Once in a while, our Zkylos CFO comes along with an excellent article idea! Today, Zkylos presents the knowledge of Victor Grinchenko and his take on how to get your shit together when it comes to creating a worthy finance plan which is crucial for your business.
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“What is your company doing?” — The number #1 question that any business owner will be asked. Moreover, rightly so! Because if you can’t quite put your finger on the perfect response, then perhaps you should reconsider what the hell you are even doing.
There are many answers you can choose to contest; however, there is one ultimate response that should be at the top of everybody’s priority: “Making money.”
Because if you are not doing that, then what are you even doing?
Yes, OK — you can say things like:
- “Making the world a better place.”
- “Saving someone else the time & hassle.”
- “Entertaining the kids.”
- “Impressing aircraft engineers.”
And so on . . .
I mean, of course, all of these justifications could be valid! But — realistically — it’s not the truth.
What Is Your Company Actually Doing?
Let’s be honest — what are we really talking about when describing the purpose of our business?
Think about it! At least in 99.9% of cases, businesses should be making profits. And if they are not, can you even class them as being a serious business?
One thing that is utterly crucial to understand is that knowing your concept before you even begin is the fundamental necessity to achieving success. In other words, you literally have no right to launch a project or startup without a very detailed and hard-won financial plan.
Absolutely, if you go ahead without one, you are setting yourself up to fail and doing nobody any favours. So bear that in mind and get to work!
How Should Your Financial Plan Look?
What your plan should look like really depends on the many different aspects which reflect your business as a whole. Everything should be accounted for. In short, the entire structure would relate to the complexity of your unique business.
You can buy and sell — (sometimes, far from easy) — or you can launch spaceships — (other times, it’s your hobby!)
Overall, the financial plan must show how and when you will achieve [or not] your desired results in profit and what components will bring about such occurrence.
Which bring us to our next point:
The Two Main Drivers For Profit
- Revenue
- Expenses
Expenses = Certainty
Most things delivered in this world are for money, and so necessary costs can easily be validated without much hassle.
Meanwhile, the tricky part lies in being conservative in recognition of the expenses — even if you are not 100% sure, PUT THIS EXPENSE INTO THE PLAN.
The key here is NEVER to take ‘the cheapest route.’ You MUST make a safety net and understand what the maximum expenditure might cost you.
One way to look at it is that on the other hand as well, expenses do reduce your profit — so try not to fly in a rage! Remember, it is necessary to invest and put money where it is going to help your business to grow.
Revenue = Uncertainty
The area that is most tricky to predict! That being said, if you are good with math and logic — grab yourself a coffee. Let’s walk through a step-by-step exercise I can suggest for you!
- Assess The Market Size.
Firstly, you MUST conduct the necessary desk research. Personally, I advise you decide on costly market researches vs. a self-made ‘market size analysis.’ There are plenty of materials on strategic consulting cases where you can learn the approach to becoming a market size ninja of your open coworking space . . . Cold-bloodedly practicing ‘assumption driven mathematical logic.’
2. Create A Revenue Forecast.
Once you are set on the volume of your chosen market size — in both money and physical terms, then you now have to decide how big of a piece of a pie you are actually able to eat.
It’s time to draw your first product/service revenue ‘mix matrix’ and get your first revenue forecast. Each revenue stream must (ideally) be supported by a firm contract, a marketing plan, (i.e., do we have funds to spend? Is it in the budget?) and competitors analysis alongside your company’s advantages as well as anything else relevant to ensure this is as realistic as possible.
Zkylos, for example, decided to include ONLY proven and essential services to the financial model as revenue streams. We have an evidently clear understanding of the volumes of pets born and registered in each country worldwide and these are the services which people are using constantly.
At Zkylos we provide a variety of top-up products including our unique pet ID, AI analytics and other ways of monetization. However, we are prudent in not boosting our income to ensure the project will survive as well as succeed, even with primary services.
3. Final Assessment.
After you feel satisfied that you have covered everything, you can divide all fixed costs, i.e., those which incur independently based on the number of goods/services you happen to sell/render during that period, against the product itself.
Here is how you will understand the sales volume which must be achieved and maintained to ensure you steer clear of being a loss-making enterprise. The result will be the minimal size of your market segment — but if it is difficult to achieve, you must think everything over again. Recognize when and where changes are essential.
Something EVERY Financial Plan Should Consider
Every financial plan to exist should be based on a timeline and segmented into months, quarters, six month periods, etc.
What’s more is that you must have a clear vision to indicate whether or not the project has enough funds left over before you break even. It is essential to know that your safety net leaves room for anything that could go wrong.
Plenty of mishaps should be considered including not having sales grow as fast as you might have hoped for.
When forecasting revenues, make sure to take a look at all aspects with a critical eye. Sales cannot skyrocket anywhere between 30%-50% if there is a lack of a strong underlying backbone, e.g., new contracts, additional services offered or the death of a competitor.
Finance Plans Are Ever-Evolving
Another point to take into account is that the finance plan is a never-ending party. Each piece of information to appear surrounding your business could influence your project — so it is 100% necessary to be active. Make sure that you update your plan daily, weekly or at the very least, monthly.
Checking in on your financial plan on a regular basis applies discipline and awareness. When creating a plan for a startup, at first, there could be way too much uncertainty to come to one single vision of revenue flows.
Predict Accurately
A better way to resolve missing anything for your plan would be to create several scenarios, starting with the most pessimistic, then optimistic and then those that are in between. The key is to adjust all corresponding expenses within every version, (if needed) — this includes getting to grips with a version which contributes to a ‘Cash-Flow Basis.’
By doing so, you will demonstrate an understanding of how to not get into a cash deficit at any time which is also vital when negotiating payment terms as far as boh sales and expenses are concerned.
Final Word
Last but not least, recognize this: your finance plan is a ‘deal.’
No matter what, you must always respect this ‘agreement’ between stakeholders of the process — starting with your secretary, ending with your investors and collaborators.
As a rule, you should take every effort so as to improve revenues as well as control the expenses to ensure that you succeed in the bottom line — gaining profit.
Now you have a finance plan that will not fail! Go ahead, press on and kick some ass.
Scribbled by Victor Grinchenko, Company CFO, 1st August 2018
Co-Scribbled by Nicky Lawson, Zkylos Representative
Don’t hesitate to leave a comment below and share your additions to this article or reveal your thoughts and opinions. Zkylos is intrigued and excited to hear what the community have to say about every matter we discuss. Staying together is what drives success!
