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4
ACTIVITY-BASED
COSTING
William C. Lawler
Dave Roger, CEO of Electronic Transaction Network (ETN/ W), sat stunned
in his office. He had just come out of a preliminary third-round financing
meeting with potential investors. Six months ago his CFO had assured him that
third-round financing would not be a problem. Much had happened since that
date. The Internet stocks had crashed. Money for the technology sector was
now tight. In the two rounds before the crash, ETN/ W had so many prospec-
tive investors, the company had to turn some away. Since then their business
model had not changed; ETN/ W had a solid revenue stream, and the forecast
was for continued revenue growth—unlike many of the recently failed Inter-
net companies, ETN/ W had real customers who were happy with its services.
Yet the meeting had concluded without closure on the third round for one sim-
ple reason. When Dave started talking about their “proven” business model the
potential investors immediately asked for specific details—“Explain your busi-
ness model in terms of how you will create wealth for us, your investors.”
As he fumbled to explain how ETN/ W would create shareholder wealth,
they stopped him and suggested an approach with which they were all
comfortable.
If you were a manufacturer we would expect you to tell us how you will use our
investment—some goes to infrastructure such as plant and equipment and some
to working capital such as inventory and receivables. You would then tell us how
much it would cost you to build your product, how much to market it, how much
to service it, and what customers would be willing to pay for it. Our first two
rounds of investment would have given you sufficient experience to gather this
type of data. With this information, you could explain your business model—
how you would create enough wealth to pay back our principal plus our required