1. Lack of Preparation

Perhaps the number one mistake that new startup entrepreneurs make is the lack of preparation itself. A “One size fits all” approach to you startup is a disaster. Just like clients, each investor is different. Study the fund’s background, understand their investment thesis, gauge their mindset, and know why you want an investment from them (outside of capital, what else can they provide you?). Many startup founders are completely unprepared when entering the board room. Business plans are not required in the pitch meeting (in most cases), however, you need to be able to answer questions about the business plan. Practicing your pitch with each type of investor will help you in the long run and give you ample opportunity to perfect your pitch. Giving you the preparedness you need to nail the meeting and close the investment.

2. Unrealistic Expectations

The majority of entrepreneurs set the bar too high with unreasonably high expectations. They think an investment will change their life and make the startup instantly successful. In reality, this is almost never the case. Founders must set reasonable expectations of growth, revenue, profitability, and financials; backed by strong market research. Even if your product or service may be unique, build a logical approach to why your assumptions are valid. This will help to set your own expectations at a reasonable level. Furthermore, it can give you a clear mindset when approaching expectations with investors.

3. The Drama of Fundraising

Being an entrepreneur is definitely an exciting journey. However, the majority of founders lose their focus when they get excited about the fund raising process. The ultimate goal of fundraising is to obtain enough money to be able to fund the stage of your process. This could be product development, client outreach, human capital, etc. Entrepreneurs need to keep this in mind rather than just closing an investor. The majority of investors will see this, and may lose interest.

4. Value Proposition

While many startups are built on a unique idea, some of them are a “copy-paste” of an existing idea. Many founders are inclined to thing their “copy-paste” idea will be funded, because several similar startups have been funded. The problem with this approach is the lack of a clear value proposition. Questions entrepreneurs can ask themselves; Why is your startup different? How is it unique from the rest of your competition? Are you offering the same product / service in a niche segment as others? Are you offering the same product or service? Has the market seen your product / service before? Having a clear value proposition, product positioning, and product differentiation increase your chance of receiving funding.

5. Lack of a Clear Strategy

The success mantra for a startup is having the right product, the right team, a clear product need, and a solid action plan. Many startups fail in these items due to a clear action plan. Missing a clear action plan leads to confusion, higher capital burns, and a higher chance of startup failure. All startups should have a plan of a set of dynamically changing milestones across all time frames (short, medium, long).

6. Justifiable Valuation

If you walk into an investor meeting seeking, $1.5mm at a valuation of $15mm (10% of the company), you have to be able to justify it. The vast majority of startups cannot, they say they need ‘x’ amount of money to obtain ‘y’. This model is backwards. Entrepreneurs first need to determine their value then they can properly decide how much money to raise. With this model, startups need to discover what they can do with the money they are able to raise. This gives more confidence to investors when they are analyzing your company for investment. They know what you are going to do with the money and are able to justify your value.

Understand the value of your company may be difficult, and many mistakes can be made along the way. Five23 helps entrepreneurs and startups overcome these six items and determine the value of your company. By being an unbiased third party, we can determine value and analyze without prejudice. To learn more about what we offer startups, please follow the link here or contact us via email: contact@five23.io.

The post Top 6 Mistakes Entrepreneurs Make with Investors first appeared on Five23.

But first, what is a business plan? A business plan is a formal document that puts all of your ideas for the business together in a logical sequence. Think of it as a blueprint for the company. It’s the first step of any great business and a necessity if you are to succeed. It’s a realistic and workable plan that outlines various aspects of the business including industry performance, market stats, and the financial summary… among other items.

Many entrepreneurs only write business plans in university or only when they are seeking financing / startup capital. While this may be fruitful for those reasons, a business plan is so much more. It’s something to fall back on when in need and you have lost your way. Additionally, it can establish goals for the company as you grow. Yes, investors and bankers need a business plan to understand what you want to build, but more importantly it can be a guiding light.

While thoughts scribbled on a napkin can work as a business plan. It’s not ideal… not in the least. It’s a start though. To seriously write your business plan, there are several aspects you may need to research. Most of this information can be found online, however, be sure to check your local business chamber, associations, and library.

Things you need to think about may include: Business potential, strengths, weaknesses, opportunities, threats, legal, financial, market, incorporation, taxes, etc. You want to be able to give a complete picture of your business to an outside party. As well as how it will grow in the years to come. A framework if you will.

