As the world and the US slogs through the current economic turmoil, the task of economic development professionals is shifting. What use to be a local struggle to attract businesses and jobs, competing against other states or even other communities in their own state, has become a battle against local job loss and the inevitable business closings. This shift, has brought the small business champion out of formerly dismissive EDC presidents and in my opinion…is long overdue.
But first let me tell you another story. As a 30 something, I remember taking my first real spelling and math tests in the third grade. Today formal, gradable tests are taken in the first grade. Zachary, a typical ADHD diagnosed, mischievous first grader and creative mind was dutifully taking his first spelling quiz when he came upon a word he didn’t know how to spell. Stuck, he stood up, walked over to his best friend, Miles, and looked over his shoulder to see how he had spelled the word.
Mouth agape, the teacher walked over and scolded Zachary and told him that looking at how others did their work is not allowed and that he would be punished for CHEATING…which clearly he was guilty as charged. Zachary, being the bright mind he is, stared back at the teacher in amazement and said, “How can I learn how to do it myself if I can’t see how it is done the right way?”
Zachary gets it.
In a speech given at Harvard University by then president, Derek Bok, he cited the following ways in which college students learn: “habit, example and exhortation”. While I do not agree that we need to beat knowledge into people heads, I do agree that as adults we learn from: a) trying over and over again (habit), b) watching others (example) and most importantly, c) from our mistakes (and those that pound on us for them - exhortation).
Note how all of these are punishable offenses during our formative school years. As a student you only get a limited number of chances to form a habit, you typically don’t work together to solve problems (on tests) and too many mistakes and you are punished by one of the school systems most humiliating and horrible constructs - being held back.
Then - suddenly - during the student’s glorious entrance to post-secondary education, he is required to switch from a generalist education with a minimum of 70% knowledge of every subject, to a specialist education - the type of employee the worlds corporations look for.
Lets check back in with Zachary. After facing a problems, coming up with a creative and logical solutions, he was consistantly punished and the already difficult challenge of being an active learner in a corn-row, stay in your chair environment got all the more difficult. After several attempts at creative solutions…Zachary quit trying and just did his best to not draw attention to himself by staying within the guidelines, consistently being told…”You could do so much better if you just applied yourself.”
But I digress…the real crime is the destruction of creativity. You don’t need to review recent studies to see that 95% of kindergarten students are creative whereas by the end of second grade I doubt more than 2% consider themselves or even attempt to be creative.
So what does Zachary have to do with economic development…or for that matter small business. Let me connect the dots:
Since the 1990 the net job creation in this country was added by small businesses in the united states. Large businesses have experienced a net loss of jobs even while the total job base grew through the boom of the tech bubble and the subsequent housing bubble.
The current job hemorrhaging can be replaced by new business ownership not relocation and expansion of fortune 500 companies.
Entrepreneurship necessitates creative minds identifying opportunity… for, from crisis comes opportunities.
Creative destruction is occurring on a massive scale day in and day out in our education system, workplace and society in general.
These are the dawning days of the Entrepreneurship Generation. Entrepreneurship is not only our future…but it is and has been our past present and future. I also believe that Micro-credit and peer to peer financing will help us fill the gap as we face a new banking and equity capital environment as the world’s economy figures out what the “new normal” is moving forward.
I also believe that entrepreneurship, creativity, and innovation are the answer to the question: “How do we fix this mess?” I know others, including www.weareamericasbailout.com think the same way.
Maybe another question that needs to be asked is…”Does our education system need a new model while we are at it?”
One of my favorite radio programs is a quasi-science show called Radio Lab and is hosted by Jad Abumrad and Robert Krulwich. There are two reasons why I love this program so much: 1) because the production values are so good that no matter what they are talking about it sounds multilayered and dynamic and 2) while the topics are science related they are not overly technical and there is a heavy philosophical element usually presented from various sides by the two hosts and their guests.
