5 Tips for Jump-Starting Your Start-Up
Many start-up and early stage companies, whether they recognize it or not, need help preparing or sharpening their financial plans. A business’s financial plan will come under heavy scrutiny by potential lenders, investors and potentially even vendors and other business partners. Because the financial plan is a key tool in establishing, monitoring and managing profitability, growth, and ultimately the long-term success of any company, its development should be a priority for business owners.
Below are five tips for putting together a financial plan:
Be a Planner
You do have a business plan, right? Well, at least you have one in your head (every entrepreneur does), and perhaps now is the time to formalize it. Preparation of a financial plan should always be preceded by the business plan, or roadmap of the long-term goals and objectives of the business. The financial plan is a critical element of the business plan; it essentially determines how a business will be able to achieve its strategic goals and objectives, describes each of the activities and resources that are needed to achieve them, along with the timeframes involved, and solidifies the business plan by confirming that the objectives set are financially achievable.
Financial projections are part art, part science; part instinct, part experience; part wishful thinking, but all important. This will involve making many assumptions and it’s best to be coldly realistic in this process. Entrepreneurs are notorious for overestimating revenue and profit growth. Almost every entrepreneur I meet takes the “hockey stick” approach to projecting their top line, such as $100 million in annual revenues by year five. In the vast majority of situations, this is simply not credible. And whatever you do, don't back into numbers just to make your firm more attractive to potential lenders and investors.
Entrepreneurs are just as notorious for underestimating nearly everything else, from every category of selling, general and administrative (SG&A) expense, the time it will take to book your first sales and collect your receivables, the time it will take to reach cash flow breakeven, and more. Is a new supply chain being established? A new e-commerce site? Ramping up a new sales force? Assume that “anything that can go wrong, will go wrong.” Start-ups must allow for the time it takes to deal with setbacks, the inevitable hick-ups and unanticipated challenges. Hope for the best, but prepare for the worst.
If you haven’t already, study your industry and calibrate your financial plan to both industry and general economic trends and conditions. Projections should be supported by data collected from the experience of other similar businesses and/or industry data. Have you developed a “peer group” that you can compare yourself to? If this group is generating 45 percent gross margins on average, do you really think you will generate 60 percent gross margins with a similar business model? If so, you’d better be able to explain why you can produce an exceptional result; expect potential lenders and investors to benchmark your plan against established reality.
Whether you have adhered to or broken the first four tips, it is critical to have clearly stated, understandable and supportable assumptions, especially if your plan is breaking the mold. Substantiate your projections wherever possible by including the source or basis for estimates; the more definitive and supportable the estimate, the more acceptable the projections will appear. You must be able to support the assumptions used; you will most assuredly be called on them!