The following 10 steps can be used as a guideline when creating your business plan:

1. Executive Summary

This is one of the most critical aspects of your business plan. I have seen many companies come through Five23 whose plans were initially rejected by investors because the executive summary was poorly written. An executive summary can range from one paragraph to two pages. It is to include your entire business idea, information about the industry, market competition, management team, risks, financial projections (historical projections if you have them), and, most importantly, your implementation plan for the business. In the perfect scenario, the executive summary should be written last, after the entire business plan has been written. A summary of each section if you will.

2. Business / Company Overview

The first section of your business plan, this should start with an introduction and a brief business overview. It should include details on the history of the business (how you came up with the idea), the type of entity you are, your vision statement, objectives, capitalization schedule, objectives, and an outline of your financial proposal / funding requirements.

3. Products / Services

Section 3 explains to the reader of your business plan the products / services you are proposing to sell. Here you need to give detailed information about the product / service. The more detail the better. You need to define the features, benefits, value proposition (margin), competitive strategies (what makes you different), how and where your product / service will be produced / rendered.

4. Industry Overview

The industry overview section of the business plan demonstrates the viability of your business idea by discussing the size and growth of the industry. Five23 recommends our clients use the ‘funnel approach’ when writing this section of the business plan. Under the funnel approach, the industry overview follows a macro to micro direction. Starting first with the international industry, followed by country, region, city, then neighborhood. If there are any industry permissions or regulations, you can list them in this section. You may also discuss some of the numbers in this section such as total market size, client size, etc.

5. Marketing Strategy

The marketing section of the business plan is one of the most important sections of the business plan. Even if you have the best product / service in your industry, you need a plan on how to reach customers and where to find them. In this section you should describe your target market segment, competitors, and the key value proposition. You should also include what the pricing for your product / service will be and how it appeals to customers. You might also mention key factors such as recent industry trends, social media metrics, as well as upcoming conferences and events. Additionally, you need to define you tactics and how these items will affect sales and company growth. As with every section, the more information the better.

6. Operation Plan

An effective management team is the key to driving any business. From the initial concept to an exit, the team is the driving force. In this section you need to define who your team is, what they studied and what experience they have that can make the company a success. Here you can also define day-to-day operations to a five year plan. How the company will grow and in what direction. The human resource strategy and hiring plan should also be in this section.

7. Financial Plan

While this may be the least favorite part for the majority of entrepreneurs. It is by far the most vital to the company and business plan. This is the part venture capitalist and bankers will jump to first. It is also the number one reason these parties back out. If this section is not bulletproof, investors will walk away. The rest of the business plan may be perfect but if this section is 100% there will be no investment. Five23 cannot emphasize this enough.

This section should include any historical financial data you may have in terms of profit / loss, EBITDA, net assets and liabilities, etc. Here you also need to put your financial projections and any justification you may have for them. Projected cash flow and balance sheets are ideal on, at the least, a quarterly and yearly basis from present day to three years out (five years ideal).

If you need help with the ‘Financial Plan’ of your business plan, please contact Five23 here or via email at: contact@five23.io. We help companies from around the world create financial and business plans that entice investors and promote understanding.

8. Risk Analysis

While many business plans do not have this section, Five23 has determined it can lead to greater startup success in the first few years. The ‘Risk Analysis’ section will discuss the key risks the business is exposed to and how these risks can be mitigated. For example, if you are creating a business plan for a coffee shot and you assume you will have 100 customers a day, this section will determine the viability of that assumption and what to do if you exceed / fail to meet that goal. Let’s say only 85 customers come, will you make enough money to remain open? How long can you sustain at that 85 customer mark? What if you have 140 customers, do you have enough employees to handle that quantity? If not, how will you deal with the situation. Though it is not common, many investors / loan officers will appreciate this section and it may be a determining factor in receiving an investment / loan.

9. Implementation

A bit more common than the last section, the implementation of the business is often overlooked. Once the reader has read your entire business plan, the standard first question is, “How are you going to do this?”. This section defines that. Here you should discuss the company’s first milestones and how you are going to achieve them. Additionally, who is in charge of each milestone from your team and what skills do they have to see them accomplished. You should lay out at least five milestones here with clear paths to achieve them.

