yearly financial estimations.
- Receivables and payables are calculated based upon the outstanding
- Fixed assets are calculated by adding the monthly expenditures and by deducting the expenses
Monthly Cashflow Projection
- Cash flow operation includes the changes in networking capitals and this is due to changes in payables, receivables
Projection of Payback period and EBITDA
In order to calculate the EBITDA add a function to check when it becomes positive. For payback period, calculate FCFF(Free Cash flows to Firm ) and track monthly by adding a function.
Yearly key metrics and financial statements for the Mobile App
Factors involved in estimating the financial statements are,
- Total Number of downloads, Active users, Installs, MRR and Subscribers
- Balance Sheet, Income Statement and cash flow statement
Discounted Cash Flow Valuation
Depreciation and Amortization schedule
When all the data are available it can be built easily
We hope this provides the detailed financial model for a mobile app in an detailed way