Starting and running a company can be overwhelming. Endless new action items seem to appear magically on your To Do List as you day develops – with all of them either whispering or screaming to be your top priority. And, when the day is done, it often seems that one or more of those unanticipated priorities won – and the most important action items you originally had on your list when you walked into your office this morning did not get done – again.

So, how is an entrepreneur to decide on their priorities – especially when there is so much that needs to be done? The answer is surprisingly easy.

1. Priority 1: Absolute top priority for the CEO of a start up company: maintaining a comfortable cash balance. That’s what is in your checking account. It cannot go to zero or go negative. Period.Every morning, everything on your priority list has got to focus on either maintaining or increasing your cash balance so that, as a minimum, it exceeds your comfort level. Everything else is secondary.If this is not your top priority, you greatly increase your risk that you will go out of business.

2. Priority 2: The only thing that is close in priority…but that is still second to Cash Balance…is generating positive cash flow from operations. If you have this, a lot of #1 is automatically taken care of. Remember, even the smallest of cuts that never stops bleeding will eventually kill you.Get above break-even as quickly as you can and stay there. There are two basic ways to do this: increase sales and cut costs. Running lean and keeping costs low by cutting all fat but no muscle is almost always a good idea.However, you can only cut so much and still have the infrastructure that you need to be in business. That leaves sales as the primary way to get above break-even and stay there. Every day, your Priority 2 should be driving sales – including short-term and long-term revenues. For a start up company, I recommend that the CEO spend half of every day on action items that directly relate to marketing and generating sales.
3. Priorities 3 – 101? See Priority 1 and Priority 2. Yes, they are that important.

4. Priorities 102 – 1,001? Items that at least indirectly, but positively, help Priority 1 and 2. Period.

5. Priorities 1,002 – 10,000? Everything else required to run and grown your company.

Ignoring this pecking order of priorities is why most start up companies fail…so slay those dragons every day by focusing on Priority 1 and Priority 2.

How do you know what a comfortable cash balance is for your company? How do you know where real break-even occurs with your current products and services?

You have a realistic business plan – and you measure actual versus budget every month.

Too many entrepreneurs make a huge mistake throwing together their business plan with sweeping generalizations that skew their projection so badly that their whole plan really is a case of GIGO – Garbage In / Garbage Out. The only thing worse than going the wrong direction based on Garbage Out – is to go the wrong direction, enthusiastically.

A bad business plan usually gets you going the wrong direction, often enthusiastically. The result is that most entrepreneurs don’t recognize this problem until it is too late to change direction and save their company.

What makes much more sense is taking the time to generate realistic and meaningful start up, revenue, personnel and operating cost numbers for your new start up company. If you need help, get experienced mentoring from someone who has the expertise you need – someone who can ensure your underlying assumptions make sense for your company in the real world.

Then, you can use your business plan to know how much start up capital you will really need, where your cash balance will be each month and each year…and when you will get to sustained positive cash flow from operations.

With this knowledge, you will know how to best invest your Priority 1 and Priority 2 time on your start up company to get you maximum results.

What is the second biggest mistake?

Many cost-sensitive entrepreneurs depend on number crunchers, bean counters and newly minted MBAs for their projections – just to save a few dollars.

New start up CEOs doom their new company by pinching pennies in the wrong place. Instead, what they need are pivotal insights from experienced consultants who can provide the guidance the entrepreneur needs for producing a realistic, genuinely implementable business plan.

Your business plan is not some academic document – instead, it is your crucial road map to successful implementation of your vision for your new company.

The most important part of any business plan is the detailed financial projections that are the basis for the entire business model of every new start up company. There are four sets of underlying assumptions that drive all the projections:

1. Start up costs – what will you need to spend up front to get the company going?
2. Sales forecast – the single most important set of assumptions for your whole plan – how many of what, will you sell, for how much, at what costs, when?
3. Personnel – how many, of what kind of employees, will you need at what cost, when?
4. Operating costs – what will it really cost to be in business, generate sales, give necessary sales support and exemplary customer service and cover all back office expenses?

Every part of your financial projections is just arithmetic – based on those four sets of driving assumptions. Because it is just arithmetic, many entrepreneurs make the often fatal mistake of assuming it is trivial and can be done easily and cheaply.

