By Kate Sackman
Most entrepreneurs are inventors. Even if they don’t have a patentable idea, they have discovered or created something they believe to be unique that is solving a problem that needs to be solved. They are inventors because they are focusing on creating their product, but often have not yet considered all the expenses and investments necessary to bring their idea to market. Early on in the 14-week Empower Accelerator program at StartUP FIU, we introduce the key elements in a financial model. Maybe you have heard it said that your financial model is your business plan expressed in numbers, which is a great way to think about it.
Financial models can be daunting for entrepreneurs. The numbers can be scary, but they help reveal the true story of the assumptions you are making about your business. When you look at all the expenses of the business, including development costs, salaries, customer acquisition, and capital investment, you find out how viable your business model really is.
In addition, creating the financial model requires you to decide how to price your product and the various revenue streams your business can generate. In order to project your profits over the next 12, 24, 36 months, you need to clarify for yourself exactly how you are going to reach customers, how long it will take to get them to buy (and pay you for) your product, how often they will buy, and how many products you will sell in each time period. Whew.
If this seems daunting, think of a roadside lemonade stand, the costs of setting up, selling, getting customers, and how many cups of lemonade must be sold for the lemonade business to make a profit. It is a simple example, but determining your numbers at the early stages of your business is not that much different.
Just take it one step at a time. I suggest you start with expenses (usually easier), then really ask yourself the hard questions about how you are going to get your first 10 paying customers, then the next 10, and so on. When you do this thoughtfully and thoroughly, you will understand your funding needs, your staffing needs, and your business plan will start to write itself. In a few years when your business has traction, making a financial plan for the coming year is easier because you will have some history. Use your financial plan to set and track monthly sales goals for yourself and you will be much more in control of your success.
About Kate Sackman
Kate directs the Empower Accelerator at StartUP FIU and is a serial entrepreneur with industry experience in software, medical devices, media, environmental science, marketing and finance. She believes powerfully in the potential of passionate entrepreneurs when their energy is focused and persistent. As an adjunct professor at FIU, she teaches Global Social Entrepreneurship in the Honors College and Technology Entrepreneurship to master’s students in the Engineering school. Since joining FIU in 2016, she has truly enjoyed helping over 100 start-up founders innovate in all areas of strategy, business model, funding and pitching.