1 00:00:07,070 --> 00:00:12,020 Welcome. I've never been accused of being the last traditional lecture. 2 00:00:12,110 --> 00:00:22,940 I feel like a dying species or something, and I will certainly try to make it an interesting and hopefully not too traditional lecture. 3 00:00:23,390 --> 00:00:32,060 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. 4 00:00:33,200 --> 00:00:38,929 But it is a such a traditional topic, but you'll see that in fact there's nothing traditional about financial projections, 5 00:00:38,930 --> 00:00:44,959 and especially if you have a fear of numbers. 6 00:00:44,960 --> 00:00:52,070 And I've met many students and entrepreneurs who have a fear of numbers and heightened fear of accounting. 7 00:00:52,550 --> 00:00:59,120 I want you to relax. There is nothing complicated about anything we're going to do today. 8 00:00:59,120 --> 00:01:05,900 And even though we are going to use numbers, you will see very quickly that it's not about the numbers. 9 00:01:06,260 --> 00:01:09,020 If you're good with additions and subtractions, 10 00:01:09,020 --> 00:01:14,720 you should be absolutely fine with the rest of today's content and nothing more complicated needed to do that. 11 00:01:15,200 --> 00:01:23,030 In fact, I've become more and more convinced and in the recent past, I guess, that entrepreneurship is not about numbers. 12 00:01:23,060 --> 00:01:25,610 Entrepreneurship is about storytelling. 13 00:01:26,240 --> 00:01:36,380 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. 14 00:01:37,190 --> 00:01:41,940 So. I'm here to tell you a story. 15 00:01:42,930 --> 00:01:47,460 The only problem is I'm an economist. 16 00:01:47,670 --> 00:01:52,320 And how interesting could a story from an economist possibly be? 17 00:01:52,800 --> 00:01:57,480 So I'll do my best not to be my economist self and I'll just tell you a story. 18 00:01:57,750 --> 00:02:04,380 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. 19 00:02:04,390 --> 00:02:07,650 So this is one of the stories that we talk about at home. 20 00:02:08,580 --> 00:02:13,680 Magic Mirror in my hand. Who is the fairest in the land? 21 00:02:14,250 --> 00:02:17,510 You might recognise this bit. My Queen. 22 00:02:17,520 --> 00:02:23,670 You are the fairest here. So true. I don't know if you think that's fair, but. 23 00:02:26,580 --> 00:02:30,840 But Snow White has thousand times more EBIT than you. 24 00:02:31,710 --> 00:02:36,450 Surely you will have heard that fairy tale if you don't know what it is, don't worry. 25 00:02:38,010 --> 00:02:45,360 So entrepreneurship is about storytelling and things like EBIDTA and financial projections are about storytelling. 26 00:02:45,840 --> 00:02:51,329 And that if I want you to remember one thing about financial projections, it's the image. 27 00:02:51,330 --> 00:02:54,330 Oh, sorry. Here's Snow White. Just in case you missed that. 28 00:02:54,540 --> 00:02:58,380 And what I want you to remember is that financial projections are mirrors. 29 00:02:59,070 --> 00:03:02,220 In fact, that mirrors in several respects. 30 00:03:02,700 --> 00:03:09,540 The first one is a financial projection, is a mirror image of your business. 31 00:03:09,540 --> 00:03:17,130 Now, I understand many of you are in the process of planning or actually implementing a new start up, 32 00:03:17,580 --> 00:03:24,899 and there is an enormous amount of sort of strategic and tactical thought, 33 00:03:24,900 --> 00:03:28,770 all the things that you want to do and all the things that you want to have in place. 34 00:03:29,490 --> 00:03:36,090 And sometimes you actually go through the pain of putting that into a slide presentation or even a full business plan. 35 00:03:36,930 --> 00:03:38,880 And then at the end of that business plan, 36 00:03:38,910 --> 00:03:46,560 somebody is going to ask you about financial projections and you panic because this is about accounting complicated. 37 00:03:47,010 --> 00:03:48,780 Well, no, it's just a mirror. 38 00:03:49,110 --> 00:03:57,930 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. 39 00:03:58,410 --> 00:04:04,950 But instead of using the English language, you use a simple language, which is revenues and costs. 40 00:04:05,680 --> 00:04:09,820 That's really all there is to it. And I'm going to explain to you what what it means. 41 00:04:10,120 --> 00:04:12,010 But it's a mirror image of the business. 42 00:04:12,490 --> 00:04:21,790 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. 43 00:04:22,030 --> 00:04:25,240 The only thing you need to know something about is your own business. 44 00:04:25,840 --> 00:04:28,690 That's what matters for coming up with financial projections. 45 00:04:29,260 --> 00:04:34,780 Now, the second mirror image is that as you going through this process and I really highly recommend it, 46 00:04:35,200 --> 00:04:43,750 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. 