Kauffman Founders School, Bill Reichert, Financial Budgeting: Your Long‑Term Forecasting
>> Okay.
So we've talked about the operating budget, which is really a monthly budget over a period
of a year or so.
The other thing you need as an early‑stage entrepreneurs, you need a long‑term financial
forecast.
You need a five‑year projection as to how this business is going to evolve over a longer
period of time.
Now a lot of entrepreneurs when we ask for a five‑year projection they say, Bill, you
have to be kidding me I don't know what's going to happen next month, how do you expect
me to project five years.
The reason we ask entrepreneurs to do long‑term financial projections is we want to see what's
in your head.
And we want to see the assumptions you've got about your business, your competitors,
and the marketplace in general.
This is one of the reasons why it's critically important that you are personally involved
in doing your forecasting.
You cannot hand this over to some consultant, to some accountant and day do a five‑year
forecast.
Because you have to know deep in your heart and deep in your brain exactly the business
you're planning to build.
And that business should be reflected in your long‑term financial forecast.
So you remember, going back to your business model formula, that's where this fits into
your long‑term financial forecast.
So you take those business model formula numbers, bottom up, build up your revenues, month‑by‑month,
quarter‑by‑quarter, year‑by‑year for five years.
And then you will be able to estimate the expenses that you're going to have to incur
to achieve the revenues that you need to achieve to hit your goal as a successful company.
Go ahead, look at some templates for long‑term financial projections.
But don't just fill in those templates.
Create your own model.
Your own model is driven by the business model we talked about before.
It's characterized by the unique aspects of your business that are different than anyone
else's.
Figure out what it's going to take to get to your goals each year and to your long‑term
goal in five years.
And then put together a long‑term financial forecast that seems reasonable.
That's your first step and that's your first draft.
Once you have your first draft, what I'm going to ask you to do is get at least three people
into the room with you.
I want one of them to be an optimist.
You know, it's probably you.
It's probably one of the founders, the visionary.
But you don't want your financials to be shaded by your enthusiastic optimist.
So, I want a pessimist.
I want somebody in the room who knows how to look at stuff and say, you know, what if
this doesn't happen, what if we can't hire that person, what if we can't get those contracts,
what if things just take longer than we thought.
Get that pessimist in there to counterbalance your optimism.
The third person in the room needs to be a truth teller.
A realist.
The third person needs to be able to go out and look for the financial reports of public
companies that are kind of like yours, and see what of their expenditure and their different
categories and what sort of results did they get.
So you've got an optimist, you've got a pessimist and you've got a realist in the room who are
then going to review your long‑term financial forecast.
And they are going to rip it up.
And you're going to do a couple iterations.
And you're going to identify what you think you know and what you know you don't know.
You're going to have to say, okay, you know, we still don't know exactly how this is going
to play out.
But this is our current estimate.
And that's okay.
That's fine.
It's not going to be something that you have to write in stone.
And it's not going to be something that you have to live up to for your investors.
We know your long‑term forecast is going to be wrong.
Don't worry.
We already know that.
The question is, do we believe that you have the discipline to build out a company against
these estimates and get better and better and better at it overtime.
One of the biggest mistakes entrepreneurs make is their long‑term financial forecast
doesn't match the rest of their business plan.
So for example, you talk about doing direct sales to the market, but your forecast doesn't
include direct sales as part of your expenditures.
Make sure that your long‑term financial forecast matches your business model and matches
everything else you're telling investors.
You want to make sure that the business that you want to build is accurately reflected
in your long‑term financial forecast.