Wednesday 31 July 2013

Financial Projections that Result in Funding

The Purpose of Financial Projections

When it comes to financial projections, there are two types of entrepreneurs: first, the "visionary entrepreneur" who considers financial projections silly, so she makes up numbers that look good to investors; second, the "intense entrepreneur" who develops an 10,000 cell spreadsheet that includes the number of licenses of Microsoft Office that he needs to buy in year five.

If you are the first type of entrepreneur, you run the risk that the investor won't trust you with his or her money. This type of entrepreneur often alienates investors because of his cavalier attitude. If you are the second type of entrepreneur, you run the risk that the investor will think that you actually believe your projections.

When it comes to financial projections, however, there is only one type of investor: people who don't believe your financial projections, whatever they are.

So what's the right balance of vision versus detail? The point of financial projections is to tell a story with numbers-a story about opportunity, resource requirements, market forces, growth, milestone achievements, and profits. Your job is to create a numerical framework that complements and reinforces the vision you've painted with words.

The investor isn't interested in the precision of the numbers, but he or she is interested in what the numbers say about the economics of your business, and what they say about your understanding of your business. The goal is to tell a credible, as well as exciting, story about what your business could become.

To be credible, your numbers have to make sense on the first review. If you are suggesting that your company will grow faster or be more profitable than any company in history, you will lose credibility. Your numbers must survive simple questioning:
  • Do the capital requirements shown in your projections match the funding you are asking for?
  •  
  • Do you know how many customers you have to land to generate the revenues you are projecting?
  •  
  • Do you know how long it takes and how much it costs to acquire a customer?
  •  
  • Do you know what resources will be required to support customers?
  •  
  • Do you know how much you will have to spend to stay ahead of the competition with your product or service offering?
Why Have a 5-Year Financial Model?

The reason to develop a financial model of your business for five years going forward is to make explicit the driving factors behind your revenues and expenses as you pass through several stages of product development, market penetration, and organization growth. As they say, if you don't know where you're going, any road will get you there.

Most important, you need to show investors how you will grow your company from the bottom up-sale by sale, employee by employee-rather than building a model from the top down. No one believes that a model built on getting "only one percent of the target market" is a credible plan.

You won't be presenting your operating plan to investors in your first few meetings, but you'd better understand how you are going to run the business once you raise capital. A well thought-out operating plan will reflect your ability to allocate resources-people and money-to the highest priority objectives.

Building from the Bottom Up

The problem with financial accounting, however, is that it forces you to present your numbers using big company functional categories, such as sales, marketing, engineering, general, and administrative. But startup companies really operate as projects, with most projects running across functions.

You need to run your company as a startup, but present your financials using the standard framework of accounting. That means that the details of your operating plan will reside in a model built around the activities required to achieve your critical milestones.

That way, when an investor drills into why you are planning to spend money the way you are, you can frame your answer in terms of business priorities and deliverable milestones, rather than saying something like, "Most companies spend 25% on sales."

Still, building your operating plan from the bottom up based on projects you need to execute is challenging. We all over-estimate how much we can accomplish in a month. Make sure your projections are tempered by real world experience. You want to over-deliver during those early years, not under-deliver. You don't want to have to ask for more money before you've proven what you promised to prove.

Two Final Tips

First, don't call your projections "conservative." We refer to this as Entrepreneur Lie #1. Investors want to see a bold plan that is well thought-out and realistic, if everything goes reasonably well. They don't want to see a delusional plan. Your job is to show that you have tapped a team with the experience and insight to justify your bold optimism.

Second, model your company on other real world successes. You don't have to make up your business model. You should be able to model your financial projections on companies that have been successful before. Use the S-1 IPO filings of companies with business models similar to yours to get an idea of what is realistic. If your projections are wildly different than other highly successful companies, then your assumptions are probably off.

Conclusion

Your operating plan and your longer-term projections will evolve. You should be constantly engaged in testing your assumptions and adjusting your actions as you learn. The trick is making sure you are always using your precious resources-people and money-most effectively, for the highest return, rather than letting inertia perpetuate activities and expenditures that are not productive.

It's obvious, but it's true: The number one cause of failure is running out of money. And the number one cause of running out of money is the failure to grow revenues faster than you are growing expenses.

