Calibrating Financial Objectives

1]  Start with a "Use of Funds" list with three key figures: minimum funding to get your venture off the ground and test the waters, nominal to hit stability (self-funded, break-even?), and optimal (move fast to grab market share before others can do so).  In the example below, this company nominal number is $140K.  You DO need a chart that clearly explains your use of funds. Yes, you should include salaries to the key employees.  And you should know how long it will take to get to stable ... the money will come from a combination of sales revenue and your start-up funds.

2] When you know your optimal start-up funding number, subtract the amount that the founders will contribute. This does NOT have to be a big number, but should show some level of commitment from the founders, albeit modest.  In the case below, the founders are committing $40K, so the company needs to raise $100K from investors.

3] Early stage investors are typically looking to acquire 20 to 30% of the company.  In the example below, this company is proposing selling 25% of their venture for $100K from investors.  So if everything goes their way, this startup will have $140K cash committed. The $100K from the investors is 25% of the company,  the company needs to be worth $400K total. Therefore, the business plan (AND the team that goes with it) must be worth $260K.  Will your plan be worth $260K.  YES, it CAN be ... no joke.  Is it easy. No, it's not. Takes a lot of work, but you and your team CAN do it.

4] To attract investors to this venture, they want a significant return on their investment to compensate for the very high risk they are taking putting money into something that at this point does not exist.  It is a startup, NOT a done deal!  So they are typically looking for a return on their investment in about 5 years of 10x to 20x ... Yes, 10 to 20 TIMES their investment. That is roughy 50% to 80% ANNUALIZED!  A whole lot more than what the no-risk bank would give them, or the typical 10% annualized return from Wall Street.  Where does this return come from?  The value of your venture in 5 years will be greater than what it is today.  How much greater ... 10 to 20 times!  In the example below, the venture valuation goal in year 5 is 20 times startup ... $8 million.  That is a GOAL for the company, but the company has 5 YEARS to make it happen.  YES, it CAN be done.

5] Rough estimate, if this company needs to be worth $8M in 5 years, its revenue for that 5th year should be in the ballpark of $8 million.  Yes, valuation of the company AND revenue are both about the same.  ROUGH estimate, but a reasonable one to use to CALIBRATE your financials.  If this company is going to generate $8M of revenue in year 5, how many "cookies" will it have to sell?  A lot!  A whole lot!  But it also has 5 YEARS to make it happen.

6] Suggest you use this process to APPROXIMATE and "CALIBRATE" your financials.  Now ... this process has a lot of assumptions. A WHOLE lot of assumptions. The most fundamental assumptions is that this company has been managed well during this 5 year period. No funny business. Good cash flow, good balance sheet, no major down-side issues like getting sued for patent infringement, et al. GOOD management.  Legal, moral, ethical.  YES, that IS how you will manage your venture.

7] The numbers below favor the INVESTOR.  A 20x return is on the high end of expectations for a good, solid business plan and a good, solid team.  Less than 20x is more favorable to the startup team. Less than 10x is minimizing the risk of your startup and prospective investors will think you're getting cocky.  More that 20x and the startup team is telling potential investors that they think risks are REALLY high.  The range to target is 10x to 20x ... the risk-return multiplier.  "Calculate" (an estimate, really) this number LAST.  If it's between 10 and 20, nice!!

8] Everything here is subject to change, and likely to have "exceptions" for this or that. Every investor looks at things a little differently. And every venture IS different, even if they are similar.  So get used to investors and judges and mentors and advisors giving you different advice and perspectives.  There are multiple paths to success. Be careful not to stray too far from your chosen highway!  The biggest money issues I've seen are 1] the numbers don't "fit" together, and 2] the numbers are way outside the "rational ballpark".

Basic Financial Statements

There are a variety of tools used for pro forma financial objectives planning and post-facto reporting ...

• Assumptions: a thing that is accepted as likely to happen ... the probability of a particular customer placing an order in the next 6 weeks, for example
• Budget: an estimate of income and expenditure for a set period of time
• Income Statement: provides performance information about a time period. It begins with sales and works down to net income and earnings per share (EPS)
• Cash Flow Statement: the total amount of money being transferred into and out of a business; a positive cash flow is good.
• Balance Sheet: a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time.