47 00:04:44,260 --> 00:04:52,389 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 48 00:04:52,390 --> 00:04:55,719 of revenue and then doing a few other things here and there are actually generating revenue. 49 00:04:55,720 --> 00:05:00,440 Why am I spending so much time here as opposed to there? That's the mirror. 50 00:05:00,460 --> 00:05:03,430 That's the honest feedback that you need on yourself. 51 00:05:03,430 --> 00:05:10,809 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. 52 00:05:10,810 --> 00:05:13,540 And this is a mirror that will bring you back to reality. 53 00:05:14,470 --> 00:05:23,560 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? 54 00:05:23,980 --> 00:05:32,500 Who are people? I just call them investors here. It's really more than investors you want to hire somebody with into your business. 55 00:05:32,770 --> 00:05:36,459 Maybe they're going to say, well, tell me, what's this business about? And give me some financial projections. 56 00:05:36,460 --> 00:05:40,240 I know whether it's worth spending more time spending on it. 57 00:05:40,510 --> 00:05:43,930 They're going to try to understand what you're doing in the business. 58 00:05:44,290 --> 00:05:51,310 And frankly, this is the most practical reasons. Typically, entrepreneurs really get down to writing proper financial projections. 59 00:05:51,730 --> 00:05:54,940 The day that an investor says, Well, can you show them to me? 60 00:05:56,000 --> 00:05:59,840 Investors will look at these and they will say, oh, I don't believe it. 61 00:06:00,590 --> 00:06:05,150 No one, no one remembers ever believes a financial projection. 62 00:06:05,840 --> 00:06:12,080 Yet they are a mirror image because they say something about you and how you think about your business. 63 00:06:12,740 --> 00:06:17,940 They are, at a basic level, a measure of your financial literacy. 64 00:06:18,050 --> 00:06:22,220 Can you figure out some basic things about your business? 65 00:06:22,610 --> 00:06:26,480 But much more deeply is that they show whether you really thought about your business. 66 00:06:26,720 --> 00:06:31,810 Have you thought about all the costs, all that is going to take you to build this business? 67 00:06:31,820 --> 00:06:35,000 Have you in calculated the fact that, you know, 68 00:06:35,630 --> 00:06:41,660 getting paid always takes longer than having to pay other people things that really matter to your business. 69 00:06:41,660 --> 00:06:47,440 Your investors will just be able to see by looking at their financial projections whether you've thought through your business or not. 70 00:06:47,450 --> 00:06:51,650 And again, you don't need complicated number or complicated formulas or anything like that. 71 00:06:52,010 --> 00:06:55,300 You need to show that I understand my business. 72 00:06:55,310 --> 00:07:03,960 That's what financial projections are about. So there are lots of limitations to doing financial projections. 73 00:07:04,470 --> 00:07:10,770 And I think it's important to say that the first thing is whatever you do, financial projections are always wrong. 74 00:07:11,100 --> 00:07:17,339 Apparently 25 years ago, there was one company in Silicon Valley that actually made their numbers. 75 00:07:17,340 --> 00:07:23,190 And people still talk about it because it's the only among 10 billion companies that ever made the numbers. 76 00:07:25,550 --> 00:07:29,150 Entrepreneurship Start-ups are inherently unpredictable. 77 00:07:29,360 --> 00:07:33,950 Nobody expects you to do actually what it does in your financial projections. 78 00:07:35,390 --> 00:07:39,800 Even if you achieve, you're going to achieve it at a different point in time. 79 00:07:40,130 --> 00:07:46,460 Typically a year or two or three years later than what you planned for, because timing is really hard to estimate. 80 00:07:47,030 --> 00:07:50,150 And by the way, this is something we were just going to find a couple of times. 81 00:07:50,180 --> 00:07:58,320 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, 82 00:07:58,530 --> 00:08:02,760 you start coming up with these really precise financial predictions that don't mean anything. 83 00:08:03,120 --> 00:08:07,620 There's no there is no precision in anything we're going to do here. We're trying to get ballparks. 84 00:08:07,620 --> 00:08:13,500 We're trying to get orders of magnitude. Tried to give us an idea of whether this has a chance or not. 85 00:08:13,770 --> 00:08:17,100 And we're not going to worry about cents or anything like that. 86 00:08:18,390 --> 00:08:22,110 Financial projections are always out of date. I hope they're out of date. 87 00:08:22,860 --> 00:08:26,430 If your financial projections are out of date, your business is moving fast enough. 88 00:08:26,640 --> 00:08:32,820 You're not adapting quickly enough to your environment. Because the truth is, as an entrepreneur, things keep changing. 