Every year, millions of people have a great idea for a product or service. It might be either the formation of a new business or an addition to a current organization. Some never get off the ground, but some end up changing the world! According to recent data, 90% of startups fail every year, but the remaining 10% offer the potential to shape how we live our lives and transform the communities around us in significant ways.
Having a well-thought-out financial plan is often the difference between having a venture that ends in disappointment and one that soars. So, how can you set your new venture up for success?
Foundational Elements for Success
Before spending the time and money required to create a detailed financial plan, entrepreneurs and innovators must carefully consider the foundational elements that their new venture will be built upon. Founders should ask themselves the following questions:
- How will this product or service make someone else’s life better?
Will it enhance their lived experience? Will it cut their costs? Will it make life simpler or easier?
Buyers aren’t interested in the seller’s great idea unless they think it will make their lives better in some way. About 42% of all new ventures fail because their founder created a product or service that too few people want.
Most founders will develop a product prototype or service offering outline and show it to potential buyers to gauge their interest as a “proof of concept.” Listen carefully to those early audience members – they’ll usually tell you how to improve your offering to better match their needs in a way that’s extremely beneficial. Don’t take it personally if they think you have an ugly baby. Iterate until you hear a chorus of positive response!
- How are potential buyers currently solving the problem that you seek to solve?
Asking this question will identify your current competitors. Analyze their strengths and weaknesses. Thoughtfully consider how they might respond to your entry into “their” market. Can they easily replicate your innovation or improve upon it? Or do you have some sort of unique competitive advantage? Warren Buffet calls these competitive advantages “economic moats” and takes them very seriously when deciding where to invest. He only invests in businesses that have something that keeps competitors from easily matching their offerings, which leads to price-based competition and rarely ends well.
- What resources are needed to produce the new product or service?
How will you build a talented staff and leadership team? Not having the right team in place is the cause of about 23% of all business failures.
Will you need to invest in manufacturing equipment and facilities? Find the right retail location? Obtain necessary permits and licenses? Compiling a list of necessary resources is key to building your financial plan. And don’t ignore the boring stuff like business processes. Your sustainability will depend on the quality of what you produce. Quality comes from having well designed internal processes.
- Do you have the personality and temperament to make this venture a success?
Many people underestimate the time commitment that a new venture will require, or they don’t think through the impact on other aspects of their lives like family, health, life commitments, etc. Be honest with yourself – are you willing to make that new commitment? Founding a new venture isn’t just a job – it’s a way of life, at least initially.
Many new ventures require the founders to put personal assets at risk – are you (and your family) ready to assume that type of risk? Most new ventures will require everything you’ve got.
Once you’ve gone through these foundational steps, it’s time to build a financial plan.
Making a Financial Plan
About 29% of new ventures fail because they run out of cash. Having a solid financial plan can ensure that you aren’t one of them. A CFO can help you build a financial plan, acting as both a thought partner and financial model creator. Here are the elements of any good financial plan:
- Solid Sales Forecast
Who is going to buy your product? Where are they located? How will you reach them? How will you price your offerings? All sales forecasts come down to price times volume. A sales forecast should flow out of your answers to the first and second foundational elements questions we discussed earlier. This is the backbone of every successful financial plan.
- Cost of Sales/Service Budget
What is it going to cost to produce and deliver the product or service that you are envisioning? Who is going to do it? Where and how will you find supplies, inventory, or service providers? Can you acquire these direct resources at a price that will enable you to cover your costs and provide you with a fair return on your investment? How will your cost of sales or service compare to your competitors? Will you have any “moats” initially, and can you deepen them over time?
- Expense Budget
Marketing: What are you going to spend on marketing and how will you spend it? What will your key marketing messages be? Consider the old marketing adage: “You can be better, cheaper, or different – pick two.” A concise marketing message should flow from that choice, hopefully leading to the basics of a marketing plan. Have a “go-to-market" plan that details how you will inform potential buyers that you exist and offers them a compelling reason to try your new offerings. Find people who know more about this than you do and listen carefully to what they say.