Basic Business Glossary

• Accounting: the action or process of keeping financial records relating to a particular period or purpose
• Advertising: describe or draw attention to a product, service, or event in a public medium in order to promote sales or attendance
• Assignments: a task given to someone as part of a job

Things to Avoid in a Venture Plan

1. Form over substance. If it looks good but doesn't have a solid basis in fact and research, you might as well save your energy.
   
2. Empty claims. If you say something is so, back it up in the next sentence with a statistic or fact or quote from a knowledgeable source that supports the claim.
   
3. Rumors about the competition. If you know for sure one is going out of business you can allude to it, but avoid listing their weaknesses or hearsay. Stick to facts.
   
4. Superlatives and strong adjectives. Words like major, incredible, amazing, outstanding, unbelievable, terrific, great, most, best, and fabulous don't have a place in a business plan. Avoid ``unique" unless you can demonstrate with facts that the product or service is truly ``one of a kind". Your opportunity is probably not unique.
   
5. Long documents. Keep it under 25 pages total. Write whatever you want to write, but keep it at home. If they want details, they will ask.
   
6. Over estimating on your financial projections. Sure you want to look good, but resist optimism here. Use half of what you think is reasonable. Better to underestimate than set expectations that aren't fulfilled.
   
7. Overly optimistic time frames. Ask around or do research on the Internet. If it takes most companies 6-12 months to get up and running, that is what it will take yours. If you think it will take 3 months to develop your prototype, double it. You will face delays you don't know about yet--ones you can't control.
   
8. Gimmicks. Serious investors want facts, not hype. They may eat the chocolate rose that accompanies the business plan for your new florist shop, but it won't make them any more interested in investing in the venture.
   
9. Typos and misspelled words. Use your spell checker, hire an editor or have four people read the document from back to front, but get those errors out of there if you want to be taken seriously.
   
10. Amateurish financial projections. Spend some money and get an accountant to do these for you. They'll help you think through the financial side of your venture, plus put them into a standard business format that a business person expects.
    

[Thank you, Kaye Vivian]

Sales Tips

Most business owners would like to focus all their energy on daily business operations and serving existing client demands. It's critical to your success, however, to focus on gaining new business from current and potential customers in order to grow and sustain your company.

Budget Considerations

Tips for Creating a New Venture

1. Identify and screen opportunities ... create a vision and concept statement; build an initial core entrepreneurial team; describe the initial ideas about the value proposition and the business model
2. Refine the concept, determine feasibility, and prepare a mission statement ... research the business idea and prepare a set of scenarios; draft the outline of a business plan and an executive summary
3. Prepare a complete business plan with a financial plan and the legal organization suitable for the venture
4. Determine the amount of financial, physical, and human resources required ... prepare a financial model for the business and determine the necessary resources; prepare a plan for acquiring these resources
5. Secure the necessary resources and capabilities from investors, as sell as new talent and alliances
6. Launch the new venture!

[2.14]

Industry Analysis Questions

1. In what industry is your venture? (Use NAICS industry nomenclature)
2. What is your primary NAICS number?
3. What other notable companies are in this industry?
4. What companies are the industry leaders, and why?

Traits of Terrific Teams ...

1. Challenge each other
2. Provide mutual inspiration
3. Perform well in a chaotic environment
4. Maintain control despite the extreme pressure
5. Trust each other
6. Respect each other
7. Share a common vision
8. Open to new ideas
9. Have a sense of humor
10. Have integrity
11. Full of energy
12. Team players
13. Honest and direct
14. Calculated risk-takers
15. Get along with others
16. Able to handle pressure
17. Are inspirational
18. Are doers
19. Are competent in their field
20. Are balanced
21. Are experienced
22. Share leadership and ownership of team tasks
23. Communicate continuously
24. Provide performance feedback
25. Most decisions reached by consensus
26. Division of tasks is clear
27. Collaboration is the norm
28. Share learning
29. Listen to each other
30. Comfortable with disagreements
31. Are cohesive
32. Are mutually supportive
33. Coordinate activities
34. Share work expectations
35. Have complementary skills but a collaborate style

How to Write an Operations Manual

Operating a company without a formal set of rules and regulations is similar to sailing across the ocean without navigational charts. Rarely can objectives be reached in either case without an operations manual that explains "how to do it."