89 00:08:32,820 --> 00:08:38,460 And so the moment you write down the financial projections, a week later, things will have changed in your business. 90 00:08:38,730 --> 00:08:44,400 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. 91 00:08:46,020 --> 00:08:54,840 But change is important, and I'm sure you've heard enough about lean start-ups and pivots and all of these buzzwords. 92 00:08:55,920 --> 00:09:00,060 They're very important, and they mean that the financial projections have to be out of date. 93 00:09:00,990 --> 00:09:05,940 Third thing is, they're always optimistic. Now, there's a whole language that goes with that. 94 00:09:06,330 --> 00:09:12,569 So every time that you see an entrepreneur presenting in front of an investor 100% guarantee, 95 00:09:12,570 --> 00:09:16,320 at some point the entrepreneur will say, our financial projections are very conservative. 96 00:09:18,370 --> 00:09:22,930 I. Don't know why everybody has the same sentence. 97 00:09:23,200 --> 00:09:26,560 Somehow the Conservative Party has a monopoly in this part of the presentation. 98 00:09:28,060 --> 00:09:32,570 Sorry, Labour, but. Everybody says it. 99 00:09:32,600 --> 00:09:35,860 Nobody means it. That's just the truth. And. 100 00:09:37,700 --> 00:09:44,930 So everybody gives a very rosy picture of what this company will look like and then say, Oh, my projections are conservative. 101 00:09:46,050 --> 00:09:54,880 The problem is. How about going into an investor meeting and being honest and saying, Hey, this is my average expectation, 102 00:09:55,360 --> 00:10:03,519 you're going to look really unimpressive because everybody expects you to exaggerate and here you are not exaggerating. 103 00:10:03,520 --> 00:10:09,310 So this is a very unhealthy game where you're expected to say something that's basically wrong. 104 00:10:10,060 --> 00:10:15,820 And if you say the right thing, then people say, Oh, he was saying the wrong or she was saying the wrong thing. 105 00:10:15,820 --> 00:10:23,040 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. 106 00:10:23,760 --> 00:10:25,409 What we are typically doing, though, 107 00:10:25,410 --> 00:10:34,680 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. 108 00:10:35,040 --> 00:10:38,580 We're trying to tell the story when things are working. 109 00:10:39,880 --> 00:10:43,420 And then later we're going to say, well, there's obviously a bunch of risk. 110 00:10:43,570 --> 00:10:47,530 You know, revenue might not be as quick, costs might be higher. 111 00:10:47,530 --> 00:10:49,900 And I recognise these as risk factors. 112 00:10:50,200 --> 00:10:55,750 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. 113 00:10:56,440 --> 00:11:03,550 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. 114 00:11:04,410 --> 00:11:10,170 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. 115 00:11:10,500 --> 00:11:14,700 The uptick in the optimistic number, though, is the story that people want to hear. 116 00:11:15,000 --> 00:11:22,650 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. 117 00:11:23,990 --> 00:11:33,380 Great. So financial projections and this is very important and financial projections are not a substitute for a proper financial system, 118 00:11:33,590 --> 00:11:41,360 the financial record system. Basically, we make a very big distinction between the financial statements that reflect our 119 00:11:41,360 --> 00:11:46,130 activities up to date and the financial projections which are going forward. 120 00:11:46,640 --> 00:11:51,980 I am not going to teach you today anything about financial statements. 121 00:11:52,160 --> 00:11:59,450 There's a ton of material and is readily available to to read about that, and that's basically bookkeeping. 122 00:11:59,960 --> 00:12:04,430 Now, little advice if you're starting your business, make sure that you're doing it, doing it properly. 123 00:12:04,430 --> 00:12:10,159 It's really important. And what I'm going to talk about is how do I plan as an entrepreneur? 124 00:12:10,160 --> 00:12:14,450 Because the bookkeeping part in a Start-Up is often, well, you know, I've been around, 125 00:12:14,450 --> 00:12:17,120 I've been doing this for a month and it hasn't been very complicated, 126 00:12:17,630 --> 00:12:24,980 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. 127 00:12:25,520 --> 00:12:29,510 And so that's that's an important difference. 128 00:12:29,780 --> 00:12:33,890 And that's why I tend to argue you don't get an accountant to do your financial projections. 129 00:12:34,190 --> 00:12:37,880 You have to do them because they're about business. They're not about accounting. 130 00:12:39,760 --> 00:12:47,229 Wonderful. So what I'm here for basically is give you some tools on how to develop financial projections. 131 00:12:47,230 --> 00:12:51,730 That's sort of the main objective of what we want to achieve today. 