"Wait, I have to do financials for my business?!" That's what many entrepreneurs shriek as perspiration rolls down their foreheads when they're told three or five year pro-forma financials are needed for their business when applying to the Innovation Fund. That's closely followed by, "How am I supposed to do that? I'm an entrepreneur, not an accountant." In all honesty, when asked to write this blog I shrieked, "But I'm a numbers person. I don't write!" It took a bit to calm me down, but I realized I do know about financials and I have written before, so I could do this. Hopefully, your panic will subside or at least diminish and be replaced by some degree of confidence after reading this blog.
Why even do financials?
First, you are putting your time and savings into your business idea. You will need to know if the business will be successful. That means making money! A former boss of mine always said that if you are not making money, it is a hobby not a business.
The financials will tell you not only how much money you will make, but how much money you will need to raise for your business before you generate cash as well as when you will need the money which is equally important. Looking over the financials will help you identify the key variables that may offer opportunities to improve on the profitability of your business such as product price, product costs, or working capital.
Second, lenders, grant awarders, equity partners, and other investors want to know that they will make a decent return on their investment. They will also want to know how much money you will need and when. Your financials alone will not guarantee that you will get funds from these people, but poorly done financials or you not understanding your financials could be the result of you not getting the funds.
How can I do financials for my business when I don’t even have a business?
That’s what most entrepreneurs ask me. My response to them is that you don’t have a “business” yet, but you do have a “business plan.” Creating the financials for your business is merely taking the pieces of your business plan and putting the numbers to each piece.
That sounds pretty simple, doesn’t it? It is if you have a well thought out business plan. I have found that the people who have the hardest time doing financials are the ones who are just in the “idea” stage of their business and have not thought through the business to determine the basic components of their business plan.
Most people have a pretty good idea of what their product is, although it may not be in its final form. That is about all they have. You need to know much more.
Does the product solve a problem, what does it look like, who will develop it, who will make it, what will it cost, does it need testing, how many iterations will be needed? Now that you have the product, who is your customer is, where he is, how are you are going to get that customer, what price he will pay? How are you going to get the product to the customer? How will you grow the business? What support will you need? These are just a few questions that you will have needed to think through in developing your business plan.
These questions will help you develop the categories needed in your plan. Your plan should include a timeline of tasks to be done to complete certain milestones. What resources are needed to do each of these tasks—people, outside help, capital, expenses? Once you have that, you have what’s needed to do the financials for your business.
I have the plan—how do I get the financials?
Okay, you have a plan. It might not be totally complete, but it’s close enough. The Innovation Fund has the tools to make the financials for you. Our Excel workbook that you will use as the template to input the numbers and/or resources derived from the tasks in your business plan and it will create three- or five- year pro-forma financials: Income Statement, Balance Sheet, and Cash Flow. And, all three statements will tie together.
To help you do this we also have a guide that explains the three statements that will be created and takes you through step by step how to “numerize” your business plan tasks and put them in the Excel Workbook. As you know, your business is constantly evolving as you get more knowledge and make changes accordingly. The beauty of this template is that all of the financial statements will change accordingly.
A key benefit in doing these financials is that the logic also works in reverse; the financials are the numerization of your plan, but doing the financials may bring to light something that you many have forgotten to consider in developing your plan.
There are two things to remember about your financials:
- There are numbers that will not be right
- The numbers will always be changing.
And if you still have questions, that’s okay. The Innovation Fund application process has help at every turn. Just give us a call or send an email and we can set up an appointment.
Just to let you know, it probably took me three or four times longer than the average person to write this blog, and I had some help sprucing it up. I’m told I have to write more of these blogs. Surely I can get better each time. I’m sure your financials will too.