Since joining Atlanta Ventures, I’ve seen a fair amount of financial forecasts from entrepreneurs. There is a huge variation in what I have seen: simple to complex, conservative to aggressive, realistic to impractical, spreadsheet to graphical, fact driven to made-up assumptions, etc. While there is no one perfect way to build a financial plan, it is helpful for entrepreneurs to ensure they have a basic understanding of budget structures/terms, a thoughtful/data driven approach to budgeting, and most importantly the flexibility to realize the only certainty in any financial forecast is that it will be wrong! Here are a few things to think about when building a budget.
There is no one perfect template, but having a structured template is important. Having revenue that can be composed of price and volume. Having different types of costs (i.e. sales, marketing, engineering, G&A, etc.) that grow accordingly with the business. Showing corresponding profit and margins. Having a structured template makes it very easy for whomever you are sharing with (co-founders, team, investors) to logically follow your approach and more easily understand your plan. There are numerous alphabet-soup metrics that can be derived as well (LTV, CAC, GM, ARR, etc.). Rather than just using acronyms, it is often helpful to define how you are making the calculation, as logical people may have differing views on how a certain metric should be calculated. Lastly, I advise entrepreneurs to start simple and expand. The more information you know on assumptions, the more complex you can get. However, making a complex budget—driven on invalidated and numerous assumptions—may look pretty in a spreadsheet, but is not that helpful. Let the stage of your business drive the complexity of your budget, but in any scenario keep it simple and always have an “Executive Summary” that highlights the so-what.
I advise entrepreneurs to start simple and expand
Numbers and Realistic Assumptions
We have all seen the proverbial hockey stick growth chart, yet few will achieve it. When using assumptions, the more you can base assumptions on historical facts and reality tested outcomes, the better. For example, if you are forecasting Annual Contract Value (ACV) at ten thousand per customer, yet have only ever signed up customers at $500 ACV, that doesn’t appear realistic. If you grow from $1 Million Annual Recurring Revenue (ARR) to $10 Million ARR and only add two thousand dollars of expenses, that also does not seem realistic. If you show $500 Million of ARR in a market you size as $625 Million, that also does not seem realistic. Always do a sanity check on your assumptions, growth rates, margins, market share, etc. to make sure it passes the sniff test. The worst way to turn someone off to your projections (and to your entire pitch) is to have something with no basis in reality. Lastly, some people try and forecast out for 10 years … forecasting one year is incredibly difficult, so why waste the time to project 10 years? Keep it simple—3 to 5 years max—and really tell the vision in the out years, versus just the numbers.
While building a financial budget/plan is a great exercise, the most important value should be what specific actions it can help you determine.
• Based on this forecast, I will run out of cash in 6 months and need to start lining up sources of cash now.
• Based on this forecast, it will take 15 months to get to $1 Million ARR, so I need to adjust my burn rate accordingly.
• Based on this forecast, I will need to hire two SDRs in the next month in order to have time to ramp up the sales team.
• Based on this forecast, I will need to hire an additional customer success person in three months to maintain my desired staffing ratios.
As you build your plan, always try and keep an eye out for the “so-what” and specific actions you can take as a result of your exercise.
In order to help with this, Atlanta Ventures has created a simple budget template that entrepreneurs can use to think through key aspects of a budget, enter assumptions in an organized fashion, and see the impact on their business. Click here to download the template and provide any feedback.