You have the dream of owning your business. You have the idea. You probably have lots of questions that you’re asking and answering (or still struggling with): Will it serve a need in the market? How to pay for it? How to make it happen? Do I quit my job and work on your idea full time or start out part time? When do I hire employees? Will it help me earn the living I want? How to simply get things done, such as product design, technology set up, etc.? Do I bootstrap the start-up, borrow, or take on investors? Depending on the answer to that question, how do I find lenders or investors? Will I enjoy spending time in the business?
As an aside, that’s a good one that some entrepreneurs don’t ask. Owning a business can be a grind. At some point, it becomes less about enjoying the product or the initial glory of starting the business. It becomes the actual running of the business – managing people, product manufacturing, delivery, etc. I often recollect an interview of a college football coach (Urban Meyer I think when he was coach of the Florida Gators) said coaching football is a grind, all the video, planning, memorizing playbooks, etc. I immediately thought if a coach isn’t having fun being involved in football, every boy’s dream, then I don’t have a chance enjoying my job! (I found a way to do so, however. Thankfully!)
Another time I heard a young man tell his story of starting his own bakery in college and continuing it as an adult. At some point, the joy of baking and selling awesome baked treats that brings daily joy to customers was overtaken by the grind of inventory management, supply purchasing, employee management, building rentals, customer complaints, etc. Again, in the middle of an awesome job, there can be struggle. We all need to keep our perspective though.
My point with that little sidebar is to find something you’re passionate about, keep perspective and enjoy the path, acknowledging not every moment is easy or fulfilling. Hopefully you’ll find something in which the “grind factor” is not too consuming.
I’ve asked all these questions myself, because I’m a start-up, in various stages for a few small businesses, and I’ve also stopped pursuit of several others over my career because I didn’t like the answers to some of the questions above.
All that being said, one of the things I’ve always done is to at least understand the finances. When I’ve developed businesses or scrapped ideas, or if I’m helping one of my clients, after studying a business, I’ve always developed a financial model with key drivers. A good model will help to tell the financial story, which will help supplement your founding vision for the company, etc., as you talk to stakeholders.
What are the key drivers? It’s going to be different for every business, but rules of thumb include number of customers, prices, costs (including cost of research and development, cost of sales and inventory management, overhead, staffing and benefits, etc.), desired owner compensation, necessary capital, cash flow, liquidity, borrowing costs, investor infusions, tax implications possibly, etc.
It’s important to prepare a good model based on assumptions from these drivers to help quantify these matters, set targets, track progress, plan for cash flow, plan for distributions eventually (investor and owner), financing, and unfortunately, even to know when it may be time to do something different-either to turn the ship around with a different strategy or to scrap the business.
I see lots of models out there, and many times they’re too simple, often reflecting income and revenue. A good business model is more than simply revenues and expenses. The income statement is important and the assumptions used to build the initial model need to be reality-based. It also needs to reflect the complete financial picture: costs of capital, cash and liquidity, inventory financing, investor investments. These are all related to a balance sheet, and these assumptions will help you understand your ability to carry on the business in cash flow terms.
Additionally, it may be a good idea to do several versions to reflect different scenarios that the business may encounter. Eventually as the business gets off the ground, and you start to spend money and hopefully collect some too, “modeling” becomes “budgeting”. The assumptions and estimates become very real. At that point, the benefits of expert initial modeling will become readily apparent, as you start to see how assumptions become reality, and you learn what it will really be like to run the business. You’ll likely always need to be forecasting especially in the high growth stage in order to project cash flows, etc., but the more history you have, the more the assumptions can be based on your own story.
In conclusion, revel in the fun of starting a business, pursuing your dream. It is indeed fun. Some attention to your early financial modeling and planning will pay dividends.
Karl spends his time thinking about ways to help organizations with sound financial decisions.
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