Building Financial Forecasts by David Churchill

Building Financial Forecasts

A client and I have just completed building a financial model for his business idea and also reviewing it with the SBA office. I’d like to briefly share some of those experiences. I believe this represents a list of steps one might go through to assemble a good financial forecast.

• We began with one of the financial-forecasting templates available at SCORE’s national website, www.score.org. However, it very quickly became obvious that while flexible, it would be difficult to adapt the spreadsheet to the client’s business model.

• We focused on the first year of operations, both to look at business results and also to evaluate what start-up capital might be needed.

• We went looking on the Internet, and found a simple spreadsheet that a for-profit company in our client’s line-of-business had built and posted. I reviewed the spreadsheet, and concluded that it would make an excellent start, and that we could take results from it and use them as part of the input date for the SCORE spreadsheet.

• We made a conscious decision to use SCORE’s spreadsheet to calculate labor costs, as the spreadsheet found on the Internet didn’t include calculation of labor overheads, as SCORE’s spreadsheet did include those calculations (FICA, etc.).

• Together we validated our choice of base-case assumptions and decided the SCORE break even analysis would be built around and interpreted from those base-case assumptions. In other words, while we could have built a “ramp-up” of business into the model, we decided it was more straightforward to see what the break even analysis told us about the sensitivity of the first year’s business results was to sales, rather than
invent a specific sales ramp-up and then have to interpret the break even analysis.

• I discussed with our client what appeared to be the most important input data; together we made sure there was good validation for that data.

• This process turned out to be an excellent tool which showed us how the business could be started up in a manner requiring much less risk and financing than the original plan.

Our hope also is that this will make financing this new business more attractive to a prospective lender. Note that our client had already formulated a well-developed, written business plan. Without having done the thinking and planning that development of that plan required, we would not have been able to work through the financial forecast. And, that’s another reason why we, as SCORE mentors, believe a written business plan is so essential.

Involve Your Employees, Share Your Profits With Them By Norm Beckert

Want to maximize the effectiveness of your business and improve your bottom line –then
involve your employees!

To start with refer to your employees as ‘our people’ or ‘our partners.’ It’s not a big deal, but ‘people/partners’ tends to signal that they are welcome to be involved in the direction your business takes, and hopefully they truly are. They know more about their portion of the business than most anyone, so honor that knowledge and take advantage of it.

Getting your people involved is easy if your nature is to be a ‘Team Player’. It has been known for many years that a ream approach can leverage individual contributions. Consider having a key employee take on a leadership role and form an action team. You can start with something simple, maybe a fifteen minute meeting with a pre-advertised agenda, Start with small, achievable items if at all possible. For example: “What can we do to become a better company?” Let your people determine the issues on which to focus and to develop the measures to record improvement.

Acknowledge your employees’ contributions and reward improvement. It could be a luncheon to start with, but to really be effective you’ll need to share your bottom line. At SCORE counselor Roy Montague’s specialty parts manufacturing business he did that early on and according to Roy “it really paid dividends”. Roy went on to share his experience.

A Profit Sharing Program was instituted to reward the employees for their contributions and their performance. Key performance indicators (KPI’s) were developed and included: On-time Delivery; Rework Hours; Amount of Scrap; Invoice Errors. Our “can-do” accountant was able to close the monthly books within three days of month end and the Profit & Loss Statement was put on the lunch table for everyone to review.

We had a company wide meeting shortly after sharing the P&L and EVERYONE except for myself, the owner, received a bonus providing we had a profitable month. My bonus was the appreciation of the value of the business. A typical bonus pool of  25% of our profit was available prior to factoring in performance. Within three months we watched billing errors go from 12% to less than 2%; on-time delivery improved from 90% to 98%; and our rework was reduced by 50%!

The major achievements FOR Roy’s Company were a high level of customer satisfaction, increased business from existing customers, more referrals, a high level of employee morale and a low level of employee turnover, and an efficient and profitable operation. Based upon industry surveys for the specialty parts manufacturing business Roy’s business paid the top wages, had the highest customer satisfaction scores and was one of the most profitable businesses in that sector.

No two profit sharing programs will be the same. Start simple and adjust as you go. Be particularly aware and sensitive to the construction of your profit sharing program, knowing that it’s extremely difficult to take away enhancements once they are given!

The bottom line: Share information about performance and profitability with your people and your business will run smoother, with happy customers and little turnover of staff.

