For people starting a business, I know it can be extremely overwhelming regardless of whether you’re starting from scratch and don’t have much capital to work with, or you have the benefit of working capital behind your work. Writing and mapping a financial projection for a lot of people is at times not only the lest exciting part of the business, but also one in which they might be entirely proficient. The personality traits of a person that decides to start a business are vast, and they need to be in order to pull off the goal of a thriving enterprise. Sometimes, one of those trait’s is not fiscal diligence.
That’s OK, but, it’s generally the bottom line to success or failure, pun intended. There’s a reason in colloquial language that we use the term “bottom line,” and it means the same thing all around: We’ve shaved down all the fluff to this one bare bones reality. And with a business, if you don’t have a goal to eventually steer this bottom line to profitability, there is really nothing good that’s going to come of it. You’ll go out of business. Investors will sour and you won’t get another round. Your valuation will drop. You can’t invest in growth. The list goes on and on.
But don’t fret, because here’s another bare bones reality: There’s really no way to tell in the very beginning what your finances are ACTUALLY going to look like. Sometimes, that reality is what deters people from drawing up as accurate of a financial plan as possible in the beginning. They know it will be wrong, so they put its importance behind the legion of other things they have to do in the short-term. However, you have to do it because your initial projections are going to read like the chapters of a book, and as you begin to have monthly numbers roll in, you’re going to be able to compare your projections to reality. The financial projection becomes a financial reality, and all of a sudden you can superimpose what you believed to be truth with actual truth.
Usually, most people overshoot the bow with their financial projection, it just happens. Even when I sit in investment “pitch” meetings and the entrepreneur projects his finances onto the wall, whether it’s a massive uptick in revenue or a planned linear growth, I usually in my mind know that it’s usually on the high side. It makes sense, you have high hopes for your business and you believe you can achieve what you had planned in your mind. The other reality is that there is no way you’re going to be able to atone (before you ever tried) for the things that pop up when running a business. Ask any investment professional or venture capital firm, and they will tell you this is one of the reasons why they put much more value on a company being run by someone “who has done it before.” One reason is because that person has a much greater likelihood of navigating the inevitable unknown.
The problem I see many times is that people wait too long to adjust their projection based on the results of reality. What happens is that their projection was based on some measure of logic, the numbers are under, meet, or exceed their projection, and then they don’t take the time to adjust their projection, they just adjust the current month. Now, if you’re exceeding projections, that doesn’t excuse not adjusting them, but it certainly won’t lead you down the path of despair. It WILL, however, delay your insight into potential new hires, growth, or product development and production. On the other hand, if you’re not adjusting your projections on down months (not “one-off” down months, but consistent missed projections) then you’re headed into The Money Pit.
People have many reasons why they don’t want to adjust projections and here are just a few off the top of my head: They think it is an isolated bad month, they justify the month because they are new, they don’t have the time to continually update projections, they don’t want to see what an adjusted projection will look like, etc. The problem is that none of those skirt the reality that is going to come eventually if numbers continue to be down. Adjusting your projection allows you to analyze so many things, such as whether you need to let an employee go in order to stay afloat or whether your actual numbers mean you’re overspending on product, etc. In order to avoid The Money Pit, you need to make your financial projections a living beast, because when your “bottom line” reaches zero, the game is truly over.