Startup Financial Planning: How to Get a Pragmatic Forecast
The importance of financial-planning assumptions
Unless you have a lot of startup experience, it can be a little tricky to make down-to-earth financial projections for your new company.
Pragmatic assumptions are important in such a forecast.
Internet startups
When in doubt, start by decreasing your assumptions.
What else can you do as an Internet startup?
Excelling in thought leadership, Ms. Joey Tamer is a Los Angeles-based a strategic consultant to entrepreneurs in technology and digital media, and to experienced consultants in all fields to maximize their practices.
Joey Tamer, www.joeytamer.com
Here are her seven financial-planning suggestions:
- Reduce the rate of adoption of your product/service.
- Increase the rate of attrition of your customers.
- Decrease the rate of conversion of “free” to “premium” customers (if you have that model).
- Decrease the time of the conversion of “free” to “premium” customers (if you have that model).
- Add significant time (double?) to your ideas about the “time to market” of new features and benefits.
- Add significant time to the receipt of subsequent revenue from adoption, conversion and retention of customers, and from their “upsell” to new features, benefits and versions.
- Add 10 to 15 percent (or more) to all costs.
In addition, I’d point out that there are good reasons for you to consider why and how to determine your break-even point and to use a business success checklist to work smarter, not harder.
More startup questions to ponder
An esteemed business professor, Neil Delisanti, recommends that startups use the forecast for follow up and to see how they are doing against it. Don’t wait until end of year, he warns, because that’s too late to make changes.
Now retired, Mr. Delisanti has taught at the University of Puget Sound and The Evergreen State College in Washington state, and successfully counseled 2,000 new or young businesses via the Small Business Development Center in Tacoma.
He agrees that it’s best to subtract or add 10 to 15 percent to or from the expected, which can be easily done in an Excel model.
“It is recommended they build a model forecast utilizing cells with variables that will change the results of the entire sheet with just one cell entry,” he adds. “That way by changing just the price, the net profit changes, or change the price and sales volume and the whole thing changes.”
Contingency scenarios
He’s also an advocate of creating contingency scenarios. He’s the consummate devil’s advocate for anticipating unplanned events such as riots, natural disaster, product pulled from shelves or hardship from construction on your street.
More scenarios for which to plan:
- If you have to stop selling an obsolete product or service
- If you have to increase taxes/license fees/compliance expenses
- If you need to increase labor costs and also reduce expected productivity of labor
- If you face rising costs of resources; petrol/electricity/water/trash collection/etc.
(Note: Both experts are trusted and valued colleagues. Mr. Delisanti and I have worked together for more than 20 years. I know Ms. Tamer well since 2004 via our membership in a professional organization for consultants. )
From the Coach’s Corner, here are more of Ms. Tamer’s related insights:
6 Values for Financial Protection — Debt is the catalyst for all financial woes – for individuals and the aggregate economy in the United States and globally, esteemed associate Joey Tamer astutely reminds us. To illustrate, she asserts the first credit card issued by Bank of America enticed baby boomers into using credit for immoderate purchases. We now know the card as Visa.
Options to Navigate This Marketplace Bedlam — Uncertainties regarding Wall Street, actions by the Federal Reserve, and funding often set off alarm bells. But if you’re looking for capital, there are reasons to hope, according to leading consultant Joey Tamer.
What Should You Divulge When Asking for Investment Capital? — If your startup is the next big thing, but you want venture capital, you can start smiling. Yes, financing has been difficult to obtain in recent years. But entrepreneurs wanting venture capital have reasons for at least a small celebration – the money is starting to flow again after the Great Recession took its toll.
Eight Strategies to Consider Before Starting A Tech Business — So, you’ve got an idea for a tech business, but you’re unsure about your prospects. Do you know what are important strategies to consider before starting a tech business?
What No One Tells You about Raising Investment Capital — Investment capital is available during all economic cycles, according to leading consultant Joey Tamer. Ms. Tamer has proven approaches for raising money. “In good times, risk capital is available from all sources, and they compete and sometimes share hot deals with each other; the practice is termed syndication,” said Ms. Tamer.
