Financial Modeling

Bill Warner Thursday, July 17, 2008

“Financial models are a black art and don’t really reflect what is going to happen anyway,” says a typical entrepreneur! Well, true and not true. It’s not a black art, and your business is probably going to act differently than you expected. Nevertheless, you can’t run a business without a game plan. When an executive and founder put a business plan together, one of the exhibits is a financial model of the business. This is your financial road map. It is important to show an estimate of how the business is going to perform over the first three to five years. It is shown as balance sheet, cash flow and income and expense statements. These are created from estimates of costs, expenses and revenue that all feed the calculations in the financial statements.

But, where does the executive get the data? There are lots of ways to go about this, but here is an approach that works pretty well, and in this order:

  • From your market plan, do an estimate of revenue. Don’t just use a market share percentage and think you are done. Take into account the:
    • Lead generation productivity expected
    • The length of the sales cycle
    • Price assumptions
    • Revenue recognition assumptions
    • Collection assumptions
    • Availability of trained sales people
    • Productivity of the supply chain

Calculate the number of customers per month and multiply by your price assumptions. Then calculate the revenue based upon your collection assumptions. Since so much of the cost and expense item are determined by revenue assumptions, this is the first step in creating a financial model. No, you won’t actually attain revenue exactly as you planned. The important aspect of this exercise is that you make reasonable assumptions to convince yourself that the revenue plan can be achieved.

  • Based on the revenue estimate, the number of products and services sold is known. The costs of goods sold can then be determined. This is a matter of reflecting all the costs of manufacturing the product. For hardware, it’s the manufacturing cost. For software, it’s the cost of creating the software distribution package. For services businesses, it’s the costs of performing the service. Maintenance is also a cost item. These numbers will be subtracted from revenue in the income and expense statement to determine the gross profit.

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CEO Coach - Improving Communications

Bill Warner Monday, July 14, 2008

Getting your ideas across, helping your employees, and achieving your ambitions all come with effective communication. Even though you may already be a good communicator, everyone can improve on their current abilities and approaches to communications.

Network With Other Executives

One way to improve your communications skills is to take advantage of local business organizations. Many business communities have organizations like the Council for Entrepreneurial Development (CED) which is housed here in Research Triangle Park, North Carolina. The CED is a place where entrepreneurs can gather to share ideas and gain training on business related topics. Take advantage of CEO gatherings, industry networking events, business seminars and communications coaching opportunities.

Get Out and Meet People

Other ways to improve company communications include implementing an aggressive program of Managing By Walking Around (MBWA). CEOs can’t communicate if they are stuck in their offices. Get out and walk the halls and visit the cubes of ALL your employees. Ask questions about how the employees are doing, what they are doing and how they are going it. Be interested or at least act interested in your employees and the teams they work within.

Regular Employee Communications

Share information about the company freely. If the CEO does not share the information, the employees will make up their own information. This is the dreaded rumor mill. Share information in person in company meetings on a monthly or quarterly basis. Implement a company newsletter/newspaper/e-letter and encourage every department and team contribute.

Be Consistent

Be consistent in your communications. Many CEOs complain that they have set the company vision and shared it with the employees, but “everyone is going in different directions?” What they don’t realize is that each time they share the vision they state it slightly differently and the employees hear a different vision.

Be brief and only communicate the minimum required to get the message across. To elaborate and elaborate slightly differently each time just breeds confusion and lack of focus.

Focus on Improvement

The most effective way of improving communications is to assess your situation, identify and improve on your areas of weakness, and capitalize on your strengths. Where do you start? Ask your employees.

Make communications a daily drum beat. Communications effectiveness starts in the CEOs office, continues with MBWA, and ends in the CEOs office. You can even get a coach, who can impartially discuss your communications needs and strategies.

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