Critical Assumptions – financials
Excel is an excellent tool, but unfortunately the ease of use has allowed entrepreneurs to plug in a whole mind boggling facade of numbers that were generated by the program with little regard to their accuracy in the real world. When inundated with sheet after sheet of numbers, the reader of the plan often glosses over much of the detail and glances at the bottom line – seeking only – does the plan make money? Yet, even if it does show a profit, the reader is not overly impressed because almost anyone can manipulate the spreadsheet to come up with an acceptable premise that the potential is there. The spreadsheet is useless garbage unless the reader has confidence in what the numbers mean and they are derived from solid market research and proven assumptions.
You can’t just throw a bunch of numbers in a spreadsheet and expect the reader to believe you. You have to back your projections up with solid research, experience, logic and reasoning. The business plan is the narrative to explain what you are going to do, the projections explain how you are going to accomplish what you said would happen. Most bank lending officers and equity investors are astute in dissecting the financial projections. Don’t try to pass something off as a guesstimate thinking they won’t catch your lack of solid research. They will take you to task. Most have access to industry standards and will see how you stack up against the best operators in the industry. If you are out of whack on something they will want to know why. If you don’t know they will question everything you’ve done.
How Can You Make Projections More Relevant?
- Back your projections up with real numbers. If you have an ongoing enterprise and you are taking things into the future using existing numbers is the most solid evidence you have. In this case this is a real projection, because you are taking real numbers and making a projection as to what will happen into the future backed by the past. Sounds good, but unfortunately this isn’t a likely scenario in the real world.
- Use existing numbers as the basis for the future. This is much more realistic and useful. If you have expansion plans and are adding staff or production capacity, using the existing numbers as a base is a solid approach. Yes, the expansion part of the projections is still subject to several unknowns, but at least you are making these additional sales and expense estimates with solid evidence.
- Using existing numbers from a similar operation. These could be a similar business in an area that poses no competitive threat, or from industry association numbers published in their annual report. Not every operation is the same however, and it behooves the author of the projections to clearly articulate the assumptions.
- Get commitments: it is a risky venture to wish or hope that the customers will utilize your product or service. Getting commitments from potential customers that know the price and quality of what you are offering. Written contracts hold a lot of weight with a bank or an investor. Even verbal commitments from reputable clients will give your projections needed credibility. The value of the commitment is in the assurance that the potential customer will in fact purchase the good or service. Potential customers that do not know the price or the quality of the offering may give a cursory acceptance of what you are doing, but they are not nearly as reliable as a signed contract.
- Partnerships and/or Strategic Alliances. A solid and reputable partner in a new venture is a valuable asset. They can assure your sales and can offer sage advice going in as to what the customer or client is looking for. Often they have specifications, drawings or layouts that clearly outline what is needed. Price may even be determined. These partnerships or strategic alliances can alleviate a lot of the guesswork in any expansion and make the financial projections much more reliable and believable to the person reading the plan.