Welcome. I've never been accused of being the last traditional lecture.
I feel like a dying species or something, and I will certainly try to make it an interesting and hopefully not too traditional lecture.
But it's a privilege to be here. I am going to be talking about financial projects and that's the only lecture for which I wear a tie.
But it is a such a traditional topic, but you'll see that in fact there's nothing traditional about financial projections,
and especially if you have a fear of numbers.
And I've met many students and entrepreneurs who have a fear of numbers and heightened fear of accounting.
I want you to relax. There is nothing complicated about anything we're going to do today.
And even though we are going to use numbers, you will see very quickly that it's not about the numbers.
If you're good with additions and subtractions,
you should be absolutely fine with the rest of today's content and nothing more complicated needed to do that.
In fact, I've become more and more convinced and in the recent past, I guess, that entrepreneurship is not about numbers.
Entrepreneurship is about storytelling.
And I think one of the skills of great entrepreneurs is to be able to tell a story, and that by itself can create the business.
So. I'm here to tell you a story.
The only problem is I'm an economist.
And how interesting could a story from an economist possibly be?
So I'll do my best not to be my economist self and I'll just tell you a story.
But I really don't have a good story. Thank God I've got a five year old daughter and well, she's got a few good stories.
So this is one of the stories that we talk about at home.
Magic Mirror in my hand. Who is the fairest in the land?
You might recognise this bit. My Queen.
You are the fairest here. So true. I don't know if you think that's fair, but.
But Snow White has thousand times more EBIT than you.
Surely you will have heard that fairy tale if you don't know what it is, don't worry.
So entrepreneurship is about storytelling and things like EBIDTA and financial projections are about storytelling.
And that if I want you to remember one thing about financial projections, it's the image.
Oh, sorry. Here's Snow White. Just in case you missed that.
And what I want you to remember is that financial projections are mirrors.
In fact, that mirrors in several respects.
The first one is a financial projection, is a mirror image of your business.
Now, I understand many of you are in the process of planning or actually implementing a new start up,
and there is an enormous amount of sort of strategic and tactical thought,
all the things that you want to do and all the things that you want to have in place.
And sometimes you actually go through the pain of putting that into a slide presentation or even a full business plan.
And then at the end of that business plan,
somebody is going to ask you about financial projections and you panic because this is about accounting complicated.
Well, no, it's just a mirror.
All you are going to do in your financial projections is you are going to try to reflect what you're planning to do in the business.
But instead of using the English language, you use a simple language, which is revenues and costs.
That's really all there is to it. And I'm going to explain to you what what it means.
But it's a mirror image of the business.
And you don't need to have any degree in accounting or know a lot about finance and stock markets and all of these complicated things.
The only thing you need to know something about is your own business.
That's what matters for coming up with financial projections.
Now, the second mirror image is that as you going through this process and I really highly recommend it,
especially if you have a fear of numbers, go through the exercise of building your own financial projections because it's a mirror to yourself.
You're going to go through a process which you say, this doesn't make sense if I'm doing all of these activities here and then are generating a lot
of revenue and then doing a few other things here and there are actually generating revenue.
Why am I spending so much time here as opposed to there? That's the mirror.
That's the honest feedback that you need on yourself.
Because as you start your business, you fall so in love with all of the activities and strategies and tactics that you lose the discipline.
And this is a mirror that will bring you back to reality.
The third in the mirror image that I want you to remember is that people will use the financial projection as a mirror image of what you doing?
Who are people? I just call them investors here. It's really more than investors you want to hire somebody with into your business.
Maybe they're going to say, well, tell me, what's this business about? And give me some financial projections.
I know whether it's worth spending more time spending on it.
They're going to try to understand what you're doing in the business.
And frankly, this is the most practical reasons. Typically, entrepreneurs really get down to writing proper financial projections.
The day that an investor says, Well, can you show them to me?
Investors will look at these and they will say, oh, I don't believe it.
No one, no one remembers ever believes a financial projection.
Yet they are a mirror image because they say something about you and how you think about your business.
They are, at a basic level, a measure of your financial literacy.
Can you figure out some basic things about your business?
But much more deeply is that they show whether you really thought about your business.
Have you thought about all the costs, all that is going to take you to build this business?
Have you in calculated the fact that, you know,
getting paid always takes longer than having to pay other people things that really matter to your business.
Your investors will just be able to see by looking at their financial projections whether you've thought through your business or not.
And again, you don't need complicated number or complicated formulas or anything like that.
You need to show that I understand my business.
That's what financial projections are about. So there are lots of limitations to doing financial projections.
And I think it's important to say that the first thing is whatever you do, financial projections are always wrong.
Apparently 25 years ago, there was one company in Silicon Valley that actually made their numbers.
And people still talk about it because it's the only among 10 billion companies that ever made the numbers.
Entrepreneurship Start-ups are inherently unpredictable.
Nobody expects you to do actually what it does in your financial projections.
Even if you achieve, you're going to achieve it at a different point in time.
Typically a year or two or three years later than what you planned for, because timing is really hard to estimate.
And by the way, this is something we were just going to find a couple of times.
Beware of false precision. The one of the dangers is if you actually know a lot about finance, if you know a lot about accounting,
you start coming up with these really precise financial predictions that don't mean anything.
There's no there is no precision in anything we're going to do here. We're trying to get ballparks.
We're trying to get orders of magnitude. Tried to give us an idea of whether this has a chance or not.
And we're not going to worry about cents or anything like that.
Financial projections are always out of date. I hope they're out of date.
If your financial projections are out of date, your business is moving fast enough.
You're not adapting quickly enough to your environment. Because the truth is, as an entrepreneur, things keep changing.
And so the moment you write down the financial projections, a week later, things will have changed in your business.
