Forecasting is more art than science. Most people hate making business projections. They’re going to be wrong and they don’t like it. Will it come back to bite them? Will there be a crystal ball and chain? How can I possibly know?
How would you like to sit down with somebody two years after he started up his company and talk about how he projected his numbers and how they subsequently turned out? How about what he learned in the process and what he’d recommend? Frankly, I think Guy Kawasaki’s post today called Two Years of the Real Numbers of a Startup should be required reading for everybody looking at starting a business. Glenn Kelman of Redfin does us all the favor of opening up his books and sharing.
Glenn readily lists things that turned out different. Rent per employee turned out a lot higher than planned, benefits per employee less, payroll tax less, telephone costs per sales employee almost double, and so on. Meeting costs were much higher than planned, but accounting costs were much lower. This is all very real and very concrete. I think this is a great way to get over that hurdle of uncertainty that makes financial projections even harder than they already are. Remember, as I’ve said elsewhere, all business plans are wrong, but no less vital, because it’s the first step towards tracking and, eventually, management. Your assumptions will be wrong, but how would you know if you don’t track them.
That, by the way, is one of the excellent tips that follow the numbers. Track your assumptions.
Flag your assumptions. Rather than burying your assumptions in Excel formulae, call them out in a separate tab of the workbook, so that you have a control panel for adjusting the model. This is especially important if you plan to share your model with potential investors.
And there’s also this delightful dose of reality:
Keep market-share under 20%. Most startups reach a jillion in projected revenues by assuming that the business grows by leaps and bounds for five years. Since there’s a natural limit on growth, be ready for the question: “What would your market-share be in year five?” If it’s over 20%, take the jillion-dollar projection down a notch. Even a hit like iPod doesn’t have 20% market-share. You’ll be lucky to come close to 20% of any market.
And it goes on. “Plan slow. Run fast.” “Build from blocks.” This is a great post. Thanks Guy and Glenn. If you’re at all serious about getting up and running, read it.