Anyway, while perusing the Radio Lab website the other day to download some files for my iPod, I came across a podcast entry where the two hosts are discussing the early days and their first failed attempt at creating a skit for another public radio program called This American Life. Toward the end of the skit, Jad answers a question about how the show is produced, and he talks about science in a way that struck me, in that it is directly related to entrepreneurship and for that matter…life. Here is an excerpt:
“It’s about challenging people and it’s about challenging people who know…it’s about presenting science as something which is not inevitable. It is not something where people who are esteemed sit behind podiums and convey knowledge to the rest of us who know nothing…”
As a business consultant I can appreciate the sentiment. Often time’s clients come into my office expecting to find that silver bullet that will make their new company successful or get their struggling business out of trouble. Despite seven years of post secondary education, ownership of multiple businesses, and six years consulting over 1000 entrepreneurs I still haven’t found that silver bullet. And, if they do get an answer from a so-called expert it doesn’t mean its the best answer or even the right answer. Success is never inevitable.
Entrepreneurship is about challenging the status quo. The reason entrepreneurs find many people don’t think their idea will be successful is because it is not what other businesses are doing currently…it is not what is expected. But in reality, the unexpected is what makes great products and services successful, the Purple Cow, as Seth Godin puts it. The unexpected is where competitive advantages are formed.
“It’s about going into your lab, making mistakes, breaking stuff, doing it again, and again, and again until you get lucky. It’s like anything.”
In the laboratory of commerce this statement rings equally true. It’s about taking your ideas, turning them into business models, introducing them to consumers, failing, making mistakes, changing your assumptions, changing your business model, again and again and again until you get lucky. Often times, we hear stories from some of the world’s most successful entrepreneurs about how they failed six, eight, ten times or more before they made it big.
Sure you can improve your odds by surrounding yourself with people who are smarter than you…another anecdote often told by successful entrepreneurs, but ultimately, success often happens by sheer chance…just like science, just like entrepreneurship, just like everything in life.
When entrepreneurs start a new business they often have a nasty habit of paying little attention to whether or not the timing it right for that business idea. Some will start their business either way, no matter what the data (or the bozos) say. And some of those entrepreneurs are going to be successful in spite of the worst of odds.
But today’s economic uncertainties actually puts the question of timing front and center in the entrepreneur’s minds eye.
So here are some things you should consider before starting a business in today’s brutal business climate:
It was the worst of times:
Consumer’s are tightening their purse strings which will mean slower sales. One of the most common mistakes a new business makes is over estimating their revenues, leading to a lack of working capital sooner than they can achieve their break even point. During these less than robust economic times, entrepreneurs will have to make sure they are fully capitalized before launching.
Access to credit for start-ups has always been tough…now it is even tougher. Lenders have increased their requirements for personal credit scores, collateral and equity. They have also shortened loan terms and increased interest rates making the loans you can get less than desirable.
The number of venture capitalists and the size of their deals is shrinking. Even before the current economic downturn VC firms started looking at two types of start-ups deals: a) The very large deals - i.e. fifty million plus and b) The very small deals - i.e. those under one million. Today, many venture capital firms have all but dissappeared and valuations have become leaner for those start-ups obtaining capital.
It was the best of times:
In most areas there is tons of cheep real estate on the market and the supply is only going to grow as retail and service businesses take a massive hit. Now is the time to negotiate the shortest lease terms, lower rental rates, cash for fit-up, an initial rent free period or any combination of concessions you can dream up.
Starting lean and “bootstrapping” your business will allow you to test ideas and make adjustments and give you time to work out the bugs. Assuming you have enough capital to make it through a slower than average period, starting now will allow you to test market new products and services without the fear of loosing too many customers while you make adjustments.
Input costs (gasoline, food prices, energy, etc) are declining and suppliers are desperate for business. Sales are slow for everyone, including those supplier and vendor who will be selling to you. In addition to cheaper inventories and overhead, advertisers are hit peticularly hard during economic downturns. Entrepreneurs can use that fact to get the best bang for their marketing buck and a stellar deal on your grand opening blitz.