As much as your investors may tell you, "We back teams," they expect you to make money. If you deliver on your numbers, you will become rich and successful. If you fall short, you won't. So as much fun as it is to paint an exciting vision, at the end of each month, you will be measured on your ability to deliver what you promised.

Good luck!

Friday 5 July 2013

IMPORTANCE OF SELF-DISCIPLINE IN BUSINESS

Self discipline in business? That most sound ridiculous, well without self-disciple and self control in business, no success is possible. This is because  the achievement of business success demands high levels of discipline from you in every area of you business  activity. This was why John Viney said, “the quality of self denial in the pursuit of a longer term goal and indeed, the will power to maintain that level of self denial, is an excellent training  for the boardroom".   There is never enough  customers for you to sell everything you want to sell. There are never enough  sales revenues to help you achieve all you financial goals. There are never sufficient profit to enable you to expand as much as you want.
You must discipline yourself to understand that the customer  is always right. No matter how your product or service is, weather it was gotten from future or  Venus. Its nonsense  if customers does not like it. Let you see business people who are unhappy with their level of sales and profitability. To know if your product or service  is truly  attractive or valuable if people buy it willingly-and then buy it again and tell friends to buy as well.
According  to expert, fully 70% of your business decisions will turn out to be wrong in fullness of time. You must face the possibility that you could be wrong in your most cherished assumptions and beliefs.
All business investment, ventures enterprise and start ups require a high level of optimism. You must believe in the future of your business along with you new products and services.
Have so much confidence in their marketability that you are willing to undertake financial risks and in rest many hours weeks and even year to achieve your business goal.
Your need self-discipline to curb your  confidence, to remain objective and realistic. Overconfidence in business leads to business mistakes, financial losses and worst bankruptcy.
To survive in the business world war arena of competition discipline yourself to be equal to or better than your competitors. After all they have sleepless nights think of how to get you out of business. So knock them out before they do. You must out-think them.  The discipline of advance planning can spell the difference between success and failure.
Try not to make errant assumptions. As peter Drucker said, “Errant Assumptions lies at the root of every failure” Business fail because executive rely on assumptions that are not tested. They assume that since their products can create the universe, then it must be bough heavily. They forget that the sole purpose of business is to please its customers and at the end the come ranting that they put in trillions in adverts, best product in Mars  which your can find even on earth. Well understand that the complaining customer is also part of the business, love them because they see the flaws you never saw. They hold the keys to put your competitors out of business. I guess I have to stop here for today.
Thanks for reading and I welcome you again on my next blog. For now I need some hamburger, will you get some for me? Oh, never mind OK!

Friday 21 June 2013

Small Business

According  to  inc. magazine, “small business and medium sized business are growing as never before. They are the sector that is creating the new ideas, the new products the new jobs and the profits that are fueling our economic recovery.”
Before we get  on the word “small business” should be defined, perhaps you have been asking ; what is small business?
A small business in the definition of SBA (Small Business Administration) is any business that:
  • Manufactures with up to 1, 500 employees.
  • Wholesale establishment with up to 500 employees with annual sales of up to $25million.
  • Retail firm with yearly sales of up to $13million.
  • Service companies with annual revenues of not more  than $14.5 million.
Well the above probably scared you, didn't it? Personally I do not like phrase small business, if you read the opening paragraph  you will see that small business is not actually small.How the hell will I employ over 1500 worker as a starter. Does folks who started the above most be dreaming when they said that. A business must never be small in the eyes of who started it, irrespective of what the SBA’s termed small business. Small business are not small since the contribute 40% of gross national product (GNP) and over 60% of the national work  force  is employed by small business.
Also every business was once small. Seeds are small but have the potentials of producing a large harvest.
Today’s home-based business has the potential of becoming tomorrow’s giant corporate conglomerate.
Personally I would rather be define small business small business could be define as:
1.  Any business independently owned and operated business of up to 30 or fewer employees.
2,  It could be a part-time business operated from home.
3.  A company started with comparatively limited capital out lay.
4.  It will be a venture that fall into manufacturing wholesaling, retailing and service.
Does this last paragraph above define your business? If it does hit the like button. Have a nice day ahead.