10. Third Party Analysis

A third party analysis of your business will help in the eyes of potential investors and bankers. Additionally, it gives you an opportunity to vet your business idea without the risk. Third party business reports can find faults in your ideas and identify golden opportunities. It can make sure your idea is worth pursuing and to what degree. Moreover, you may learn much more about the market, opportunity, and competitors than you might have thought possible. Here at Five23, we have helped companies from around the world talk with some of the largest investors and close funding rounds. From initial concept, to full-fledged Series E, we can help strengthen your argument from an unbiased position. Click here to learn more about what we offer startups. If you have any questions about our services, please feel free to contact us here or via email at: contact@five23.io.

On behalf of all of us here at Five23, we wish you the best in creating your business plan and your venture!

The post 10 Key Steps to Creating a Kickass Business Plan (2019 Guide) first appeared on Five23.

To be honest, the penalties for 409A Valuation non-compliance are insane; hefty fines, irreversible reputation damage, and a potentially greater tax bill. But they are there for a reason. An inaccurate 409A Valuation can lead to another Enron. We all don’t want that. The IRS doesn’t want companies generating their own 409A Valuation because the likelihood of inaccuracies can by high. That is why there are Safe Harbor provisions for companies who obtain an 409A Valuation from third parties. It’s a win-win situation. The IRS doesn’t have to go through your 409A valuation with a magnifying glass, and in return, you get an accurate, non-biased value of your company. The Safe Harbor 409A Valuation is one of the best assets you can add to your company.

409A Safe Harbor Opportunities

IRS 409A Valuation (Link Here) has two opportunities for startups through which you can achieve a Safe Harbor 409A Valuation. If you meet the conditions of any of these three items, you are considered in “Safe Harbor”. Below is a description of each of the three opportunities:

Independent Appraisal

Binding Formula

Illiquid Startup Safe Harbor

Each of these opportunities are complex and unique. Each provides you with a clear path to achieving a Safe Harbor 409A Valuation. Let’s take a look at each:

Independent Appraisal Safe Harbor

When it comes to the matter of 409A Safe Harbor Valuations methods, the independent appraisal opportunity is among the most common and easiest to pursue. The IRS wants an independent 409A Valuation from a reputable firm that employs consistent, well-documented methodologies in their appraisals (like Five23). This is typically the easiest route to take in securing a Safe Harbor 409A Valuation. Find an independent, trustworthy valuation firm and pay them to do your 409A valuation. What’s so hard about that, right? Turns out, finding a quality fully-independent firm is more difficult than it seems.

Many companies turn to their cap table software providers for a 409A valuation package deal. This makes sense. Your cap table software has access to almost all the data you need to perform a safe harbor 409A valuation. However, even the leading cap table software providers stretch the boundaries on independence. And, in many cases you will run into a conflict of interest. Typically, your software provider doesn’t have the proper authority to provide you with an accurate 409A Valuation. They use old methods which do not require up-to-date financial data, which will eventually lead to an inaccurate 409A. If this is the case, you will find your valuation may be grossly mis-calculated. The IRS may find your company to be grossly mis-valued and take away your Safe Harbor exemption. At this stage you still may be on the hook for the inaccuracies.

Binding Formula Safe Harbor

The binding formula Safe Harbor applies to 409A Valuations based on the consistent use of one, generally-applicable repurchase formula in the company’s stock transfers. The legalese around this provision incomprehensible at best. The formula applies whether those transfers are compensatory or non-compensatory. It’s applied all of a company’s stock transfers and the stock transfers of at least 10% of the company’s shareholders. Additionally, the IRS specifies: any person or issuer holding more than 10% of the combined voting power across all classes of the issuer’s stock is void from this exception. Thus effectively making the provision unattainable for the vast majority of companies (any company which one shareholder owns 10%+ of the companies shares).

The big exception to the binding formula safe harbor presumption are “arm’s length transactions” related to the company’s stock. These are transactions for which both buyer and seller have no prior relationship and act independently of each other’s interests. The actual legislation covering this Safe Harbor presumption states that this generally-applicable formula should apply when used as part of a non-lapsing restrictions surrounding the company’s stock.

In essence, unless your company has a valuation of $100mm+ and more than 100 independent shareholders. You are not going to fall into this exemption opportunity.

Illiquid Startup Safe Harbor

The illiquid startup opportunity to Safe Harbor 409A Valuations is intended to accommodate the startup environment, where equity switches hands on a much more frequent basis. It applies only when both the service recipient and the service provider (typically the “employer” and “employee”, respectively) do not anticipate an IPO within 180 days or a change of control event within 90 days. A ‘Change of Control Event” could be a shift in voting power such that one person or entity holds more than 50%. It could be a liquidation; could be a substantial sale of assets; could be a board call. Point is, you’ll know it when you see it.