Competition will be focused on their own problems rather than trying to ward off potential new entrants. Now may be the perfect time to stage a sneak attack on the big guns in your area. While they will be busy cutting advertising, cutting customer service, cutting corners and struggling under the weight of their own size you can swoop in light, nimble, and packing cash to draw customers into your store.
Finally, if you can make it in these times…you can make it any time. Some of the country’s most successful businesses including Burger King, FedEx and Microsoft were all started during some of our country’s toughest economic times. Who knows…your company may be next.
In just two short weeks, clients will start coming out of the wood work with their shiny new business ideas and New Year’s resolution in tow. I guess it is just human nature to want to close out the current year and start the next one with ambitious plans and great expectations. I look forward to these new clients with great anticipation and will plan on receiving them with warmth and encouragement.
I wish all of you a happy holiday and a prosperous New Year!
The big media is talking about big dollars, big companies, and big bailout packages. Sub-prime mortgage backed securities, money market mutual fund savings, and now commercial paper have all been at the center of the conversation of the current credit crisis in the US and, in recent days, worldwide.
To some, the credit crisis is a very real and immediate danger directly affecting their day to day work life and personal life. But, to others it seems like a distant war being fought by some other society. And, like any war on an abstract concept it is difficult to determine what affect any action has on “the market”.
But what about small business? At its most basic “cause and effect” form, the credit crisis has had several immediate effects on small business:
A Reduction of Working Capital- Most businesses face one of three scenarios that necessitate the need for additional working capital financing. The first is seasonal sales. Working capital lines of credit help ease the effects of the natural ebb and flow of sales throughout the year.
The second is cyclical sales. Industries can be hot for several years, then go cold suddenly. Generally, if the business is not in a permanent decline cycle due to obsolescence, the expectation is that a company needs to weather the storm until the cycle turns positive.
In the current credit environment small businesses are seeing their “standing” or revolving lines of credit being pulled or reduced without notice. At the same time renewable lines of credit are being “called in” due and payable at the end of their 12 month cycle, without the option to renew in the new year.
Tougher Long-Term Debt Requirements- Generally there are two types of business loans beyond short-term working capital notes; a) fixed asset loans for expansion and b) permanent working capital loans.
Permanent working capital loans are still being offered but with shorter terms and more collateral coverage requirements. Banks have reduced the amount they will lend against inventory and against current accounts receivable for permanent working capital loans and tightened the terms in which they are willing to lend. Many are now asking for fixed asset collateral or cash value securities to pledge against permanent working capital loans.
Businesses borrowing money for property, plant and equipment expansion are certainly in better shape than those borrowing working capital but they have not been spared the effects of the current credit crunch. Collateral requirements have been heightened with some banks requiring additional personal assets be pledged against the loan for added security. Again, as with working capital loans, loan amounts are being reduced with banks requiring higher project “equity percentages” or down payments on buildings and equipment.
Weak Consumer Environment- Plain and simple…sales are down. People are worried about their jobs, the value of their IRA, the value of their homes and their mounting credit card debt. This is not a good environment for businesses dependant on consumers spending disposable income. Interestingly, one of the only positive stocks on the the day of the big 700+ point crash last week was…Campbell’s Soup. Apparently all the anxiety over the above issues is translating into stellar comfort food sales. Overall though, sales are suffering and small businesses are suffering along with it.
What does this mean for entrepreneurs in the process of starting a business. It might mean that it is time to take a step back and see what the coming months bring. It might mean reaching deeper into their pockets and pledging more assets against that start-up loan. It might mean nothing at all.
