Okay. Let me talk a little bit about cost projections. I'm going to go a little bit faster in the interest of time.
The first thing you want to do is you want to estimate your cost of goods sold.
And we typically express them as a percentage of sales.
But this is the cost that, you know, we we have just for selling the product.
The next thing on the cost side is you got to figure out your expenses.
And here are the key categories that you need to think about. You clearly are going to have to pay a rent if you need a property.
A lot of companies don't need that today anymore, and typically you have a trade off between renting or owning a property.
And that's true also for capital equipment. The quick answer is entrepreneurs almost always want to rent, not own.
It's going to be sort of this should be, you know, part of your DNA as an entrepreneur.
If I don't need to buy it, let me not buy it. Because typically we're finance constrained and we just want to service.
And so the rent model tends to work better. But you have to calculate your expenses of renting, leasing the equipment.
The big one then is labour expenses. And here people just often do the wrong calculation because they only think about salary.
You really want to think about benefits, training, costs, bonuses, maybe even things like stock options.
And the tricky part is whether you as a founder are going to draw a salary.
This is not an issue as long as you're a sole proprietor because it's your business,
it's your self, the moment you're going to grow and you're going to have taken outside investors.
This becomes a huge issue. Basically, entrepreneurs often make the mistake of forgetting to put a founder salary on there,
and five years into the business, they're still hungry.
And other expenses, marketing and sales is a big one and then legal and administrative type of things as well.
And. The third type of cost category is what it costs you to even get to revenue.
And this is really important at the Start-Up stage.
Some of these are very mundane set up costs just to get a bunch of licenses, find the office space, maybe some legal setup costs.
But then you will sort of want to think about how long is my pre revenue development phase if you have a restaurant,
maybe some refurbishing, but within two months you're up and running or less in a biotech.
The first ten years of your company are pre-revenue, so development costs take on a whole different meaning.
What are they? A lot of them are employees. So that you actually counted already other expenses, so don't double count.
And by then there's a bunch of other capital expenditures. And for technology based companies,
the cost of one licensing in the technology and then protecting your own technology are very significant development costs.
Would you typically want to do at this point is develop some kind of a milestone and
figure out the timing of when you're going to spend all of these development costs.
There are things like taxes. It's not a bad idea to pay your taxes.
I highly recommend it. And you also want to look into tax credits.
Those affect your financial projections. They're very specific to industries and countries and things like that.
So I'm not going to talk too much about them and.
Now. How do we integrate the financial projections?
Couple of useful things if you want to use them. Here is the fundamentals.
There is a whole bunch of software out there and on my web page you can find one of the models that basically
allows you to just convert your revenue and cost projections into the standard three financial statements.
So you don't really need to know a lot about the accounting. You just use these software.
It's not a bad idea that you trust and understand the numbers that they generate.
They tend to generate the three statements.
The income statement is about establishing the viability and profitability of the business, and that's what the income statement will give you.
The cash flow statement is determine your financial needs and monitor the survival of your company.
The balance sheet is, in some sense the financial health or the resilience of the business.
How long, how detailed you typically want to give a minimum of one or two years?
One years? Absolute minimum. Two years is probably better. Some businesses you're going to take a 3 to 5 year rise in.
If you want to do a nuclear power plant, you probably should do 50 years.
Now, it depends a lot on the industry and the development cycle, the frequency.
This is incredibly frustrating. Should I do monthly, quarterly or yearly?
And whatever you do is wrong. So I've seen investor presentations where a presenter shows monthly projections very precise.
The investor says Way too much detail, just give me the yearly stuff. So next time round same presenter brings yearly.
So Mr. While there's no detail here, I mean, give me the details. So whatever you do is wrong.
That's that's a good sort of starting point. The point is you should be prepared in some sense to have all of them.
I want to give you one example, though. Here's a cashflow forecast.
Here's my quarterly cash flow forecast. Looks great.
I've got a great business, you know. Okay. So my first rig was a bit tough.
My cash balances go close to zero. But look at the business that I have here.
Well, this is a quarterly forecast. Let's look at the monthly forecast.
Ooh, it actually turns out that I will never be rich or anything like that,
because if I look at the monthly picture, I realise that I'm running out of cash.
And by the way, a business that runs out of cash is no business anymore.
It's the lifeblood of a company. So cash management is incredibly important.
A company that runs out of business does not exist. The way it works is, well, either, you know, the bank comes after you or if you have employees,
they don't come back on Monday morning because you didn't pay them on Friday afternoon.
So this is very important to remember the detail and have especially for the first year, I recommend that every entrepreneur should have monthly,
in some cases, weekly financial projections, because even within a month you can run out of money in the middle of the month and that's not good.
So two words about cash flow management. I'm going to be very brief here.
There is a concept of working capital. This is a bit more of an accounting concept, so I just want to briefly touch upon it.
But it is a concept that's really important. That's the cash burn rate, which is at what rate does your company eat of money?
And the reality is most companies burn cash. A few companies print cash.
That's if you have negative working capital, you're basically receiving the money before you're delivering the services.
That's beautiful. It works and so on. Subscription models.
Most businesses, especially if you're dealing in physical goods, you first pay the suppliers and then at some later point you sell your goods.
That's positive working capital. You really have to manage that.
So the concept of working capital is something that you can get out of your financial projections.
And so as you're doing your planning, this is something to pay attention to.
One other thing I'd like. Oh, here's my haiku. Look at that burn rate.
When is my fume? Days and fume? That is basically when you're running out of cash.
Pray for tomorrow. Now you might wonder what Tamo is.
So Thomas says, then a miracle occurs. So that's my my haiku about.
And very briefly, trade credit is an incredibly important concept, and your financial projections will get you towards that.
Again, this is going into I just want to make you aware of the topic of managing cash.
Trade credit is something that's often badly managed. In fact, people sometimes use it too much, not too little.
And so I have a little table here that you can look at at your leisure, but is the true cost of trade credit?
And the answer is sometimes trade credit is more expensive than credit cards. So that's something to be aware of.