Financials of a Start-Up

June 12th, 2011 | Uncategorized | SK | Comments Off

One of the biggest problems a start-up faces is to figure out the expected financials.

The biggest issue I have seen with people worrying about financials is breaking it down into smaller pieces.  They just follow an example spreadsheet downloaded from internet or get one from another start-up and start working on the same template.  They do not make significant modifications pertinent to their business.

Another thing that comes to my mind is some people are not able to figure out their target market and market penetration strategy.  They struggle with revenue predictions.

We all know that Profit = Revenue – Expenses. The easiest way to create detailed financials is to break down revenue and expenses into a bit more detail.

Revenue

Expected revenue can now be thought of as units sold times price.  Pricing is a different animal in itself.  There are books on pricing and consulting companies built upon it.  However, pricing for a start-up should not be this difficult.  If it is then rethink your business model.

Generally, it is good to create financials monthly for first three to five years.  For first few months, you can have even weekly detail if you want to.  Create a valid set of assumptions regarding your units sold and use it against price to predict revenue.

One of the biggest things to take into account with revenue predictions is that it should look realistic. Doubling of revenue every month or sudden change of revenue at a certain point of time should be avoided until and unless you can explain that.

If you have not figured out the target market yet then use the market segmentation approach to figure it out before proceeding further.  Otherwise, your financials will not be realistic as you will assume too big a market for your products or services.

Expenses

I find the best way to do financials is to first create a list of major tasks that need to be carried out in next two years. I create a Gantt chart to list activities’ start and finish date.  Then assign the cost that will take to execute those tasks.  This kills two birds with one stone.  You have your tasks planned out as well as have expenses listed monthly or weekly.

Besides all these expenses you have to include your office rent, furniture, utilities, insurance, legal, accounting, payroll, capital investment and other expenses related to your business.  Make sure to add 10 to 20% of all expenses as buffer expense to account for the expenses you may not be able to think of now but will sneak up to you later.

For beyond two years of expenses, you can estimate on monthly or quarterly basis and accordingly enter it into your spreadsheet.

Expenses can be all listed together or broken down into Cost of Sales and G&A. More on that later.

Profit

Add all revenues and subtract operating expenses to get EBITDA (Earnings Before Income Tax, Depreciation and Amortization).

All of these steps are a great start and in most cases good enough to give yourself as well as others more realistic estimate of your future revenues and your expenses.

Comments are closed.