So that you don’t think I am just being a Negative Nancy I am going to share with you part of an email I received just this week from a representative at US Bank that had the subject line “U.S. Bank is Still Doing Loans!”. Here is the opening paragraph:
U.S. Bank is still doing small business loans! In today’s market, we realize more and more lenders are putting greater restrictions on their lending policies, tightening the already difficult lending market. U.S. Bank has avoided the sub-prime debacle and is in a good position to continue offering SBA loans to our current and new clients.
This is not an attempt to promoting U.S. Bank here. In fact most banks, especially the local / regional banks in most areas, are probably doing just fine as most banks sell off the majority of their mortgages to the investors who are now going under. What I am saying is there is still money flowing to small business. Given the right opportunity and the right circumstances your dream for small business ownership can be realized.
Besides, the average entrepreneur faces far tougher conditions in the day to day fight for solvency than some worldwide credit crisis can throw at them!
Recently at a small business conference in Chicago I attended a few different seminars on marketing, promotion and branding. Being a self proclaimed finance geek, I find it is helpful to step outside of my natural habitat to broaden my knowledge base, and the best place for me to do that is by exploring marketing concepts.
You see, marketing & promotion is my Achille’s heal as a business consultant. Despite attending dozens of seminars, attending trade shows, reading books (actually I prefer audio books) on the subject and even listening to a few Zig Ziglar tapes I found at a garage sale…I still am not confident in giving advice on marketing.
I think the problem is that finance is finite and marketing is…well, subjective. Numbers never lie. Certainly people can lie by changing the numbers to misrepresent the actual condition of a company. But, anybody with an undergraduate level education in accounting knows that the practice, at best, is an estimate.
Marketing on the other hand is a whole other animal. Even with built in feedback mechanisms it is difficult to determine the effectiveness of an ad campaign. Trying to gauge the effectiveness of a promotional event over the long term…forget it. The Internet, however, has allowed businesses to see what is working and what is not by running multiple campaigns and tracking impressions, clicks and CTR or “click-through rate” to see which ads convert the most. Even then a quality ad may only convert 2% of the time time giving us an appreciation for the sheer effort it takes to attract customers, and that’s before making a pitch to try and get a sale.
Which brings me to the issue that is bothering me. Brand. It seems the marketing experts give company branding more credit than I believe it deserves. Most marketing gurus point to examples such as Apple, Coca-Cola and Fed-Ex as examples of how important brand management is.
These are great brands, all of them, simple colorful, memorable…but I wonder how memorable they would be if there wasn’t great companies behind them. Would an apple with a bite taken out of it still be a great logo if Apple wasn’t such an innovative company with ubiquitous products? Would it still be a great logo if say it was the logo for eMachines or some other lower tier computer company?
How about coca-cola…would RC be coca-cola’s size today if it had just thought of and implemented the fancy script logo with “coke bottle” shaped containers (I guess then it would be “RC bottle” shaped)?
Would FedEx still be the leader in overnight air mail if their logo didn’t have that arrow in the white space between the “E” and the “x”? According to the experts once you see it you will never look at the logo without seeing it every time. But, do people who have never look at the logo that way use UPS or DHL instead?
I guess the more important question I am trying to ask is this: Does a brand help a company become great or are these simply great brands because they represent great companies. These questions made me recall an article I read from Mac Berns, a marketing consultant here in Fargo, ND and someone I consider a friend. Below is the logo he regards as a great brand and you will have to read the article to find out why.
I think his article goes a long way toward answering the questions about the importance and relevance of brand. Until I figure it out, I will probably see you out there somewhere at a marketing presentation. I will be sitting in the second to last row scoffing the the instructor with a furrowed brow, wishing I was deep inside an excel spreadsheet somewhere else.
There is blood in the streets of America’s businesses both small and large. On Wall Street, the collapse of financial institutions, the bailouts of Freddie, Fannie, Bear Sterns and now AIG. 500 point daily drops in the Dow Jones Industrial Average with investors fleeing to cash and US treasuries. Sure there has been the rapid decline of the price of a barrel of oil, but that has been the effect of sinking worldwide demand (and strengthening the US dollar), which are ripples from the US economy swelling to tsunamis world wide.