Under the illiquid startup presumption, your 409A Valuation must be performed by a “qualified individual”. The IRS specifies a qualified individual to be someone companies can reasonably rely upon based on some combination of knowledge, education, training, and experience (Five23 for example). They further specify this to mean five years of relevant experience.

Failing to Achieve a Safe Harbor 409A Valuation

As stated previously, you should view meeting 409A Safe Harbor requirements as a mandatory part of running your company. While it’s not actually required, the penalties of non-compliance aren’t worth the risk. Not even close. These penalties are exacted on each employee deferring compensation. The employees can be hit with a tax on their income, with the entire balance of their deferred compensation plan applied—for the current year and all past years for which their compensation was deferred. There’s a 20% excise tax on that. On top of that, the IRS charges interest on that 20%. That premium interest rate is roughly 1% plus the federal underpayment rate. Employees are hit with these tax penalties in tandem with whatever fees and fines they accrue in their efforts to pay off what they owe. Basically, get ready to pay a fortune to the government for failure to comply. Luckily, that is why there are Safe Harbor 409A Valuation, and they are cheaper and easier to get than you would imagine.

Safe Harbor 409A Valuation from Five23

At Five23, we pride ourselves on working closely with startups and investors to provide the best service possible. Our 409A Valuations are quick, straightforward, and painless. We give you a simple form to complete with minimal information required. From the time you start the process, we typically complete a 409A Valuation in just a matter of days. In addition, being an unbiased third party. We give provide the Safe Harbor 409A Valuation discussed in this article. 

If you’d like to get started with a 409A Valuation, you can view our packages here (all come with a 409A Valuation). If you’d like to learn more about Five23, please visit our website or send us an email to: contact@five23.io. We’d love to hear from you.

The post 409A Valuation Safe Harbor Guide (2019) first appeared on Five23.

For any entrepreneur, knowing how much money you need to raise is a big part of being ready to talk to investors. How you can determine the amount of capital you need to raise is key to getting the figures right. This post should help you solve the task of identifying how much capital you need to build your runway.

Identify Major Milestones

Investors usually look to fund a business to its next major milestone. These are milestones that show your business has reduced one or more key risks in its development, such as demonstrating market demand for your product or service through a critical mass of customers or users of your prototype, outgrowing current production facilities, or ideally, achieving consistent profitability. Start by identifying the major milestones for your business over the next few years.

Create a Plan

After you’ve identified those milestones, create a plan to achieve them. The process of developing a business plan will help you create a roadmap for achieving those milestones. Because the business plan is a big picture view of where you are going over the next few years, you should also dive deeper and create a more detailed project plan for achieving the next major milestone in your business — that is the milestone that you are looking to fund. Really spend some time plotting out each step, identifying how long it will take and what resources are needed to achieve that milestone.

Project Cash Flow

Now, translate your plan into numbers by creating a financial forecast. We recommend developing a monthly forecast for the initial year and an annual forecast thereafter. For each period, forecast your business’ revenue, expenses, delays in customer payments, and purchase of assets. Project cash flow by looking at the difference between cash inflows and outflows in each period. You can begin to see how much funding you will need by looking at the sum of the cash flow over the estimated time frame to achieve the next milestone.

Note: If you are having trouble with forecasting, we’ve offered step by step guides to getting started on financial forecasting and analyzing cash flow in previous blog posts (view them here).

Be Realistic

Go back and check your assumptions to make sure they are realistic. Ask yourself if your estimated time frame for achieving the next milestone is realistic based on the research you’ve done in your industry, the time you have available to dedicate to your business and your capacity to lead the business. Make sure the expenses you identified are necessary to develop the business over that time frame — that you are not inflating expenses nor are you missing any expenses. Also, add in a small buffer for inevitable mistakes or miscalculations in the implementation of your plan; we recommend a 5% buffer in either direction. Lastly, ask yourself if the forecasted revenue growth can really be achieved with the resources you will have.

Choosing the right amount to raise is critical to the success of your business. If you underestimate funding needs, you’ll end up raising less than you need and may find your business in a cash crunch. If you overestimate funding needs, you risk losing credibility with invests and may not be able to raise the funds you need on reasonable terms, if at all. So, before you start talking to investors, make sure you have identified your milestones and have put together a well-thought out plan and financial forecast.