But – if you guess wrong on any of these assumptions, then most of your projections are wrong – including two of your most important projections: your cash flow and your capital needs. If you guess wrong on your assumptions that impact these, then you will probably run out of money and your new company will fail.

Number crunchers and bean counters are great at arithmetic. So are newly minted MBAs. And, they can be relatively cheap to hire. But this cheap hire may be the most expensive mistake you will make as a start up CEO.

These cheap hires almost never have any experience base or expertises that help entrepreneurs make meaningful assumptions. So, entrepreneurs who use this approach for their business plans end up with GIGO: garbage in, garbage out projections that are misleading at best – but more often, fatal in the end.

As the adage goes, the only thing worse than going the wrong direction – is going the wrong direction enthusiastically. By basing your business plan on the wrong assumptions, you end up going the wrong direction – probably enthusiastically – believing your bean counter-generated plan will be the path to wealth.

Entrepreneurs who have thought they were saving a few hundred dollars by hiring cheap number crunchers or inexperienced MBAs, end up losing everything they’ve invested in their new company – all because they were penny wise – and dollar foolish – or rather, thousands, hundreds of thousands or millions of dollars foolish.

Cash is always limited for start up companies – but this is one place you do not want to get trapped by false savings.

What’s the best way for you to avoid the second biggest mistake for your new start up company?

Hire an experienced management consultant who specializes in start up companies – particularly a consultant who has started at least a dozen of their own companies. That way, you get insights based on real life experience that will help you end up with a genuinely implementable plan for the future – your future and the future of your new start up company.

Ceo Resource LLC has specialized in cost-effectively helping over 2,000 entrepreneurs and start up companies with their business planning for the past 14 years.

Please check out our services at:

www.ShouldYouStartACompanyToday.com <~~ Sample documents and blog

www.ChiefDragonSlayer.com <~~~ Business plans and planning

www.StartUpCompanyMentoring.com <~~~ 1:1 CEO coaching, consulting and mentoring

www.StartUpCompanyWorkshop.com <~~~ 1:1 Insights to design your own business model, your business plan, your own future

www.StartUpCompanyUniversity.com <~~ Training courses for the entrepreneur and start up CEO

Wishing you stellar success for your start up company,

Robert Lee Goodman, MBA

One of the many great things about my profession is working with so many bright entrepreneurs and CEOs in so many interesting businesses – and providing them with pivotal help to accelerate the success of their vision.

(There are so many others – which are so proprietary in nature – that I can’t even list their industry here!).

International client locations include: China, United Kingdom, Germany, France, Netherlands, Israel, United Arab Emirates, Saudi Arabia, Australia, Singapore, Thailand, Honk Kong, Japan, Taiwan, Canada, Brazil, Mexico, India, Cayman Islands, Italy, Costa Rica, Spain, Belgium, Sweden, Pakistan, Austria, Russian Federation, Philippines, New Zealand, Argentina, Panama, Antigua, Ireland, Malaysia, Switzerland, Guatemala, South Africa.

If you need one on one consulting and mentoring, please see www.StartUpMentoring.com for pricing and details. If you need a business plan or strategic or tactical business planning, please see www.ChiefDragonSlayer.com for pricing and details. If you would like a very affordable course on developing your own business plan, please see www.BusinessPlanAudioCourse.com.

My 14 plus years of providing this kind of broad diversity of top-level tactical and strategic planning enables me to quickly relate to your industry and specific business needs – which means you won’t have to spend extra time for me to come up to speed with your needs, your industry and your particular set of dragons that may be keeping you from success.

This one is filed under “Dragons – Sales: How Do You Forecast Revenues For A Start Up Company?”

Question:

I am working on a quickie Excel spreadsheet I developed for a business plan for my internet startup company and am clueless how to even start getting a handle on my guessing my revenues for the first year, let alone the second and third years of my new company. I obviously need to hire you for a lot of what I’m doing since I am also clueless about a lot of things and how to implement them – and it looks like you really have already done it all! But I want to at least have a guess on revenues before I take the next step and start spending money. Help!

Dennis

Answer:

I haven’t done it “all”…but in three decades, I have done a LOT when it comes to start up companies! Working with 2,000 start up companies can do that for you!

In answer to your question, projecting future sales for ANY company can be challenging – but it can be especially difficult for a start up company with no history for guidance.