“Think small and act small, and we’ll get bigger. Think big and act big, and we’ll get smaller.”
-Herb Kelleher
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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.
Marketing Financial Information? Be Careful Choosing a Medium
If you’re in the business of communicating financial data, don’t succumb to the charm of state-of-the-art technology, especially online video. In choosing a messenger medium, a conservative approach is best. Trust is paramount.
That concept was underscored by a 2012 academic study that concluded the use of online video by CEOs to release a financial restatement will not be fully trusted by investors, especially when blaming others for accounting errors.
The study’s researchers: Frank D. Hodge of the University of Washington’s Foster School of Business, W. Brooke Elliott of the University of Illinois at Urbana-Champaign, and Lisa M. Sedor of DePaul University.
A headline for the article regarding the study at accountingtoday.com read: “Study Examines Use of Video for Financial Restatements.”
The site explained the study was published by the American Accounting Association in The Accounting Review.
Apparently, it’s OK to use a YouTube video when management is contrite for reporting errors.
But such contrition for errors and a restatement raises suspicious eyebrows when management points the finger at outside accountants.
“Video announcements of this kind require very special care,” said Dr. Hodge, according to accountingtoday.com.
“Managing the response of investors to events as negative as restatements (which, according to the GAO, reduced market capitalization of companies by $36 billion over a three-year period) is a formidable undertaking,” he explained. “Doing so via video over the Internet makes it all the more formidable.”
The study reveals a CEO who apologizes in online video for the need of a restatement – on a rating scale of 1 to 7 – receives a 6.15 rating. But a CEO who attributes the errors to outside accountants only gets a 4 rating.
On the other hand, such CEO statements in print were accorded ratings of 4.75 and 4.55, respectively.
“In a networked world, trust is the most important currency.”
-Eric Schmidt
The use of such online video also affected the amounts invested by fund managers. The amounts only decreased 3 percent if the CEO accepted fault.
But if the CEO pointed fingers, the investments dropped by nearly 26 percent. If the same information was presented in print, the decreases were 16 percent and 13 percent, respectively.
Methodology for the fictional scenarios: The researchers compared the opinions of 80 managers who had an average nine years experience. They were divided into four groups.
“Restating financial statements is inconsistent with investors’ positive expectations regarding an investee firm and its management, thus damaging investor trust,” the researchers wrote.
“Although excuses can be effective, individuals who deny responsibility for a failure (i.e., excuse their behavior by blaming others) risk being viewed as more deceitful and as possessing lower character than are individuals who accept responsibility for the failure,” they explained. “Beliefs about another’s character are key components of trust, and once violated trust is difficult to repair. Even when the violator issues an apology, accepting responsibility by making an internal attribution repairs trust to a greater extent than does denying responsibility by making an external attribution.”
The study makes sense. However, my view as a business-performance consultant is that a video should only be used to direct viewers to the source of information – not conveying the full information.
From the Coach’s Corner, suggested reading for consultants:
How Twitter Levels the Playing Field for Small Cap Companies — Good news for venture capitalists and entrepreneurs who are known to kvetch that that their companies fall below the radar screen of Wall Street analysts and the media. It’s widely known that mainstream media coverage seems to favor large companies over small ones. It’s a valid concern.
Insights into How Twitter Users Can Forge Opinion — If you want to influence public opinion on Twitter, the trick is to get your message out early. Once your message is stabilized on the social medium, it’s too difficult for your competitors to overcome your lead according to research.
Performance Gap Solutions for Consultants in Income and Image — How’s business? Is it time for a little biz coaching? If there’s a disparity between your income goals and your current financial situation, it would appear that you have a performance-gap issue.
Consultants – 5 Strategies to Build Trust with Clients — The five strategies that enhance relationships between consultants and clients.
Tips for Building Long-Term Client Relationships with Effective Meetings — How are you faring with your clients? Not sure? To be certain you’re doing well, you must ask yourself three key questions.
“In a networked world, trust is the most important currency.”
-Eric Schmidt
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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.