Sound familiar? Unless you have been under a rock it has been hard to miss. Even The Daily Show’s John Stewart is taking a break from beating up Sarah Palin to focus on the economic forces playing out in front of our very eyes.
On Main Street, here in the Red River Valley, community leaders and spending scads of time and money trying to convince citizens that all is well. And, for the most part, they are right:
$130 dollar oil has reopened the capped stripper wells in the western part of the state, spurring the drilling of new wells and huge land deals such as the Bakken shale formation.
The same high price of fossil fuels and government tax credits have spurred growth in wind energy boosting many of the areas manufacturers who develop the towers, blades and components. Many of the completed wind turbines won’t travel very far as the valley has some of the windiest accessible terrain in the US including the Pembina Escarpment. The glaciers that carved this valley flat leaving rich soil deposits also had the latent benefit of leaving vast barrierless plots of land to collect wind gusts and transform them into electricity. While transmission remains a formidable barrier the future for wind energy here in the Great Plains is bright.
A final latent benefit of high energy prices and government subsidies pushed the demand for ethanol to new heights. Many company laid out grand plans for new multimillion gallon plants only to be hampered by ever higher corn prices delaying construction on some projects and tightening the belt of others.
The same demand for corn and other cash crops have produced record farm incomes and record prices for farm land the valley. After years (decades perhaps) of living hand to mouth on farm subsidies the reward has been reaped for area agricultural industry. We will see how long it lasts with record increases in inputs.
Manufacturing exports are up sharply due to the weak US dollar and strong demand for agricultural implements.
The boom however has not been shared by all sectors of the local economy. Retail and service companies have slowed an average of 15%-20% or more according to an informal study of my active client base. At least once a week I receive calls from worried shop keepers proclaiming that this last summer has been the worst they have experienced. Trips to the lake and students returning home have always had a dampening effect during the summer but school is officially back in without a bounce reported.
Commercial realtors are experiencing longer than average listing days with more spaces coming on the market weekly. New developments that filled up in a couple of months following completion are now half or more empty and the phones are far from active. Office space however appears to be steady as usual with lead by the continued demand for essential services. Coffee houses, flower shops, restaurants and retail stores are burdened by the lions share of American’s belt tightening. Essentially, anything related to discretionary income is suffering.
How long will this last…certainly not as long as the nationwide slowdown but long enough to see quite a few casualties in the marketplace, even here in the valley.
About a year ago, I co-funded the start-up of a pizza restaurant, in a city near my own, with a friend I’ve known since high school. At the end of this month that restaurant will no longer be mine. Despite breaking even, we have decided that it is time to move on to better things.
The end, as it turns out, will come one of two ways. We have courted offers from several people who would like to take a crack at the biz and see what they can do with it. Alternately, barring the transfer of ownership in the next 60 days, we will liquidate the equipment through local channels and on eBay (God help us with shipping the nearly 2 ton pizza oven).
In any event, these options got me thinking about the “Universe of Investment Opportunities” that are available to all of us. The long term objective for most business and/or property owners is the building of wealth. The return on my original investment in the restaurant, be it the original amount or somewhat less (depending on the outcome), will need to be put to work.
In the evenings, I teach finance and entrepreneurship classes to adult students at a local university. One of the topics we cover is the securities market line (SML), which is derived from the capital assets pricing model (CAPM). CAPM adjusts the expected return on an investment for the risk that it poses to the investor. Ultimately if you plot these investments on a graph you get the visual representation of the SML line.
The universe of opportunities broken down to its simplest form looks something like this:
At the bottom of the line is Risk Free securities - Bank CDs, US treasuries, and the like are considered risk free.
Above that you will find bonds with average returns of 6%-8%.
Then, real estate with capitalization rates of 7% to 12%.
Long-term stock returns of the S&P 500 at 11%-13%.
