Over the past 15 years, as a judge of business plan competitions requiring me to review the financial plans of hundreds of entrepreneurs, I am constantly amazed by the number of aspiring moguls, many with excellent ideas, who want to fudge the numbers. Some believe that as long as everything adds up, it’s all good. Others believe that until they are in operation, when they have figures based on actual experience, it’s okay to take their best guesses. And all too often, would-be entrepreneurs have no idea what their financials say, because they’ve abdicated responsibility for understanding them to their accountant or bookkeeper—or worse, a person not remotely qualified for the job.
Understand that your financials have to be rooted in reality, even if your business is not up and running yet. For example, you may not have actually hired a sous chef for your restaurant, but you must give an accurate accounting of what salary that person would command. That number should be in your operating budget even if initially your mother has agreed to fill that position without taking a salary.
Everything from your projected cash flow to the cost of equipment to your projected break even point should be based on actual, reality-based research. Let me repeat: actual–no Googling for industry averages or guesstimations based on generally available information. Even if your business is only an idea on paper, the numbers in your financials can and should be real. Each element of your company’s product or service has a price tag; it’s your responsibility to know each and every one of them. You do this in variety of ways, including by researching your competitors, becoming immersed in your chosen industry and even actually shopping (even if you’re not in a position to buy) for what you’re going to need.
For example, you don’t have to have actually opened your custom dress-making business to know what it will actually cost to do it. You should know specifics, from the cost-per-yard for fabrics (depending on the source and size of orders) and the prices of dressmaking tools and equipment, to the costs of leasing production spaces and salaries commanded by experienced dressmakers in your market. The cost of every item, from insurance to appointment books, must be accounted for in your planning with actual numbers.
The better you know and the more fluently you can speak your financials, the better your business planning and execution, and the more credible you will be, especially to investors, lenders, partners and other potential stakeholders in your company’s success. (Not to mention us business plan competition judges.) When you talk about the condition, challenges and prospects for your business, you’ll be basing them on financials that support what you are saying. One of the first things I check for when I am judging business plans is whether entrepreneurs’ “word story” (executive summary, etc.) matches up with their “numbers story” (financials). It’s a major red flag for me when they don’t (and a beautiful thing when they do).
And while we’re on the subject of financials, hire a real accountant (yes, you need to pay them) with experience working with small businesses to help you put together your projections. Don’t try to do it yourself (unless you have such accounting experience). And please, please, don’t rely on a friend or family member to do it, even if they did get straight ‘As’ in math in high school. Financial planning for your business is not a job for amateurs.
The financials of your business have to do more than just add up. They have to make sense in the real world.
Black Enterprise Executive Editor-At-Large Alfred Edmond Jr. is an award-winning business and financial journalist, media executive, entrepreneurship expert, personal growth/relationships coach, and co-founder of Grown Zone, a multimedia initiative focused on personal growth and healthy decision-making. This blog is dedicated to his thoughts about money, entrepreneurship, leadership and mentorship. Follow him on Twitter at @AlfredEdmondJr.