If you’ve developed a plan and forecast, and you’ve identified how much you need to raise, you may be interested in our services to help you successfully raise funding. To learn more about how we help startups, click here. To see what is included in each of our packages, click here.

Still not sure exactly where to begin, feel free to contact us here.

The post Determining How Much Money to Raise (How to Startup Guide) first appeared on Five23.

Gain Experience

We learn a lot through experience. With the right mentors, you can gain experience from others who have already been there and done that and can provide insights from their own successes and failures. These insights are valuable assets that can save you time and money in developing your business.

Provide Perspective

When you are in your business every day, it can be hard to step out and think strategically. Having a mentor can give you a different perspective. Because your mentor is not caught up in the day to day details of the business, they can provide more objective feedback and guidance that is still grounded in experience.

Avoid Pitfalls

Because you’ve put a lot of work into the business, it can become easy to get very attached to your business plans. And, you might not recognize biases and blind spots that pose risks to your business development. Having mentors who constructively challenge your assumptions and identify weaknesses can help you avoid common pitfalls and minimize your risk.

Build Resilience

Starting and running a business is an emotional roller coaster. It’s encouraging to know you have a support network with mentors who believe in you and your business and are committed to helping you figure things out. And, calling on your mentors for guidance can re-inspire and re-energize your motivation to build your business.

Expand Your Network

A mentor can connect you with resources to grow your business. A good mentor should keep you in mind and think about introducing you to people who can support your business development, such as potential customers, partners, or investors. That’s not to say that a mentor is going to automatically open up their entire network — you still need to do the work to demonstrate you are ready to make effective use of those connections.

The post The Importance of Having a Mentor first appeared on Five23.

Listen to Your Insecurities

There are countless online articles teaching entrepreneurs how to “fake it until you make it.” This advice suggests you put aside your fears, doubts, and anxieties, and pretend to be confident and successful until you internalize that as your truth. But, confidence and success don’t come from pretending. Burying those insecurities and putting up that front is hard work, and it can cause more stress, isolate you, and prevent you from making sound business decisions. Also, those insecurities are a growth edge and are needed to push you towards what you can be. Instead, listen to your insecurities, identify ways to act on them and make changes, and take little steps to build confidence. The more you practice, the easier it becomes.

Reframe Failure

Because we have so much of ourselves wrapped up in building our businesses, any business failure or setback can feel like a personal failure. Instead of beating yourself up over the setback, try looking at it from a different perspective. Life is a constant process of failing and succeeding. When we learn to walk as babies, we fall down and try again. Starting a business is no different. Consider the setback as a learning opportunity. You’ve now gathered more data on your business and can use that data to make a more informed decision about your next steps.

Ask for Support

Many entrepreneurs have difficulty asking for support. We’ve been led to believe that entrepreneurs are self-reliant. We think asking for help is a sign of weakness. We don’t want to inconvenience other people. We don’t want to be indebted to someone else. Or, we don’t know what to ask. However, reaching out for support can greatly increase the chances of a business’ success. By connecting with and asking for support from family, friends, co-workers, advisors, and other community members, you can reduce stress from the highs and lows, energize new thinking around your business strategy, cultivate partnerships, and find more opportunities to grow your business.

Set Boundaries

The current state of work lends itself to the perception that we need to be available for our business all the time. This is often amplified when we experience low points in sales and are scrambling to find new customers. We might think we need to have a presence on social media all day long. Or, we need to drop everything and attend to every customer request that comes in. We may even take on customers or partners who aren’t aligned with our values. This can produce a lot of anxiety. It can prevent you from doing work necessary to develop your business in a sustainable way. And, the amount of time and energy you are expending can have a negative impact on your loved ones and other parts of your life. As such, it’s essential to set boundaries that guard your time and energy.

Practice Self-Care

In the early stages, your business doesn’t happen without you. And if you aren’t taking care of yourself, it might not happen. Self-care sets you up to handle the demands of growing your business. A daily self-care practice will help you reduce stress levels, and improve clarity, focus, productivity and creativity in your business. In addition to getting enough sleep and proper nutrition, consider creating a self-care plan. Start by identifying the activities that help you maintain your physical, mental, and emotional health. Then, look at how you can work those activities into your schedule. And try to practice consistently so it becomes a routine. Having a life coach is a great addition to many entrepreneurs’ routines and may help yours as well.

