How much money will your growing company need? The answer is, you want enough investment to grow the company to its potential, yet do not want to over-fund, giving up too much equity. You cannot raise funds without a reasonable estimate of what you need.
The first step is to build a projection of the business expenses and revenues - a Pro Forma Income Statement. This is a tool to describe the business, and is fundamental to understanding how much capital you will want to raise. In combination with a cash flow analysis, which is based on the income statement, you will be able to get a handle on what you will need. The process is five steps. It is easy to grasp the methods, but each step requires focus and discipline to execute - just like growing a business.
Step One: Begin at the Beginning
Start by developing a specific picture of what your company will look like as it grows. Do this on a simple schedule, with the months across the top, and milestones down the left. I generally do this in Microsoft Excel, being a finance geek. Some advisors say project out five years, and this may be useful in some businesses, but not in most. Three years will be enough to get you going.
Down the left side will be the key events you expect to achieve over the coming three years. This is NOT your financials, which describe the cost/revenue effects of what you do. This lists the business events that drive your business. Your schedule should include marketing milestones or projects like needs assessment, market identification, and product requirements finalization. You should include first prototype and putting a beta unit into field test. Sales events include early partner relationships, and a milestone of stores carrying product (show numbers of stores each month), distributors carrying product (show numbers), or direct salespeople.
To help you set up your schedule, we've created a Draft Workbook that you may access at www.techbriefs.com/workbook.xls. Go to the Expenses page of the workbook for an example of how your planning tool might look.
Step 2: Know Who Your Friends Are
Hitting the milestones you laid out in Step One will require help if this is to be a sizable venture. Therefore, you need to create a Schedule of Employees. This is done in the same format and scale as the Event Schedule built in Step One, (use a copy of the worksheet, if you are working in the templates from the Draft Workbook), but it will specify the employees required to get to each event, marked on the schedule as they will be hired.
The people at the company make the business work – or not – and therefore, one of the critical concerns of the CEO and the investors is choosing the right team. There are two important hires that most technologists need early in the process: a head of marketing and a chief financial officer (CFO). These two help the engineer/scientist address those areas in which they usually have the least experience and expertise.
When we talk about any other professions, we say "it's not rocket science," suggesting that other professions are easy. However, if you have ever tried to glue up a chair, making it clean and strong, you know that there is knowledge or skills that you do not possess. You could learn it, but the professionals you are seeking have many years of knowledge and training, and given what you are trying to accomplish, learning a completely different skill set is not advisable. You should not try to "catch up" on skills outside your expertise during this timeframe. Bring on the experts, work with them and listen to them, and you will benefit.
The VP of marketing's critical early contribution to the business plan is defining the market, how your company intends to reach customers, and the costs of getting and building customer awareness, preference, and choice of your product.
The CFO needs to be a business partner, not a "bean counter" – a small company has no beans to count. The CFO should work with the team, bringing the finance lens to the business model, the distribution methodology, the pricing, fundraising, projections, and similar projects. They are there, like you, to help the business grow through their own special expertise.
This forces you to think carefully about what skills you will need and when. When do you bring in the salesperson – just before the product launch, or much earlier to help build the collaterals and reach out to key customers? How many engineers will it really take to get to a completed, salable product, and for how many months? Can you justify bringing in administrative help early?
This is where the grinding work really begins. This may seem irrelevant, or even unknowable; it is neither. Without a clear picture of what your business may look like, based only on today's limited knowledge, you cannot argue either for the growth potential of the business or the reality of your need, nor will you be able to convince potential investors of your ability to make these decisions as you progress. Projections are unlikely to come true exactly, but they are the best tool we have to make decisions today that will support tomorrow's growth. If you don't have the experience to make projections with which you feel comfortable, have another member of your team or your board, or an advisor, review or even draft the projections.
Go to te Draft Workbook at www.techbriefs.com/workbook and see the Personnel & Salaries page for an example.
Step Three: Develop a Revenue Plan
Now project actual sales by month, based on the events described in the Event Calendar and the staffing from the Schedule of Employees. Sales normally will not start until you have a final product, although some companies can sell services or even some products (which may include discounted beta versions) before the milestone called "Final Product" hits.
This generally is done from the "bottom-up" approach, which is based on a model matching the distribution method. If the company uses a direct sales force, create a model that tracks by salesperson, showing their likely sales per period. Build a learning curve into each salesperson's sales, reducing their sales in the early months and quarters to arrive at the expected run-rate sales per salesperson by the end of nine or 12 months.
Distributors and stores work in similar ways. Each distributor, store, or channel will be expected to add a certain amount to sales, once an initial ramp-up period is completed. Adding stores or distributors will correlate directly to the number of team members with that responsibility.
Here is where the hard work of the first two steps comes to fruition. It will often also drive you to go back and change your initial estimates of major milestones and of the team. This is a critical process, and making those constructs sound and supportable will not only make funding more likely, it will help accelerate your activities once you have the investment in your coffers.
However your revenue grows, show it on the same type of schedule used in the earlier steps, and show the first sale, first key lighthouse customer sale, and revenue milestones of $10k in one month, then $100k, then $1M.
In next month's article, we'll estimate costs to make these events happen, and roll them up in a standard financial format that banks, investors, and venture capital companies use to make investment decisions.
About the Authors
Bill Neill has over 20 years experience in bringing new products to market in the high-technology markets, including his work at Hewlett-Packard. Contact Bill at