132 00:12:52,060 --> 00:12:55,780 And at the end, I'm going to talk a little bit more about where we go from there. 133 00:12:55,780 --> 00:12:59,380 But I think this is going to keep us busy for a good while. 134 00:13:00,850 --> 00:13:06,100 Now let me give you a fine recipe for how to do financial projections. 135 00:13:06,430 --> 00:13:11,380 Obviously, I'm a great cook. Use £2 of fresh primary market research. 136 00:13:12,070 --> 00:13:20,139 Mix in a cup of secondary market data. Lightly sprinkled some theoretical reasoning, decorate subtly with some wishful thinking and serve hot tea. 137 00:13:20,140 --> 00:13:26,560 Very important. So this is pretty accurate actually, about how we do financial projections. 138 00:13:27,250 --> 00:13:35,290 And I actually want to talk a little bit about it. Primary market research is incredibly important, 139 00:13:35,290 --> 00:13:42,220 and I hope that throughout your entrepreneurial journey you're going to remember that and refine your tools. 140 00:13:42,670 --> 00:13:51,440 But primary market research basically means. Not asserting what you would like the business to be, 141 00:13:51,920 --> 00:14:02,150 but going out and finding some evidence from direct observation of the marketplace about what is possible and what's not possible. 142 00:14:02,420 --> 00:14:05,840 So primary market research is essentially talking to customers. 143 00:14:06,320 --> 00:14:10,730 It is talking maybe to suppliers. That's going to be important when we're going to do the cost side. 144 00:14:11,870 --> 00:14:19,370 It means talking to competitors. It means talking to experts, finding out what it is that people want. 145 00:14:19,460 --> 00:14:25,640 Finding out what they're willing to pay. Finding out what is standard practice in my industry. 146 00:14:25,970 --> 00:14:31,100 And a lot of this is not written up. And when it's not written up, we call it primary market research. 147 00:14:31,100 --> 00:14:36,229 And when it's written up, it's called secondary market. Secondary market research has become incredibly easy. 148 00:14:36,230 --> 00:14:45,740 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 149 00:14:45,740 --> 00:14:50,479 tell you something about the industry that you're in and what some of the relevant parameters are. 150 00:14:50,480 --> 00:14:56,750 So it's not difficult to find out about what is it supply chain might look like, 151 00:14:56,750 --> 00:15:03,700 or you can find tons of data on publicly listed companies in your industry. 152 00:15:04,580 --> 00:15:12,799 You want to find that data, say you want to find out about let me just say you're interested in clean technologies. 153 00:15:12,800 --> 00:15:20,210 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. 154 00:15:20,630 --> 00:15:22,070 But then you say, Well, that's all very nice. 155 00:15:22,070 --> 00:15:28,430 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. 156 00:15:28,430 --> 00:15:34,640 Well, then you go to primary market research. All of these are things that you should be doing as an entrepreneur anyway, 157 00:15:35,120 --> 00:15:43,040 but they're also going to be the inputs that we need to come up with proper financial projections lightly sprinkled some theoretical reasoning. 158 00:15:43,040 --> 00:15:47,030 Well, you won't have a clean story. 159 00:15:47,240 --> 00:15:51,470 You're going to have to apply some logic in combining different types of data. 160 00:15:51,680 --> 00:15:57,490 And that's what we call it theoretical reasoning, the wishful thinking while we talked about it and you know, 161 00:15:57,560 --> 00:16:03,590 that's just there serve hard make sure that they look good to your investors and so. 162 00:16:04,570 --> 00:16:07,660 What are the basic steps that we're going to go through? 163 00:16:08,590 --> 00:16:13,330 We're going to talk a little bit about projecting revenues. Then we're going to talk about the cost side. 164 00:16:13,960 --> 00:16:18,370 And really, that's all there is to it. There's revenues and there is costs. 165 00:16:19,090 --> 00:16:21,520 We like one and we don't like the other, but you will figure that out. 166 00:16:22,120 --> 00:16:29,500 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. 167 00:16:29,830 --> 00:16:35,500 And we're going to introduce the cash flow statement, income statement and balance sheet, which are standard accounting statements. 168 00:16:36,040 --> 00:16:39,430 But don't panic. It's going to be very straightforward. 169 00:16:39,820 --> 00:16:45,580 We then going to talk a little bit at the end about how to present financial projections and how to manage cash. 170 00:16:45,850 --> 00:16:51,639 Once you get going, although that really gets us further than what we're going to be able to cover today. 171 00:16:51,640 --> 00:16:54,580 But I'm just going to touch a little bit on some of it.