I am writing a blog series on how to start a business. If you’d like to review previous posts on this series, you can find them here:
So You Want to Start a Business
Revenues, Direct Costs and Expenses… Oh My!
How Can You Earn More Revenue without Spending More Time
Direct Costs and Gross Margin
Keep Expenses LOW!
Profit is NOT an Ugly Word
Creating a Financial Forecast
If you have followed me through the past seven posts, you may be asking yourself, “Why on earth did Jeff tell us to start with this boring financial planning? Isn’t running a business more about passion and vision?”
Asking such a question is quite valid. Yes, running a business is about your vision and your passion. However, most people start their business planning at vision and passion and never make it around to understanding the financial requirements of owning and running a business. If you have followed the first seven steps that I have outlined above, you have had to ask yourself some hard questions. “Will my company make money?” “Will I go broke following my passion?” “What prices do I need to charge in order to pay all of my costs?” “How many clients do I need in order to make my company successful?” “What employees will I need to hire so that I am not working myself to death?” “What type of facility can I afford to rent or own?”
All of these are financial framework questions. If your vision or passion cannot fit within this financial framework, you will need to re-think how you will accomplish your vision. Too many new entrepreneurs get drawn in to owning their own business without understanding the cost of such a decision. So, now for the subject of this post, “The Sanity Check!”.
What is a Sanity Check?
A Sanity Check is merely answering the question, “Is my business vision financially possible?” If you went through the exercise of creating a viable financial forecast for your business, the answer is YES. If you cannot seem to make the numbers work, you have a lot more thinking to do before you can move on.
Is my Business Vision Probable?
Just because your business vision is possible, how do you know if it’s probable? In the exercise of creating a financial forecast, you will have to make some assumptions. These assumptions start with the number of clients you will be able to attract to your new business. They then lead to how much your clients will pay for your services. You have then made assumptions about your expenses, the cost of your employees, and many other critical aspects of your company in order for your business vision to be achieved. With all of these questions yet to be answered, you have officially entered the “Proof of Concept” phase of starting your business.
In order for you to get answers to your questions, you need to ask prospective clients what they think about your business plan. I will cover Market Research in my next blog post.