Stock Options return 10%-20%
Futures 15%-25%
Small Business 25%-33%
From the above options we can see that small business is very risky which explains why about half of all businesses fail by the end of the fifth year. It also explains why businesses get priced at 3-4 times cash flow because 1/33% is 3 times and 1/25% is 4 times. That said, half of all businesses succeed and go on the create value and the long term worth sought by entrepreneurs world wide.
For me, I am taking a serious look at my personal financial statement, my stage in life and my goals for long term wealth building and making a decision on where the best place is for my money. Maybe those years I spent as a leasing agent for a local property management firm will come in handy…or maybe the business bug will bite again in the next 60 days.
I love listening to a good story…especially ones about entrepreneurs and their path to eventual success. The woman or man who turned nothing into something, who did it quickly, and without the help of others, AKA the “rags to riches” story.
I think there is a yearning in every entrepreneur who hears these stories to identify with the subject and imagine how it could happen to them. Like there is some magic formula to success, and if we could just do this one or two things…our business would take off, our work load would ease up and we would start living the good life we deserve.
There is a video on YouTube of famed story teller Ira Glass, host of This American Life, explaining what makes a good story. According to Glass the first characteristic is (paraphrasing here) an anecdotal storyline; a sequence of events that leads to a destination, creating questions and suspense along the way. The second characteristic is a moment of reflection or “ah ha” moment.
This formula, or at least the first characteristic is used in most “rags to riches” story. The second characteristic is usually more illusive. For example, in the August issue of Inc. Magazine the cover story proclaims “Think Rich and Never Give Up“ subtitled “How Joe Cirulli turned his last 12 cents into a $17 million company”.
Clearly this cover blurb is targeted at selling magazines. But, one could imagine an enterprising entrepreneur walking by a newsstand, catching a glimpse of the title accompanied by a cover shot of an average looking Joe Cirulli and thinking: “Hey! I can do that…I have 12 cents in my pocket and I certainly know how to think rich. Where do I sign up?”
Unfortunately, unless you are at Barnes & Noble where freeloaders religiously read books and other publications free of charge in the store, you may have to spend you last 12 cents and beg for another $4.87 to find out. But I digress…the article entitled “The Believer“, also points to the books “The Power of Positive Thinking“ by Norman Vincent Peale and “Think and Grow Rich” by Napoleon Hill as a contributing factor of his success.
As it turns out, (and as you might suspect) the 12 cents and the books were inconsequential to the success of Joe Cirulli and his Gainesville fitness center. According to the article, it was a few years after he was down to his last 12 cents that he happened upon on opportunity to purchase a local health club, who’s alcoholic owner was getting divorced and facing bankruptcy. Then, only through the power of persuasion he convinced gun shy bankers not to foreclose on the business (and I guess assume the loan being foreclosed on although it is not expressly stated in the article), finds a new location on a deadline, begs people for personal loans, only partially completes fit-up on a property that fails inspection, opens anyway and finishes it over the next six months without incident or interference from the local city inspector. Once up and running, his passion for fitness and customer service grows the business into a successful operation…over years.
But I guess the subtitle “How Joe Cirulli used perseverance and persuasion to build a $17 Million Company over several years” doesn’t sound as captivating because it sounds like work. My hunch is if you asked Joe…hard work would be on the top of his list of what made him and his company’s successful.
I am not picking on Inc magazine. They are no better or worse in this regard than any other publication on entrepreneurship. In fact, just months before I remember reading an article on the true costs of building a multi-million dollar company, like lack of social life, free time, not seeing your kids grow up, poor marital relationships, etc. etc.
I am, however picking on entrepreneurs who are looking for something for nothing. So, lately I have been wondering: Do anecdotes help others become successful? Or, are they just entertainment and should be taken as such? Are they good for people or do they build false hope? I would like to know your thoughts.