And that's okay. You may have to update them from time to time when you share them with other people, when you want to learn something new.
But change is important, and I'm sure you've heard enough about lean start-ups and pivots and all of these buzzwords.
They're very important, and they mean that the financial projections have to be out of date.
Third thing is, they're always optimistic. Now, there's a whole language that goes with that.
So every time that you see an entrepreneur presenting in front of an investor 100% guarantee,
at some point the entrepreneur will say, our financial projections are very conservative.
I. Don't know why everybody has the same sentence.
Somehow the Conservative Party has a monopoly in this part of the presentation.
Sorry, Labour, but. Everybody says it.
Nobody means it. That's just the truth. And.
So everybody gives a very rosy picture of what this company will look like and then say, Oh, my projections are conservative.
The problem is. How about going into an investor meeting and being honest and saying, Hey, this is my average expectation,
you're going to look really unimpressive because everybody expects you to exaggerate and here you are not exaggerating.
So this is a very unhealthy game where you're expected to say something that's basically wrong.
And if you say the right thing, then people say, Oh, he was saying the wrong or she was saying the wrong thing.
So in reality, it's even lower. There is a way out of this game and it is basically being able to justify what you're saying.
What we are typically doing, though,
in a financial projection is we are not trying to get sort of the dry statistical average revenue or average cost of what we're doing.
We're trying to tell the story when things are working.
And then later we're going to say, well, there's obviously a bunch of risk.
You know, revenue might not be as quick, costs might be higher.
And I recognise these as risk factors.
But what you're trying to do in a financial projection, you're trying to map out what it would look like when it works.
And that's different than the expected outcome, because we know that in every Start-Up there's a good probability that things don't work out.
That's okay. So when people say, I'm going to give you a conservative number, the truth is they're giving you an optimistic number.
The uptick in the optimistic number, though, is the story that people want to hear.
Tell me how this would work if it works. And then we know that there are risks around the fact that things may not work out.
Great. So financial projections and this is very important and financial projections are not a substitute for a proper financial system,
the financial record system. Basically, we make a very big distinction between the financial statements that reflect our
activities up to date and the financial projections which are going forward.
I am not going to teach you today anything about financial statements.
There's a ton of material and is readily available to to read about that, and that's basically bookkeeping.
Now, little advice if you're starting your business, make sure that you're doing it, doing it properly.
It's really important. And what I'm going to talk about is how do I plan as an entrepreneur?
Because the bookkeeping part in a Start-Up is often, well, you know, I've been around,
I've been doing this for a month and it hasn't been very complicated,
whereas where I'm going is a much more complicated world and I want to have ways of thinking about how I'm going to plan my business.
And so that's that's an important difference.
And that's why I tend to argue you don't get an accountant to do your financial projections.
You have to do them because they're about business. They're not about accounting.
Wonderful. So what I'm here for basically is give you some tools on how to develop financial projections.
That's sort of the main objective of what we want to achieve today.
And at the end, I'm going to talk a little bit more about where we go from there.
But I think this is going to keep us busy for a good while.
Now let me give you a fine recipe for how to do financial projections.
Obviously, I'm a great cook. Use £2 of fresh primary market research.
Mix in a cup of secondary market data. Lightly sprinkled some theoretical reasoning, decorate subtly with some wishful thinking and serve hot tea.
Very important. So this is pretty accurate actually, about how we do financial projections.
And I actually want to talk a little bit about it. Primary market research is incredibly important,
and I hope that throughout your entrepreneurial journey you're going to remember that and refine your tools.
But primary market research basically means. Not asserting what you would like the business to be,
but going out and finding some evidence from direct observation of the marketplace about what is possible and what's not possible.
So primary market research is essentially talking to customers.
It is talking maybe to suppliers. That's going to be important when we're going to do the cost side.
It means talking to competitors. It means talking to experts, finding out what it is that people want.
Finding out what they're willing to pay. Finding out what is standard practice in my industry.
And a lot of this is not written up. And when it's not written up, we call it primary market research.
And when it's written up, it's called secondary market. Secondary market research has become incredibly easy.
And in the days of Internet, you basically just go on the Internet and you look for all sort of data or industry reports that
tell you something about the industry that you're in and what some of the relevant parameters are.
So it's not difficult to find out about what is it supply chain might look like,
or you can find tons of data on publicly listed companies in your industry.
You want to find that data, say you want to find out about let me just say you're interested in clean technologies.
And so you go on the Internet and you find out about publicly listed companies in the cleantech space, and you can find all sort of data about them.
But then you say, Well, that's all very nice.
That's not really quite relevant because what I'm doing is much more niche and only a few private companies are in that particular needs.
Well, then you go to primary market research. All of these are things that you should be doing as an entrepreneur anyway,
but they're also going to be the inputs that we need to come up with proper financial projections lightly sprinkled some theoretical reasoning.
Well, you won't have a clean story.
You're going to have to apply some logic in combining different types of data.
And that's what we call it theoretical reasoning, the wishful thinking while we talked about it and you know,
that's just there serve hard make sure that they look good to your investors and so.
What are the basic steps that we're going to go through?
We're going to talk a little bit about projecting revenues. Then we're going to talk about the cost side.
And really, that's all there is to it. There's revenues and there is costs.
We like one and we don't like the other, but you will figure that out.
And we're then going to show you a little bit how to build the projections on the basis of these revenue and cost projections.
And we're going to introduce the cash flow statement, income statement and balance sheet, which are standard accounting statements.
But don't panic. It's going to be very straightforward.
We then going to talk a little bit at the end about how to present financial projections and how to manage cash.
Once you get going, although that really gets us further than what we're going to be able to cover today.
But I'm just going to touch a little bit on some of it.