Joel Schwarzbart describes himself as half a CFO. What does that mean? Well, basically it means that Joel is a consultant who does many (if not most) of the financial activities that a full time CFO normally does but he does them for multiple clients.
Earlier this week, Joel gave a talk at the CSUF Startup Incubator in Placentia (by the way, we bring in experts all the time to give talks and to have office hours, you can see all of our planned events by going to our Eventbrite page) about how to do forecasting if you are an entrepreneur working on a startup. While he talked at great length on a number of subjects that are important for forecasting there was one thing that I want to focus on here: Assumptions.
The accuracy of your forecast, which is the combination of all of your projections for your business, is in large part determined by the accuracy of your assumptions. Some things you have to assume:
- How much you will spend on marketing efforts
- The costs of the raw materials that go into making your products
- Variable employee costs
- Conversion rates on your ads
- Your effective tax rates
- Travel expenses
- How many new customers you will bring online
- And the list goes on and on and on….
Many of the entrepreneurs and students I work with do not give nearly enough consideration to their financial assumptions and yet it is from these assumptions that all forecasts come from. Fortunately, there are some easy ways to develop your financial assumptions and here are some of them:
Company Financial History
If your company has been around for a couple of years you will have to assume less than you would if your business is a startup. Simply use your actual history and financial statements to inform your assumptions. You will still have to take into consideration some other data points that I will cover presently.
For our students, I always recommend them to look up the industry norm financial ratios in the library. In our library there is a database of financial ratios that is broken up by industry and by company size (there might be a huge difference in quick ratio for a small company versus a large company after all). With these kinds of industry and company-size financial ratios you can compare them to the financial ratios that you have developed for your pro forma (forecasted) financial documents; if the financial ratios you have aren’t even close to the industry norms then you might have an issue.
Besides financial ratios, there are many other kinds of industry norms that you can find out if you look hard enough or ask the right people about (industry magazines are usually a good source for this kind of information as are people who currently work in a given industry). For example, if you are opening a restaurant it would be a good idea to figure out your turnover rate (how many times a table is used over a period of time by a party).
Other Secondary Data
Besides industry norms, there are a lot of good sources of secondary data, which are nothing more than other sources of relevant information. For example, knowing the general strength of the economy is a good thing to know; knowing the strength of the economy for your area of operations is even better. Maybe the weather plays a part in the success of your business or maybe new regulations will play a more significant role in your business. There are many different fields to look into for secondary data.
(Yes, industry norms are a kind of secondary data but I think they’re important enough to have been covered separately.)
Now that I think of it, this might be the best kind of data that there is. If you directly observe something then that’s data that others do not have. For example, I remember reading about a startup a number of years back that was making some pretty good money taking pictures of department displays. Why? Competitors and companies that make items that go into department stores really wanted to know what was popular at that moment.
I have counseled students to get a head count on how many people went into a restaurant. Municipalities put out those strips on the road to get a count of how many vehicles pass by. Doing A/B (or multivariate) testing is another awesome source of observable data. Your company’s history is a form of observed data and, please, keep good metrics on your business; that will help you immensely.
I’m sure that there are other broad sources of data that I missed but I think you get the picture about assumptions. They are important because, like food, if you put good stuff in you will get good results and vice versa. And you need to have quality forecasts for your business so that you:
- Make sure you have positive cash flow
- Can plan to produce the right amount of product
- Know where to spend money to get a good ROI on marketing
Forecasting is a fundamental part of any business and we were lucky to have Joel give a great talk on forecasts. But forecasting is just a part of growing a business. There are a lot of things to consider and to do it right you should have mentors to help guide you. You can find them on your own or you can work with mentors that you can find at CSUF Consulting or the CSUF Startup Incubator.
CSUF Consulting is great for clients that already have a business who are looking to improve in some fundamental way (i.e. marketing, operations, leadership, etc.). Each client is paired with a student team and a mentor who, as part of their classes, work with clients over the course of a semester to develop a comprehensive strategic plan that directly addresses some of the toughest issues or most promising opportunities that their client has.
The CSUF Startup Incubator, on the other hand, is built off of decades of entrepreneurial experience to help entrepreneurs go from concept to launch. At the beginning of a six month residency, entrepreneurs at the CSUF Startup Incubator sit down with Incubator staff and their dedicated startup coach to develop a startup plan that will position the entrepreneur for success. From that point on the team gets to work implementing that plan with the help of the entire CSUF Entrepreneurship community, which includes more than 500 subject matter experts who can be called upon to help. Oh, and residents at the CSUF Startup Incubator also get one of our CSUF Consulting teams attached to their startup to help them develop their startup plan by focusing their efforts on a critical part of the entrepreneur’s startup.
Give us a call today if you are interested in working with us, our number is (657) 278-3930. And to learn more about how to become a successful entrepreneur make sure to check out our Knowledge @ CSUF Entrepreneurship series where we have published posts and videos on topics that are important to entrepreneurs.
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