In the mean time I have another anecdote for you: A local entrepreneur has a great idea for a new business she is passionate about. After learning the bank won’t lend her the money to get it started, she cashes out her retirement and hits up friends and family for money. Starting the business on a shoe string she runs out of cash after about 12 months. Because she has not received a paycheck to date, her personal credit suffers but she scrapes it together and pays bills when she can (mostly out of the business account). After two years she scratches out a living that when calculated per hour amounts to slightly over minimum wage. After five years that living grows to a comfortable level. She never makes millions but she is proud of having built a business that provides for her family and puts equity on her personal balance sheet.
Probably one of the most uncomfortable things a first time entrepreneur has to attempt is their first set of financial projections. Frequently I hear the following:
“Well…I don’t know how many people will buy from me!”
“I just took a WAG (wild ass guess).”
“This is so stupid…why am I doing this!”
“How the hell am I suppose to know?!?”
To all of them I answer “YOU are the expert in the business you are starting and You have to set some expectations for the banks and/or investors.”
As you may have heard, “Financial projections are part art and part science”.
So what does that mean? It means that you won’t know how to do them until you have done them. Sure there are some things you can estimate based on your knowledge and experience with a particular type of business, but the rest has to come from research. And, that research, is part of the overall business plan.
In other words, the “part art” is the educated guess or the assumptions you base your projections on, which inturn is based on your expectations.
Your expectations are based on the research you completed in the written section of your business plan, that is the “part science”.
Regarding the comments above, the last one: “How am I suppose to know?!?” is peticularaly troubling. As mentioned before, you are suppose to be the expert. But also, you should have done the research to set your expectations based on a reasonable set of (documented) assumptions.
Banks and investors will expect you to know your stuff upside down and backwards. If you bring in a boiler plate business plan with canned financial projections, or ones written primarily by another person with numbers that you can’t explain, you won’t be getting any money any time soon.
After all that I hear: “Well, all of that’s nice, but I still don’t know technically how to complete my financial projections.” So here is the process:
Make sure you have a solid financial projection program to begin with. It can be a stand alone program or excel templates but make sure the three statements (Income Statement, Balance Sheets, and Cash Flows) are interconnected.
A well researched and written business plan is a must. Every section of the business plan holds key data related to the financial statements.
Build a Beginning Balance Sheet or Sources and Use of Funds. Your Operations Plan should have laid out the assets you need to purchase to get started (Building / Equipment / Furniture & Fixtures / Inventory). Get firm quotes from several sources on each. Then document your funding based on sound business banking criteria including proper equity injection. Finally, your balance sheet should balance i.e. sources of funds=uses of funds (otherwise they wouldn’t call it a balance sheet!).
Build your sales / revenue projections. The data in the Market Potential section of your business plan or independent Marketing Plan will help you bracket your expectations for sales but in general, Sales projections are determined two ways:
Driven from market data: Target market size is determined in units or dollar volume and you estimate the amount of that market you can capture…bracketed by competitive factors (number, advantages, price) and industry factors (growth, decline, obsolescence).
Driven from budgets: When pursuing a broad market strategy it is better to determine break even point then estimate a sales goal to reach break even and eventually profitability.
Build your expense projection. Again, the information you compiled in your operations plan and other parts of your business plan will help you determine appropriate business overhead expenses.
For example your location/building will determine your lease, utility, maintenance, insurance and property taxes. Your inventory section will help you determine cost of goods sold and cash flow terms such as accounts payable. The marketing section will help you budget your advertising and promotion expense. And, your personnel section will help you forecast your salaries and wages, payroll taxes and benefits.
There is no great mystery to building financial projections. And now that we have demystified the “art and science” of it, you have the tools you need to get started and confidently plan the launch of your new business idea.
On a final note, you don’t have to go it alone. There are business consultants located at Small Business Development Centers all across the country. These counselors are usually well versed in business planning and helping your produce solid financial projections for your business. So look them up and get started today!
Or if you just can’t seem to find the answer you are looking for, ask me! I am always happy to help an entrepreneur in need!
