2.2 Financial Equation

دوره: Essentials of Entrepreneurship- Thinking & Action / فصل: Feasibility Studies / درس 2

2.2 Financial Equation

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I would go and I would open the last feasibility study that I made and I'd start to try to change it and tweak it for, for this new clients business. And I would waste, you know, several days on that before I would scrap the whole thing, open up a clean, blank Excel file, and just start putting in, this is their revenue, these are their expenses. I can't stress, how, how helpful this piece of advice is and how much time has actually saved me since I finally learned to do that.

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So, putting together the financial statements. What are you gonna need? Okay, we gotta go back to the financial equation. Okay, the financial equation basically says income equals revenue minus costs. So this is what you’re gonna need, you’re gonna need your revenues, and you’re gonna need your costs. There’s an equation for revenues. Revenues equals price times volume. So you need to know how much you’re gonna sell your product and your service for. And you’re gonna need to predict the volumes of sales you’re gonna make. Okay. And you need to, this can’t just be a blind guess. This needs to be based on market data, market research, facts out there. Some of the times these can be easy to get. Sometimes if this is extremely innovative business, brand new idea, never been done before, it’s gonna be a little bit more difficult. But this is what you start to put together. So again, in the end my feasibility studies often have 20, 30 little tabs down at the bottom of the Excel. And I put a, a tab for income and revenues and I start working that out. And often, I have one revenues in money and revenues in volume. Just looking at the volumes of sales I expect to make. And you put those together and you get all of your revenues. And that’s the top of your income statement. That’s the top of your cash flow statement. Your projected revenues. Then you go to the next step down, you start looking at costs. Okay, there’s a formula for costs. Costs equal fixed costs plus variable costs. Get, figure out what your fixed costs are, what are your fixed costs? What’s get, you know, you know that’s what you’re gonna pay month after month after month. This is, you know, the expenses that are just gonna exist whether you do business or not. Then there’s variable costs. A very good friend of mine, an extremely successful entrepreneur, he’s been saying something for years. He says, I don’t need a business plan, don’t give me a business plan, tell me what your variable costs are. That’s what I wanna know. I wanna know your variable costs. He says that if you understand your variable costs, you know what you need to know to go forward with your business. Now I’m not sure I agree with him, but I definitely don’t disagree with him. Right? Variable costs can often be hidden. And less clear. And that, to me, is one of the benefits of a business plan is in the business planning process, you start to become aware of, oh, wait a second, I’m gonna have this cost that I wasn’t thinking of before. So understand your fixed costs, understand your variable costs. Get those together in the cost portion of your or in the expenses portion of your income statement and of your cash flow statement. Then you subtract your, your costs, your expenses from your revenues. And you get your income on your income statement. You subtract the the outflow of cash from expenses on the cash flow statement from the info of cash from revenues, on the cash flow statement. And you get your net cash flow. And that’s how you’re gonna go about producing, these statements. I know that’s a very, very general overview. And it probably still leaves you a little bit in the dark. Two pieces of advice I can give you at this point. It just, it takes work. And you’re just gonna have to get into it. But as you get into it, it starts to materialize and you start to, to, to understand where you’re gonna go. And piece of advice number one. Do not use a pre-made, pre-put together, prepackaged Excel sheets. I used to do this back when I was doing a lot of entrepreneurial consulting. I would put together a lot of projected finances for clients. And every time I got a new client, they wanted me to do a feasibility study for them. I would go and I would open the last feasibility study that I made and I’d start to try to change it and tweak it for, for this new clients business. And I would waste, you know, several days on that before I would scrap the whole thing, open up a clean, blank Excel file, and just start putting in, this is their revenue, these are their expenses. It actually is a lot easier to just start from scratch. Make it your feasibility study for your business. I can’t stress, how, how helpful this piece of advice is and how much time has actually saved me since I finally learned to do that. The other thing that I can recommend is, if at this point you’re scared to death about the concept of accounting and finance, and you’d like some more information on that, the career readiness has another module on finance for non-financial professionals. So finance for, for non-financial people. One of their very best instructors teaches that course. I highly recommend this guy. And if you think you need it, I would recommend that you just jump online and go through that career readiness course as well. That can better prepare you, for putting together your, your feasibility study. So, I hope you have luck on that and, and practice makes perfect, and, basically don’t tell yourself you can’t do it. Get into it. Get your hands dirty. That’s what us entrepreneurs do. And learn how to do it. I think the other massive difference between most entrepreneurs I know and the people who are not entrepreneurial that I know, is that entrepreneurs rarely say I can’t do that. They say, let me figure out how to do that, I’ll get back to you. So, figure out how to do that, the, those that feasibility study and then you can get back to us in the next module where we’re gonna talk about entrepreneurial skills and the skills required by entrepreneur. How we doing?

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