Last month I wrote one of my more technical pieces on various capital sources for entrepreneurs. This month, I’m touching on the realism of business plans and assumptions. Given last month’s topic, it seems fitting to start with valuation.
If you’re looking for equity capital, one of the questions you’ll be forced to answer, is how you value your company. I’ve seen entrepreneurs with great ideas fail to get started because they had wildly unrealistic valuation assumptions. A few years ago I met an entrepreneur who seemed to have a great business plan. I considered myself a target customer and would have definitely used his service had he gotten it off the ground. Unfortunately, he thought his PowerPoint presentation and operating plan merited a $200 million valuation. Now, maybe some tech titans could pull that off (Larry Ellison, Bill Gates and the late Steve Jobs to name a few) but for the rest of the world, those kinds of numbers are a non-starter. Valuation is part art and part science with market dynamics changing from time to time. There is no magic web site where you can key in a number of factors and get a valuation (although there are a few that try). The one constant, however, is a realistic assessment of the current market environment for your industry sector and stage of your company.
I tend to see a similar issue with respect to sales and revenue forecasting. Unrealistic and unsupported forecasts tend to be value destructive. Resources are spent against sales that never materialize. People spend time and energy chasing unrealistic goals and then spend time and energy explaining why forecasts didn’t happen as planned. Consumed capital becomes increasingly expensive to replace.
On the other hand, I’ve had multiple clients see record profits once they lowered their sales forecasts to more realistic levels because it allowed them to more appropriately balance resource and spending decisions. This doesn’t mean they lowered their drive or ambitions. Nothing could be further from the truth. It does, however, mean that they set realistic goals and recognized both the possibility of exceeding them as well as falling short. They structured their business to be profitable with realistic sales targets and yet built in flexibility in the event that they either exceeded or missed their goals. This beats an “all or nothing” strategy any day. I realize that it sounds contradictory, but lower sales goals led to increased profits!
The same concepts hold true for expense budgeting. If the expense plan is unrealistically low then it does not allow for the resources required to effectively implement the operating plan. If it is unnecessarily high, then either resources are consumed that needn’t be, or if the dollars are not spent, then undue pressure was put on the sales team to chase sales in order to bring the income statement into balance during the planning stages. Realism with the realization that unforeseen events could change the sales forecast, management might decide it is prudent to invest more resources in the business, or that actions might need to be taken to reduce expenditures for any number of reasons is key.
I understand the need for optimism and can honestly say that I am optimistic about almost all of my clients’ business plans as we start a new year. That optimism, however, is based upon planning, preparation and understanding of what it takes to implement a successful plan. It is based upon knowing that all of the pieces of the puzzle are in place and a track record with the various operating teams that demonstrates that we collectively know how to manage each company whatever challenges may come our way. As a result, 2015, like most years, has brought about some tremendous successes at the mid-way point of the year.
Whether you are valuing your business in anticipation of a fundraising round, setting sales and expense goals, or establishing personal benchmarks, I’d encourage you to be aggressive and optimistic, but at the same time, keep it real!
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected] The archive of these monthly newsletters is posted at the Resources section of homza.com