Have you ever had to do financial forecasting for a company that hasn’t started trading yet?
I am doing a four year financial forecasting for my start-up for like the 10th time in the last 4 months. I never seem to be happy about it, I always think I am missing things, and well, I choose to do it again and again until I get it right!
Problem is that Groupmates is on a prototype stage now and its 0.2 version is due to launch on Christmas day (I consider this as our CTO’s present for the whole team), but as you may know if you’ve ever tried to create a software product, you can’t make any revenues during the first 6-8 months (realistically speaking).
So I just finished forecasting for the first 2 years (after 9 hours of work), and I decided to write about it during my small break. I feel more confident about this forecasting as I came to understand and know how to do it “right” (or at-least I hope I came to understand it), between meetings with angel investors, business advisers and books.
Many start-ups will have to make a financial forecasting at one stage of the business (most likely at many stages of the business), especially when they need to raise cash, so I hope this post gives you a starting point on the basic way of thinking at-least when you can’t be sure as you haven’t had a pilot yet or you haven’t had any customers yet.
Why is financial forecasting important for your business?
In case you wonder why financial forecasting is important there are few reasons I can say from my experience.
Let me point out few of those reasons:
- It allows you to understand whether the project or business you’re working on is going to be profitable at some point and where down the line this point will be (for example, software usually takes 6 to 12 months after launching to receive some revenue)
- It’s vital if you want to raise cash (Angel Investors, VPs, Banks, and any other source of finance you may approach they’ll ask for financial forecasting)
- It gives you confidence when you talk about your business (if you know that your business will make money eventually, and how is going to make this money then you can feel confident when pitching or even just promoting your business)
- It pushes you to rethink your business model (what revenue streams are you going to have, how much you receive from each, is it feasible?)
- It pushes you to think things about your business’ future that you may not considered before forecasting – for example: are you going to employee people? At which stage? How much you going to pay them? Offices? Where? Why?
- It makes you think if your company has what people may call “debt” – by debt I don’t mean the kind of debt you may have with a bank; this debt it may be what the company owes to founders for the money and time they already invested without getting anything back.
I’m sure there are more reasons that make financial forecasting important so feel free to comment below if you think of something.
How do I forecast without launching yet?
Let me remind you that today it’s like the 10th time I try to forecast in the last 4 months. Last week I closed a deal to pilot Groupmates with a class of 150-160 students and the main lecturer of that class, starting on the 19th of January 2015. That allows me to know that there is a need for the product and I also know how to get customers and users. It was the first meeting we had for this purpose and it was clear that our product it’s something that not only students need but educators as well.
Realistically now I can forecast with confidence the expansion rate of our sales (it won’t be exact but at-least is going to be more realistic than it was when I was doing it before this deal).
The team also managed to get a place to a start-up accelerator program and starting in February we’ll have free offices for 18 months, we’ll also have opportunities to meet other start-ups, pitch to investors, be more reliable when we talk to potential customers, attend networking events for free, and more. Now I can know for sure how much the company needs for office expenses for 18 months – that’s a total of £0.00. Even if my forecasting for office expenses is wrong for after August 2016 I will correct it when I revise the financial forecast again and again (I suggest at-least one revision a month).
A clear vision for what we want Groupamates to be in the future, allowed us to create a clear vision for the technical development of the tool, for the next 3 years, which allowed us to create an expansion vision alongside with a marketing vision, which allows us to forecast number of sales, perhaps more accurately. This is a chain of thinking that could help you with your financial forecasting (I don’t tell you to think like that, but that’s how I do it).
Something that I didn’t do properly like the 5 first times I tried to forecast, is creating a proper price tag for the licensing. Although now I have a price for the licensing, it’s still a bit unclear and it will be clearer after piloting, as we’ll be able to ask the question “how much would you pay for Groupmates?”. We won’t license the software for money before version 1.0 anyway.
The sure thing is that you need to have an idea of your price, otherwise forecasting is almost impossible. If you are in our position try to analyse competition and then think of the value proposition of your product, then you’ll have an idea of how big or small your price tag will be. To give you an extra pointer I called one of our main competitors and I pretended to be a customer, so I managed to receive prices which are not available online. A frequent question we receive from angels is “How did you come up with your price?” – Honestly, if you don’t say “I asked my potential customers how much they’d pay for it”, it’s not very likely that they are going to be impressed.
How important is the financial forecasting for investors?
I had the luck to meet Mr Morrow CEO of Angels Den during a business event in Glasgow. I like brutally honest people and Mr Morrow was really honest with me. He said that according to their statistics investors don’t really check the financial forecasting, they know that probably it will be far from reality anyway.
Although investors usually don’t check financial forecasting they ask for it and it is advisable that we try to keep it as realistic as possible.
Mr Morrow also advised that when you ask for money try to ask as much as you NEED and not as much as you WANT. This advice apparently applies mostly to males.