Occupancy Costs: Where will you conduct business and what will it cost? For some ventures, location is one of the most important and expensive overhead costs. For others, it’s less so. Consider location from the perspective of both buyers and your resource providers like employees, suppliers, municipal services, and so forth.
Staffing: Staffing costs are usually one of the largest overhead costs. Who will you need to support and supervise your operation? What will it cost to attract and retain the talent you’ll need? Don’t forget things like incentive pay, payroll taxes, and benefits!
Overhead & Tech: Overhead and technology costs are a recurring but necessary use of your cash. How can you minimize these costs while still creating the environments and systems that will enable your new venture to scale?
Capital: Interest and other financing costs are the price that you pay for using other people’s capital. Their extent will depend on the availability and nature of the capital you deploy. A good financial plan will automatically adjust financing costs with changes in the balance sheet forecast.
Other: Taxes and regulatory costs are inevitable but are usually fairly forecastable.
Profit is both the reward for your risk & efforts and also the cushion that allows you to weather operational and environmental volatility. It’s also the measure of whether your product/service is truly adding value to the lives of your buyers. If the market doesn’t reward your efforts with a profit, you either aren’t managing your enterprise well or your product or service isn’t truly satisfying the needs of your buyers.
- Forecast Balance Sheet
A balance sheet is simply a list of what you own, who you owe, and what equity you have in your venture.
A forecast balance sheet should project what your balance sheet will look like by month over the first few years of operation. It will include things like your expected payments due from your customers and suppliers, your investment in inventory, equipment, and facilities, the cost of any other investments you’ll require, any debt or equity investments you’ll take on, and most importantly, how much cash you’ll have on hand. Most of your asset list will come from the foundational list of necessary resources you compiled up front.
- Forecast Cash Flow Statement
Every entrepreneur knows that sales and profits don’t pay the bills – cash pays the bills.
A Cash Flow Statement ties together how your operating plan and your balance sheet interact. It shows how cash flows in and where it goes. Any forecasted bottom-line cash deficits need to be addressed before you launch your new venture.
And don’t cut it too close! New ventures rarely perform exactly according to expectations. Give yourself some cash cushion. It might mean tweaking your operating model and/or bringing on lenders, partners, or other funding sources. Nearly all new ventures will need time to scale up to a positive cash bottom line. Failure to understand that dynamic and plan for it effectively will put you in that unhappy 29% of new ventures that run out of cash.
Taking the time to create a thoughtful financial plan will greatly improve the likelihood that your new venture will be one of the 10% that achieves sustainability. This article isn’t intended to discourage anyone from following their dream or pursuing their passion. It’s intended to help them avoid wasting their time on something that isn’t likely to pan out.
Millions of innovators have built successful organizations that have vastly improved all our lives over time and have become a great legacy for them and their families. You might be another one of them. Having the right resources, including a skilled part-time CFO can help you get there.
CFO Selections can provide you with the right consulting CFO to help you think through your specific issues, ask all the hard questions, and do all the financial modeling that will enable you to hone your plans and make your dream a reality. That’s what we do. We look forward to helping you too!
About the Author
Bill Palmer – Partner, CFO Selections
Bill Palmer is a seasoned CFO with financial leadership experience in many industries. He has worked with dozens of small and mid-market companies and non-profits to help solve their financial issues and seize new opportunities.
For over 11 years he served as the Director of Finance & Operations at a prominent private school where he led projects to greatly expand both enrollment and the physical size of the school, double employment, and triple endowment assets. Bill also spent eight years as the Board Treasurer of a major Seattle-area children’s medical charity, helping to triple the number of children served.
As Founding Chair of the CFOS Foundation, he helped establish its institutional framework and led the Board’s review of grant applications and oversaw the disbursement of funds to successful grantees.
Bill holds an MBA from Seattle University, a BBA degree from Gonzaga University, and is a graduate of the Pacific Coast Banking School.
