Larry D. West III
THE NUMBERS GAME: WHY ALL ENTREPRENEURS MUST LEARN THE RULES OF THIS GAME
This is the golden age of entrepreneurship. From a college dropout with a brilliant business idea, to an excellent home baker starting an online bakery, entrepreneurs in the new millennium are changing the tides of traditional businesses. But with 50% of start-ups shutting their doors even before they hit the 5 year mark, the one thing that seems to deter some budding entrepreneurs is taking stock of the numbers that matter. Because numbers are the building blocks of a successful business.
The art of reading numbers and understanding what they are trying to tell you is at the core of a successful business. If you can’t make the numbers work for you, then no matter how great the idea, you will just not hit its maximum potential. Here are some of the numbers that you need to evaluate to create a strong, viable and successful business.
1. Seed Capital.
As you sow, so shall you reap. You need to carefully consider the capital you need to invest in your business because this is what is going to initiate the chain reaction for everything that follows. Weigh your marketing plan, competitors’ positioning, potential risks and profitability factors to understand exactly how much money you can safely invest. A great way to gauge the market, while raising capital, is to test crowdfunding on one of the many crowdfunding platforms, such as Kickstarter.
This translates into the dynamic forecast and cash flow projection. The important factors to be considered while calculating this are the raw materials or capital costs, labor charges, buffer, taxes, rent, maintenance, other unaccounted costs as well as input and outflow of both workforce and finances.
Many of these factors will change based on the nature of your business. Remember that although you may estimate that the business will generate a certain rate of revenue growth going forward or that certain expenses will be fixed or can be controlled, these are only estimates and not set in stone. They will however act as guiding lights as you try to navigate your way forward and grow your business.
3. Debt. Maintaining a steady cash flow requires substantial amount of reliance on debt, at least for a majority of new businesses. The debt you owe the bank, investors or any other institution will be the loans taken by your business that must be repaid, usually with interest, over a period of time. Calculating a tentative inflow or outflow of money from these sources is important. It is usually advised to split your loan amount between two or more sources so that no single lender can overpower your business.
You have set up a successful and profitable business but imagine one day there is a spark in the motor room of your factory. The spark that started in a corner burned down a huge part of your factory before someone could put that fire out. Now as hypothetical as this is, there are many smaller damages to your business that can occur, however if your business is insured correctly, they will never result in more than a minor setback. Hence, as a growing business, it’s not only important to know exactly how much your business is worth in order to arrive at the right insurance amount, but also monitor your valuation over time and keep updating your insurance accordingly.
5. Let’s sum up the numbers, shall we?
None of these numbers can be analyzed without the exact number of your business, this is the value or worth of your enterprise. Business valuation is the basis of any future transaction or estimation. It is used to set the fair market value of the shares of a business, to estimate and follow up on the budget and profits, taxation, insurance, loans and almost any other function of the company, be it qualitative or quantitative. Now this is THE number and you cannot go wrong with it because it will have a domino effect on the rest of your business.
So while you get all your pieces in place and formulate a strategy, don’t forget that your product/services, the marketing plan, your financiers, insurers etc. are the army, but what you are eventually trying to protect, business value, is the King.