Projecting conservative financials is a skill most often learned the hard way. In my years of consulting for business start-ups, I’ve found that first-time entrepreneurs gearing up for the launch of their company have a tendency to overstate the company’s revenue forecasts and business financials.
Entrepreneurs, by their very definition, believe the sky’s the limit for their new company. That might very well prove to be true, but without cold, hard facts in the form of actual performance, a startup company’s revenue forecasts are nothing more than a work of fiction waiting to be proven true. Their business financials are simply not grounded in reality!
The truth is that loan officers do not lend money to companies without a track record of sales under their belt. Not only do sales provide proof in support of future financial projections but also offers evidence of the company s sustainability and ability to repay the loan.
Investors, unless they’re your brother-in-law with deep pockets, also require proof that investing in your company is actually going to result in a return on their investment. They require evidence in the form of actual sales. Investors aren’t in the business of giving money away.
Seasoned business owners that have been around the block know that evidence matters the most when developing realistic financial scenarios. I m no longer amazed when I talk with clients that want to write a business plan based on thin air. Unfortunately, this happens more often than not when I talk with people who have never run a business.
As a new entrepreneur, you need to be your idea’s biggest critic, which is a tough assignment when you’re emotionally committed to the concept. Try to step back and see your business idea through the eyes of an investor who’s considering entrusting you with their money. Adopt a stepping-stone approach to convincing, first and foremost, yourself that you should go forward. Keep in mind that 90% of all new businesses fail within the first 24-months primarily from inadequate cash flow due to over-projecting (meaning not knowing) revenues and under-projecting (ditto) costs.
Prove to yourself that the company might grow legs and walk by pre-selling a set number of units. Use these results to accurately determine your manufacturing costs; your retail pricing; and your operating expenses. A test run prior to seeking financing provides important evidence that otherwise would only come from guessing. Basing financials projections on guesswork and gut feelings are not acceptable forms of evidence for bankers and investors. And they shouldn’t be acceptable to you, either.
Make informed decisions and choices by taking your idea out for a 6-month test run. What you learn during that six-month trial may very well change the way you think of the business. Convince yourself first that the business is viable. Then if you decide the numbers make sense and you do go forward, convincing a banker or investor will be a whole lot easier because you’ll know truth from fiction.
Recommended Books on Understanding Business Financials:
- Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports
- Finance for Non-Financial Managers (Briefcase Books Series)
- Reading Financial Reports For Dummies
- Small Business Financial Management Kit For Dummies