Financial Tricks and Tips – Start Up Costs

Below please find an email to a student struggling with the Financial Skill Building exercise:

Q: Where do I start? I don’t know what do do with these numbers and have never had an accounting course. I am overwhelmed. Also, do I just estimate sales?

A: I know what it is to be overwhelmed by this. No worries. Sometimes, there is a tendency to read lots of import into various things. This is really basic and involves some estimated guessing.

Example:

- See Eden’s Garden financials in chapter 11

- See financials in appendix of “Susan” case

- Search google for “sample start up costs” – click on the first cccb link for an example financial statement

- Search google for “manufacturing costs”  and “industry name” and click on key links to get a general idea of costs in the industry.

- Go to Aladdin, go to libraries/databases and select ‘Business/Management’. Becoming familiar with these databases was from session 3 – digging down, a helpful one might be: Hoovers (as found in step 4). Click on “Hoovers” and type “industry name” in the top blank. A list of  companies in your industry will come up.

TRICK – take the costs from the Hoover’s financials and extrapolate it as a % of sales. For instance, if their marketing expense ($1,000,000) is 10% of their sales ($10,000,000), you could start with that. (Your projected sales, let’s say, are 100 units at $10 per unit in first month. So, $1000. Your marketing budget for the month could be 10% of this, or $100.

Then, you can go back and do a scan and bump things up or down vs your business and industry trends. Typically, it is BETTER to do your own financials from scratch based on your assumptions about the business so you can stand up to questioning. But, you sound very forlorn here. Word of warning: The answer ‘I based it off companies in the industry and bumped up or down based on my own business/market characteristics” may or may not hold water to an investor/VIP.

Also – re sales. Yes. You extrapolate. If you did your market research, and focused on a target market, and followed the “addressable market” example from the class PPT – this is a start. You have a specific number of people or businesses. Then, you come up with a projection as to how many units you can sell them. So, if you want to sell 10 companies 10 units each in the first month, that is 100 units (at $10 each).

Do not be worked up about finding the “right” answer. You’ll never have it. These are projections. So, try the above, see if it works, throw some things against the wall, and you’ll have class to discuss it and work through it. This is about jumping off a cliff a bit – so, don’t worry. That’s part of the goal in the market research and financial section. You need to be comfortable with that feeling as an entrepreneur, and find your way out of it as a successful entrepreneur. This is the semi-masochistic “brain-training” of which I spoke in an earlier email.

P.s. In the future, you might find your way out of it with a different search technique you used, or your mentor, or a fellow student who is good with finances and you can by them coffee in exchange for them explaining to you. This is part of being entrepreneurial – even though it sucks, I know.