At this point, step back and celebrate that the lemonade business has a three-year financial plan. If you have followed along in these steps with your own business, then you, too, have a first-draft financial plan.
I hate to tell you, but that was the easy part of financial planning. The difficult part comes next: iterating back through the spreadsheet, making the estimates more accurate and the resulting values more believable.
There is no shortcut to that process.
Expect to iterate at least a dozen times through the whole spreadsheet.
For each month and quarter, ask yourself, “Is it reasonable that my business will earn this much revenue?” Once you believe the value, go through each of the expenses and ask, “Are these expenses high enough to bring in those revenues?”
When you are happy with the monthly and quarterly numbers, look at the annual summaries, and ask the same questions again. Since the annual numbers are sums, the only fix for those numbers is back in the monthly and quarterly values. And so on and so on, until there is no revenue left to remove and no expenses left to add.
At this point, double check that your cash balance never drops below zero. When it does (and it usually does), add in enough investments to make the balance positive.
With that exercise complete, now look at the annual totals for investments. Is that an amount you have in your savings account? Is it an amount you can borrow from friends and family? Is it an amount you could pitch to investors and expect to raise? And, most importantly, is that number a reasonable amount to invest, given the profits you expect to generate in Year 3? (If you are not yet profitable in Year 3 or, at worst Year 5, reconsider whether this business is worth pursuing.)
Too often, the answer to all these questions is “no.”
Quite often, I meet entrepreneurs who share plans with me that require $500,000 in investments but only generate $500,000 in revenues by Year 3. Those revenues are not large enough to pay back the investors with a reasonable return, and thus the “ask” of investors is simply too large.
And even if the numbers look good, it is still challenging to find investors. Maybe you can run your business without them.
Make a copy of your plan. Now change the numbers to see if you can reduce the amount of money needed from investors. Can you get that number low enough that you can give your company the needed cash from your own savings and skip investors completely? If so, you might be able to bootstrap your company.
“Bootstrapping” means paying for the startup costs yourself, instead of with investments. Most startups are bootstrapped, which means they are funded by the founder, their friends and family, and, these days, $5,000-$25,000 in crowdfunding. Can you make your plan profitable on that?
If not profitable, can you at least create a company with meaningful revenues? If you cannot run your business without investors, maybe you can at least get it started. You will have a far easier time raising money from investors with a revenue-generating company already running than with just a business plan on a piece of paper, no matter how compelling the financials appear to be.
Lastly, take this opportunity of iteration to “stress” your plan, to understand what might happen once you start the company.
Drop the revenues in half. How does that impact the time until the company becomes “cash flow positive,” i.e., when the net losses turn into net profits? How does it change the total investment dollars needed?
Add more staff. It is difficult to imagine how many people are required to sell $1,000,000 worth of products and services and to support those customers, keep up with the marketing, do the accounting, etc. For many companies, the biggest expenses are the people. Add a few extra people into the plan, and see what happens.
Delay the first outside investment by three months. Raising money is difficult. Most companies that try never even get an investment. Push back your investment by three months, adjust the plan so you do not run out of cash, and see the results. Is the business still worth doing?
Now push the investment out six months. Is the business still worth launching?
Mix all these scenarios together and you will have a more realistic plan. Sales will likely be slower than you expect. Expenses will likely be higher than you expect. Investments will likely take longer than you expect. If you have a plan that anticipates these common outcomes and that plan is still viable, (i.e., it is worth investing your time and effort), then you are in much better shape than the previous iteration, which lacked these reality-checks.
At some point, you have a plan that has been iterated so many times, you can’t find anything reasonable to change. At that point, you are done. For now.
With that, it is time to ask the key questions:
- Is that plan viable?
- Does it make a profit?
- When and how much?
- How much money is needed?
- How many people are needed?
After sleeping on this “final” financial plan, with the answers to these questions in hand, do you still think this business is a good idea?
Does your partner agree? Does your spouse agree?
Either way, congratulations. Either way, you should now know far better how your business actually works, at least in terms of revenue, expenses, and investments.
But do note that you are never truly done with this plan. Because…, as soon as you launch your product, you’ll learn more about your market than you know now. With that knowledge, you will realize that your financial plan is wrong. You will have discovered that a financial plan is never done and it is simply time for the next iteration…