Setting yourself up for success is key to becoming a strong entrepreneur, the items listed above will do just that.

The post The Rollercoaster of Starting a Business first appeared on Five23.

Get Disciplined with Invoicing

Slow invoicing is one of the biggest reasons why businesses fall short on cash; and why many business owners don’t treat invoicing as a priority compared to day-to-day activities of delivering their product or service. But, if you don’t invoice, you won’t get paid by your customers. For example, create discipline around your invoicing practices by setting aside 15–30 minutes on the same day and time each week to review and process your invoices and payments. Be sure to address invoices that need to be created and sent to customers; invoices that have been paid: invoices that are outstanding and when payments are expected, and also be sure to review customers who are past due on their invoices and need to be reminded to pay.

Review Your Expenses

Every business is different and has its own specific expenses at various stages of development. Take a look at all the expenses your business has on an ongoing basis. Evaluate which expenses are necessary for running your business right now, which expenses are related to investment in business development opportunities and which expenses are simply “nice to have.”. To improve cash flow in your business, you want to minimize the spending outside of the necessary expenses and make sure you are investing in business development activities that are yielding or expected to yield a reasonable return.

Pay Your Bills on Time

When cash flow seems thin, it’s common for business owners to start paying their bills late. But, by paying late, you’re just moving your cash problem to a future period. In addition, you may be hurting your business’ reputation with vendors. Just like your business, your vendors rely on timely payments from their customers to maintain healthy cash flow and do their work. As such, it’s important to pay your bills on time. But if it’s really not possible to pay your bill on time, communicate with your vendor about your cash flow situation, how you are working to improve cash flow, and when you expect to pay them. If you maintain good relationships with your vendors by paying on time, they are more likely to help you out when cash flow is light.

Have a Financing Option

Despite your best efforts to track and manage your cash flow, unexpected events will occur that can throw off your cash flow. These could be positive for your business, such as a customer asking you to fulfill a big order, or negative for your business, such as a commercial landlord raising your rent. When these events occur, you might need to rely on another source of cash for your business, such as personal savings, credit cards, friends and family, a business loan, or even venture capital. It’s typically more difficult to get financing when the event is occurring — many financial institutions hesitate to provide financing to business owners in time of distress and those that do often charge usurious rates and/or you may not be able to carve out the time to evaluate and enter into a reasonable financing arrangement. Having a backup financing option in place will provide a cushion for unexpected events.

Taking proactive steps in managing your business’ cash flow will help you improve operations, free up cash for investment in business development, and reduce your stress as a business owner.

The post Successfully Manage Your Startup’s Cashflow first appeared on Five23.

Many entrepreneurs struggle to put together the financial forecast for their businesses. However, understanding your business’ financial outlook is a critical component to making sound strategic business decisions; building relationships with potential team members, suppliers and investors; and relieving stress by planning for and managing peaks and valleys in cash flow.

A financial forecast serves as a guide for building any type of business. It can help a startup entrepreneur set goals and evaluate the viability of a business idea. It can also help established business owners and leaders gauge the financial health of their companies, measure progress and identify new investment opportunities. A well-designed financial forecast should align with the company’s mission and vision, and serve as a representation of the business’ values. On top of this, the best financial forecasts are those which can scale with your business.

With that in mind, we’ve compiled a step by step guide to help you through the emotional and practical aspects of getting started on financial forecasting for your business.

Understand Your Relationship with Money

I’ve seen a lot of entrepreneurs get stuck right at the beginning of financial forecasting with the word “money”. It brings up all sorts of perceptions about what money is and can do for us (or to us). Fundamentally, money is a currency; an exchange of value. Your experiences, assumptions, and habits with money can help or hurt the flow of value to you and your business. The process of financial forecasting puts you face-to-face with any limiting beliefs and habits that hurt that flow of value. So, it’s important to work on acknowledging and releasing what’s holding you back.

Gather Financial History

If you’ve been operating your business or  spending money on startup costs, you have financial information to get started from.  Take some time to go through your computer and physical files to gather documents related to your past business income and expenses. Check for files in your accounting system, spreadsheets, bank and credit card statements, and receipts. Organize this data in a place where you can access it as you work on your forecast. Typically, spreadsheets are the best location for this exercise, we like Google Sheets.