Nine lessons from two successful entrepreneurs

I recently met with two of my SCORE colleagues; Roy Montague and Joe Reger,

Both Roy and Joe have had long and successful careers as small business

owners. Over lunch we spoke about their struggles to get started and the

difficulties and many successes along the way. We concluded by identifying

several key lessons based on their experience in running a profitable small

business.

• Hire good people. Effectively managing people is, of course, very important in 

running small businesses but it all starts by hiring trustworthy, hardworking, and

capable people in the first place. If you don’t, you’ll spend more time doing their

job than doing yours.

• Constantly improve. As Roy said, “If it’s not broken, fix it.” If it works today, it 

may not work tomorrow because the environment is always changing. You need

the attitude that whatever is done today, can always be done better. Continue to

set higher goals and involve your employees in setting the goals. Their buy-in will

assure success.

• Always innovate. Finding new ways of doing things is the best way to beat 

competition. The market rewards those who are the first to produce a new and

valuable product or service. Your employees are your best source for innovation.

•  Put the customer first. Joe emphasized that, “Business starts and ends with 

your customers. If they feel they are your first priority they will keep coming back.

Understand their needs and do everything you can to satisfy them”. Roy

added, ”Satisfied customers are your most effective marketing tool and often are

the best source of information for improving your business. So, ask them what

you can do better”.

• Take care of internal customers. Internal customers are your employees,

suppliers, and service providers who are indispensable to operating a profitable

business. Treat them well and they’ll spend that little extra effort to get the job

done well and help you through difficult situations.

•  Always keep commitments. Never let anybody down even if you have to eat 

some additional expense or spend some extra time to do what you promised.

Your word must be golden and is essential to building a good, long-term

reputation.

• Work hard. Most small businesses require a tremendous effort by the owners

especially in the early going. You've got to attend to all the little details. Running

a small business is not for the faint of heart. There will be many bumps along the

road but you need to keep plowing through to succeed. Small business

ownership is not a 40 hours per week job. It’s 24/7 if need be. You need to set

the example. Being the first one on the job will not go unnoticed.

•  Watch the numbers. Both Roy and Joe emphasized the need to keep an eye 

on the numbers: are sales off or on target; are expenses exceeding budget; are

customer complaining about product and service quality; are accounts receivable

within the terms of sale; what’s happening with inventory? These are just a few of

the key performance indicators they used to track their businesses.

• What’s the competition doing? You need to know so you are not left behind. 

Check out their web-site, look at their ads, visit or have a family member visit

their shop, ask your suppliers, ask your customers. It’s OK to befriend your

competitor and even support each other in small ways (loan supplies, sources,

innovation, etc.).


Roy Montague and Joe Reger are just two of the 40 savvy and experienced

Treasure Valley SCORE Chapter volunteers eager to share their knowledge

and experience. They have covered only a few of the lessons they learned

contributing to sustaining and growing their businesses.

By

C. Norman Beckert

Get Advice Early

Even since I became a SCORE volunteer less than two years ago, I've noticed common themes among the clients who have asked us for advice. Some of these themes are more difficult with which to deal with than others, but one is very easy…. Get advice early!

There are several steps in the development of a business idea – I call them Concept, Feasibility, Develop Scope (of the idea), and Do It (execute your plan). Most of the clients with whom I speak are in one of the first three stages, and often the questions they are asking are perfectly appropriate for the stage they’re in, and they've missed nothing important from the previous stages. However, this isn't always true.

Let me give you a hypothetical example.

Let’s say that someone wanted to start a taxi business and was convinced there were some economics in it. So, they went out and purchased a taxi, got all the required permits and licenses, and began driving the streets for riders. But, they couldn't get enough customers to cover their expenses, let alone show a profit.

What did they do wrong?

Perhaps they didn't research their competition in the very beginning to understand that there were over 50 cab companies operating in their immediate local area and that the local government didn't have any regulations in place which limited the number of cab companies. It’s no wonder they had trouble finding customers!

We welcome clients to come to us early, when they are in the Concept phase, so that we can help them ask the right questions for themselves as they develop their ideas. For example, we would have talked with our taxi client above about competition and about marketing, and perhaps helped them avoid an expensive mistake or two.

The most important thing to remember – it’s usually easier and cheaper to correct problems in the beginning. Later on, the cost and other factors can be much harder to overcome. Get someone involved early as a sounding board.