By David Churchill
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.