Get Your Business Plan

Often, it’s common to see entrepreneurs who have gone through the process of planning and writing their business plans, but when they get to the financial forecasting, they get so caught up in being overwhelmed that they forget they already have a plan to start from. In your business plan, you’ve created a story of how you want the business to unfold over the next few years. Your goal in developing a financial forecast is to support that story by translating the business plan narrative into numbers. So, it’s important that you have your business plan by your side and refer to it often as you work on the numbers. And, if you don’t have a business plan, now is a good time to go through the process of creating one.

Start with Expenses

It’s easier to start with forecasting expenses, rather than sales – you have a lot more control over what resources you spend money on and when you spend money on them. First, write or type out a list of expenses. If you have them, use your bank and credit card statements to identify resources you are currently spending money on. Then go through your business plan, and identify resources you plan to spend money on and the timeframe you plan to start paying them; such as next month or next year. Don’t get hung up on specific names of those resources; describe what you think you need in a way that you can understand it (e.g. office, I.T., etc.). Next to each expense item identify: its cost; how frequently you expect to pay it, such as when you produce the product monthly; and whether it’s a variable expense that fluctuates directly with sales of your product or service, or whether it’s fixed regardless of sales volume.  You can get this data from the bank or credit card statements you’ve gathered up if you have them; or by researching online, asking for vendor quotes, and talking to people who have started similar businesses. Once you have a complete list, you can start plugging numbers into a spreadsheet ─ creating an expense forecast.

Identify Factors Affecting Revenue  

Forecasting revenue is usually the most difficult part of creating a financial forecast.  Many of the entrepreneurs Five23 works with compare creating revenue projections with looking into a crystal ball. They say it feels like they are making up numbers. However, forecasting revenue is really about making a series of logical assumptions about what you plan to sell and how you plan to sell it. As you created your business plan, you should have done a lot of research on who your customer is, what they need, where they find information, what their buying patterns are, and how many potential customers are in your market. You also should have looked at how your product or service can deliver value to those potential customers. Through this market research, you have identified many critical factors that drive your revenue.

Five23 has also determined the average growth of startups year over year is roughly 162%. Keep this in mind as you are creating your calculations.

Clarify Revenue Streams

The most important assumptions in your revenue forecast are the revenue streams. These are what the customer is paying for, how much they are paying for it, and over what time period they are paying for it.  Before you start forecasting revenue, take the time to write or type out this information for each product or service you are selling or plan to sell. This information determines the formulas you will use to calculate revenue for each product or service.  

Determine Customer Acquisition Cost

To start putting numbers to your revenue streams, it’s helpful to understand the concept of customer acquisition cost. This is the cost of marketing and sales activities that are needed to “acquire” a customer.  Making assumptions around customer acquisition cost will enable you to tie your marketing and sales plans to your revenue forecast.  If you have been operating a business, you may be able to start by looking at historical data, dividing total marketing and sales costs by the number of new customers acquired, and then making some assumptions around improved efficiency over time.  If your business is in true startup mode, you can research online or ask people who have started similar businesses what their customer acquisition costs looked like.  Try to develop assumptions around customer acquisition cost for each product or service you are forecasting – this may mean you need to go back to your expense forecast and break down marketing and sales expenses by product and service as well.  Once you have these assumptions, you can go back to your spreadsheet and build your revenue forecast.

Balance Scale, Impact & Resources

Once you have developed a full financial forecast with both expenses and revenue, it’s time to look at how everything ties together and see if it looks reasonable. Look at the month-to-month and year-to-year revenue growth. Does the revenue growth reflect realism over the next few years? Look at the changes in the margins. Does spending reflect the growth plans? Look at the components of the spending on an individual level. Does resource allocation align with the business’ mission, vision and values? You may need to go back and adjust the forecast and/or your business plan to balance scale, impact, and resource allocation. And don’t worry if everything doesn’t align the first time around. Keep tweaking your models until you find a realistic and attainable balance.

Frequently Review Your Assumptions

Now that you have a financial forecast, don’t let it become static.  Financial forecasting is not something you should do and then forget about it. In your numbers, you set forth assumptions about how you will operate the business and what level of financial performance you expect to achieve from those operations. As you operate the business under your plan, you get data that allows you to see how close actual results come to what you planned. If you regularly review this information and use it to keep your business plan and financial forecast up to date, you will be in a better position to make informed strategic decisions about your business development. This will give you key points to hit as your business grows, and goals to creating a successful business.

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