If your business seems to be sailing along without an operations manual, why take the time to compile one: Because there are at least eight ways it can benefit you and your company.

An operations manual...

• Establishes a comprehensive source of company policies and procedures
• Facilitates even-handed, consistent administration of personnel policies
• Promotes continuity in management style throughout the organization
• Helps identify problems before they arise, minimizing "crisis management"
• Reduces the number of emotional decisions, encouraging a businesslike climate of objectivity
• Defines authority clearly and distributes responsibility
• Becomes a training tool for employees
• Offers examples of standard forms, reducing the number and variety of forms used.

In any growing company, no one has the time for an extra project such as creating an operations manual. Top management must personally endorse the project and provide leadership to keep it moving. Establish deadlines and designate a "doer" in your company to get the job done.

Gather all existing procedures, systems, and forms. Talk to all levels of management and staff to get their ideas. Discuss the manual with field employees to ensure that all actual day-to-day working needs will be covered. Input from former staffers can be valuable, too. Concurrently, prepare a checklist of points that should be covered in your company's operations manual.

Consider these eleven basic sections:

1. Introduction: Purpose of the manual; how the company started; business objectives and philosophy; description of products and services; economics of your business.
2. Organizational chart: Who reports to whom; job descriptions; addresses of company's facilities; importance of each department and division.
3. General employee information: Attitude toward customers, suppliers, and other employees; statement on how to handle telephone callers and visitors; housekeeping policies.
4. Personnel administration: Hiring practices; employment forms; when and how workers are paid; outside employment; reprimands; hours of operation; coffee breaks and lunch hours; dress code; personal behavior; frequency of salary reviews; advancement opportunities; benefits paid by the company; contributory benefits; explanation of payroll deductions; labor laws; use of time cards, scheduling; overtime; vacation entitlement and holidays.
5. Products and services: Customer relations; supplier relations; sales procedures; taking pride in what the company does.
6. Operational procedures: Flowcharts, process documentation, detailed directions and procedures for each department. This detailed documentation may not necessarily be part of the “master” manual but instead may be subdivided into appropriate sections which reside in detailed department manuals.
7. Paperwork: Administrative procedures; ensuring accountability; billings; sample of each form; purpose of each document; routing flowchart for paperwork; summary of deadlines and due dates.
8. Safety and security: Protection of physical premises; personal security; statement about protection of company assets; importance of safety to the employee and the company; handling of confidential information.
9. Emergencies: How to handle accidents; what to do in case of fire, power failures, robberies and thefts’ emergency telephone numbers.
10. Maintenance and repair: Telephones; service people; who should authorize repairs; trash removal; key control; handling of equipment; property damage or loss.
11. Legal: Compliance with local, state, and federal laws; handling of regulatory agencies; inspections; record keeping requirements; maintaining ethical standards.

Once you have pinned down what you want to say, how should you say it? Convey the meaning briefly and clearly. Remember that the message is for the benefit of the readers—your employees. Too often, company documents are written either pretentiously (to enhance the stature of the writer) or ambiguously (to protect the writer should a question arise).

Don't fail to put certain procedures in writing just because it seems impossible to cover every eventuality; additions and revisions are inevitable.

Here are several tips on writing the manual:

• Present instructions in a logical order.
• Be specific. State exceptions if those exceptions have occurred frequently in the past.
• Use language and examples that are common to your company's employees.
• Adopt nonsexist language (for example: salesman becomes sales representative or salesperson, watchman becomes guard).
• Have a qualified outsider (preferably an educator or professional editor) do the editing.
• A loose-leaf, three-ring format permits great flexibility in using, reviewing, and updating material. "Sections" should correspond to chapters of a book. Within each section, the material should be in outline form.
• Do not use a "Miscellaneous" section. It becomes a catchall revealing less-than-thorough categorization.
• Each page should contain the section title, the date the page was issued, and a page number. This simplifies both the task of keeping the manual updated and the distribution of new or revised material.
• To complete the manual, prepare a thoroughly cross-referenced index to topics covered.
• A chain of command should be established to make revisions, and one person in top management should approve all proposals for change. Otherwise, duplication and overlap will create confusion.
• Finally, your operations manual should be reviewed at least once a year because, by its very nature, a growing company creates change.

[Thank you, Kenneth R. Chane]