Without spending time, effort and money with validated market research, it will be hard knowing the real size of both your addressed market and your target market. For most small, start-up companies, their target market is substantially larger than the amount that will be actually captured in the first few years. That having been said, you are still faced with the challenge most start up companies have: predicting a realistic sales forecast.

Your sales forecast numbers are probably one of the most important assumptions you make in developing a business model for your new company. Your sales numbers will have an interrelationship on many of the other numbers in your plan: start up costs, personnel needs, advertising and marketing, support costs, how much space you lease, etc.

An excellent way to forecast sales is to already KNOW your customer acquisition cost. If you know when you spend $1,000 on advertising and marketing, that you end up with 10 new clients, then your customer acquisition cost would be $1,000 divided by $10 or $100. In other words, if you know from history that it will cost you $100 to acquire and sell to a real, paying customer, then you figure out how much you are going to spend in Years 1, 2 and 3 and divide the amount spent by the customer acquisition cost. The problem with this approach is that, for most start up companies, there is no history to know what the customer acquisition cost will be. (Hint: It will usually be a LOT higher than you would expect it to be!)

There is another basic rule of thumb that might still get us close…to spend about 10% of annual revenues on advertising, marketing and other sales related costs. Although you can make the case that a start up should spend more or less than this, let’s assume for now that is what we will do. So, this is what I would do for the first pass at your business model:

• Price your services and products with your best guess as to what the market will bear based on the competition or alternative choices your prospective customers have as ways to currently solve their problem.
• Figure out how big you would LIKE to be in annual sales for Years 1, 2 and 3. Say, $1 million, $3 million and $5 million (or whatever you think is reflective of YOUR vision).
• Then, go back and figure out how many UNITS of your product and services that have to be sold each month or each year to accomplish this.
• Then, figure out for each incremental UNIT you sell, what if any, incremental cost will you have associated with that new customer. Use this amount in the Direct Unit Costs for that product or service.
• That will take care of your sales forecast side.
• Now look at the number of customers you will have each month and each year and extend your vision to see what kinds of people you will need in your organization to take care of all the issues that will be required to make the sale, collect the money, update the databases, support the customers, provide enhancements to the products and services, handle complaints, manage the company, pursue strategic alliances and partnerships and every other task you can envision FOR THE NUMBER of CUSTOMERS YOU ARE SHOWING IN YOUR SALE FORECAST. List these folks in the Personnel Table with how much you think you will have to pay to get good people. Be sure and take timing into account for the hiring. You most probably won’t need everyone on Day 1 / Month 1. Many you may not need until Month 5 or 6. Many you may not need until Year 2 or Year 3. People are usually the most expensive asset you add to your company so try and stay lean without sacrificing muscle development!
• Lastly, look at each of the operating cost line items that I have in the Worksheet and try to imagine what it would cost for each item to both generate sales…and support an organization that is responsive to the growth of your vision and providing stellar support for your customers. Again, this is where we plug in the 10% of Revenues for your total Sales and Marketing costs.
• Finally, go back and fill in all the Start Up Costs you will require in the way of R&D, computers, desk and chairs, excellent consultants!…and all the other stuff you will need to open the doors – taking your projected company size for Year 1 into account.

By using this approach we have established a LOT of things somewhat independent of the revenue model we finally decide on using. You have already set what revenue goals you have and what kind and size organization you will need to be in business…and the basic operating costs to provide the kinds of services in your vision. These TYPE of costs will all change some…but surprisingly little. The amounts for each can change a lot depending on the scalability of your numbers.

However, even if we change our revenue model, you will basically need the same kinds of folks doing the same kinds of things for the same pay…and have operating costs that will be close in most areas – with all of these just scaled up or down to reflect your changing revenue model.

Also, check out the 114 questions and my audio at www.StartUpCompanyWorkshop.com and see if any of those questions might give you added clarity for other business model considerations for your Excel spreadsheet.

The important thing is to start pulling all the above components together in a working hypothesis for our business model….and then tweak as much as needed until we have a finely tuned model that works the way you want and still reflects your vision!

Good luck with your Excel spreadsheet. Just let me know when you are ready for my help.

What do you think?

Post your ideas if you have other thoughts.

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Robert Lee Goodman, MBA
Ceo & Chief Dragon Slayer
www.CeoResource.com