Every start-up firm that takes birth initially is very enthusiastic about putting every plan into place, 75% of them end up executing everything that is planned too. But this only lasts for about one year or maximum two years. Post which, they get complacent and see that everything is falling into place on its own; hence stop forecasting the company’s financial future on a regular basis. Another argument put forward by most start-up entrepreneurs is that no one can predict the future. Honestly, yes no one can actually predict the exact future. But surely people can speculate what could go right or wrong in the future as far as the company’s finances are concerned.
What this ignorance could do to such a slacking entrepreneur is that her investors might just start suspecting the company’s financial stability and hence could take drastic steps to back off from making further investments or even withdraw the current financial support that she has invested in the start-up. Whilst investors are most essential, there are other stakeholders whose doubts about the company need to be driven-away like employees, customers, vendors, etc. It thus, becomes vital for an entrepreneur to include Financial Projection as one mandate business operation in her business plan.
Some simple, yet effective areas (tips) wherein entrepreneurs could achieve and measure their companies’ financials:
- A proper measure of per-unit profitability will help entrepreneurs understand the kind of profits they make. Simple? Yes, but if there is not much volumes (close to millions) you can achieve due to whatever valid reasons, then the profit margin must at least be 50% or more in order to sustain. This should hold good even when the consumer is a vendor or a distributor.
- Projecting and setting yourselves achievable sales volumes will help stay optimistic. Anyone can just calculate 1% of the market share and show the same as the sales target. Instead, it would serve the purpose if sales projection is derived from people who are hands-on on sales jobs.
- Keeping track of every petty-expense and before doing so, preparing a budget for the same is also very necessary. A start-up firm must forecast all expenses related to insurance, utilities, administration expenses, computer costs, trade shows, inventory, and a thousand other things. It is a good idea to set a separate budget for all such petty expenses by looking into the expenses already incurred.
- Every start-up must treat its cash-flow as the king of its financial records. The ultimatum for any start-up is break-even, when revenues first catch up with the outflow. Projecting, tracking, and controlling cash flow is considered to be the most important job of the entrepreneur, along with all the other start-up officers.
Along with these tips, it is also essential for start-ups to keep in mind the following pointers:
a) It is always a good practice to add a buffer amount to whatever budget is calculated.
b) It is also very vital to plan a re-forecast every quarter in order ensure that everything is in place, everything is executed as per plan and nothing is missed.
c) Lastly, these projections must be made aggressively. Not too rational and not too irrational at the same time. Aggressive, but not over-optimistic and also not pessimistic.
Planning helps overcome failure. Failed planning promotes failure. Note that!