Author: Jeremy Vickers
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Part 3 – Preparing for Launch

This series aims to provide a formal plan to support new entrepreneurs seeking a process of launching a new business by breaking down the major components and first steps over a multi-part, day to day guide. Each part will highlight a major theme and provide daily, 15-minute activities for the upcoming month to help get you moving towards launching your new business! If you missed the posts, catch up on parts one and two.

No entrepreneur has ever woken up from a pleasant night’s sleep to discover that someone else has prepared their financials, paid their suppliers and employees, and cashed all the checks from customers! Starting a business means dealing with money, even if you are not savvy with finances, it is important to plan your business properly from the beginning. In time, the right financial professionals will guide you through advanced financial needs. For now, build a budget, define your revenue model, project your income and source funds.

STARTUP COSTS & BUDGETING
There are two distinct types of financial projection activities an entrepreneur must learn; budgeting being the first. A startup cost budget is where this should begin. Building this budget begins with organizing your thoughts and plans from previous efforts of ideation and feasibility into a list of items that need to be purchased, rented, financed, or accounted for in some way. Often, these expenses begin with a product development or inventory cost, computers and other technology, professional services like accounting or legal, and website or graphic design work. As was explored in the previous months, focusing on the bare minimum to demonstrate viability and service customers should be the aim.

Years ago I built a budget for a real estate firm in the metroplex that was launching. I repeatedly tried to convince the founder they didn’t need the perfect commercial space, new computers for everyone, and to purchase multiple high-end printers day-one in order to preserve cash. Within six months, they burned all their cash from the launch and weren’t generating enough revenue to cover all of the overhead expenses they were now contractually obligated to.

Another important aspect of budgeting is to understand how much money you will need day one to launch. When we discuss a pro forma financial model below, we will look at monthly spending and revenue, but it is important to remember that a business does not just all of a sudden operate at full speed. It takes time, sometimes months, for revenue to begin to come in all while expenses are typically already coming out monthly.

In addition, consider fixed versus variable costs where fixed costs are those that occur monthly or regularly regardless of whether you sell a product. These may include building leases, internet, electricity and employee salaries. Variable costs are those that are incurred as revenue is taken in and may include cost of goods sold, shipping, packaging or other consumables.

FINALIZING YOUR REVENUE MODEL
Now that you’ve successfully built a business model canvas (will link to previously published BMC article) and have engaged with prospective customers you should have a sense of the type of revenue models available to you. For instance, you may choose to sell your product directly in a storefront that you own, directly online through your website or social media, indirectly through someone else’s retail store, or indirectly through a third party who distributes and sells for you. There are many types of revenue models, but what is most important is that it is financially sustainable and profitable, while being accessible and affordable to your customers.

BUILDING A PRO FORMA FINANCIAL MODEL
The topic of building a pro forma financial model could easily be multiple college courses, but the reality is that the average entrepreneur does not have the time to go that deep. Therefore, the objective of this section is to ensure you understand how to project your revenue and expense needs on a monthly basis as well as to adjust your projections as information comes in. Projecting income and expenses is a key strategic function in planning the launch and ongoing operations of your business.

To create your first pro forma, begin with listing out all sources of revenue based on your revenue model. Construct this information on an excel sheet or similar tool called revenue assumptions and begin to estimate monthly customers, purchases and revenue. Next, move onto expenses beginning with a deeper look into your startup costs and expanding those out onto a spreadsheet called expense assumptions. Here you can play around with different scenarios like when you purchase equipment, getting a loan or using a credit card, and timing of paying key expenses to manage cash flow.

Now that you’ve established your first draft of revenue and expense assumptions, you can begin building your full one-year, monthly projection. Research basic templates online for a pro forma or profit and loss statement to be your guide. Many of these free templates will have far more categories than you need, but they are helpful in guiding your thought process. If possible, try to find an example that fits your industry or business model.

ASSESSING YOUR FINANCIAL STATUS & SOURCING LAUNCH FUNDS
At this stage of the financial preparation phase, you should have a basic budget estimate of what your startup costs will be. You should also have a good sense of your revenue model, basic assumptions around how you will generate revenue and pay expenses and projected one-year financial pro forma. All together, these are the building blocks by which you will edit, add, subtract and hopefully multiply over the months and years to come. You are also now able to estimate how much cash you need to launch with a simple equation. Take your startup cost budget (how much money it will take for you to launch) and add it to the monthly expenses you project for your first six months. Even if you project revenue during your first six months, it is a good plan to have reserves of three to six months expenses at the beginning phases.

Now that you have determined your cash needs you can evaluate sources of funding. I hope at this stage that you have not determined that the costs are far too great to launch. If that is the case, you may still want to evaluate sources (which may require reevaluating your business model or idea as a whole). For most small businesses, startup funds are likely to come from personal sources, friends and family, bank loans or private investors. Personally, you may dip into savings, leverage your home mortgage or other assets, or even use a personal credit card if you are comfortable doing so. Friends and family can be a source of loans, but be sure properly community expectations and timelines. Banks are also an option, but at the early stage a personal backing is likely necessary. Private investors may also be an option through a high-net-worth individual, sometimes called an angel investor, who takes a part ownership or a higher interest loan to offset their risk.

This concludes the third part in the series “How to Start a Business in 15 Minutes a Day.” Download the daily guide and structure to walk you through the recommended steps and actions for this month. Part 4 will be available right as you are completing this set of preparation so you can continue your journey to launch a new business!

 

Jeremy Vickers, Ph.D., serves as Associate Vice President of External Affairs at Baylor University where he leads institutional events, community relations, and external affairs. He is passionate about innovation and entrepreneurship and channels that passion to serve organizations where he can support both growth and change. Jeremy lives in Waco, TX with his wife Jackie and four children.

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