If you have been following along with the series, you have now validated your concept, completed a go to market strategy and brought in the right partners for your business.  For most entrepreneurs, this next step is usually the most difficult one – creating a budget.  At the very least, you need to determine how much cash you will need to arrive at a final product, have proof of concept and be ready to generate sales.

In order to complete the budget, you need to consider all facets of the business:

• Product development
• Manufacturing
• Logistics / Shipping
• Distribution
• Branding / Marketing
• Other staffing: Administration, customer service, accounting, etc.
• Professional services: legal, accounting
• Regulatory costs
• Capital expenditures
• General and Administrative

The two most common mistakes made by entrepreneurs are 1) add up all costs and assume this is how much capital they need to start the business and 2) generating a profit and loss forecast and use this to forecast cash flow needs. What both these processes fail to take into account is the timing of the cash flows. We recommend generating a monthly cash flow forecast clearly breaking out the timing of cash inflows and outflows by month. This provides you the most accurate picture of your cash needs and whether it is even possible to get your business off the ground.

With respect to a B2C product being sold through the retail channel, here are some additional considerations which I have encountered during my time as CFO:

Your product development budget should anticipate additional customization required by retailers.  Different retailers may have different rules about product sizes, packaging, labels, safety, etc. that may require changes to your product.  Logistics and shipping need to included as well in your variable costs, so you arrive at an all-in landed cost for your final product. Be sure to understand the savings associated with bulk purchasing when speaking to your manufacturer.  With scale, your cost of goods sold should decrease, and your budget should reflect that. 

Most entrepreneurs underestimate marketing and branding costs even after they hit the shelves of major retailers.  People may be surprised to learn that staying on the shelves is much more difficult than landing on them.  In fact, retailers often have quotas they have to meet for in-store marketing so if you agree to pay for ads in their magazine, special treys, or premium shelf space, they may decide to place your product for that reason if you approach them at the right time.  Having your product sold at a major retailer does not guarantee sell-through.  There is still a requirement for major branding to raise awareness so customers know to look for your product when they enter the store.  If you do not meet sell-through targets within a certain time frame, you will be removed.

As discussed in Part 3 of this series, you should know your strengths. For example, if your expertise is in branding and marketing, you should consider bringing on partners for manufacturing and distribution. 

With respect to a technology application, here are some additional considerations I have learned as CFO:

You should know the budget and timing for each phase of product development: development, beta testing, revisions, and customization for specific clients for B2B applications.  Most start-up technology pivot and completely change their application at least once before arriving at a final product. If you are providing your technology service for free or at a very low cost during the beta testing phase, you need to validate that customers will actually pay full price for your service.  If you are licensing a technology from another supplier, make sure you fully understand the terms of your licensing agreement, exclusivity arrangements and to what extent further customization is required for each client including capital required for spending and timing for each phase.  Similar to retail, the marketing and branding budget is often underestimated in most business plans, with a bias that users will download your application because you have developed the best product (a concept I addressed in Part 2 of this series).

For all types of businesses, early financial forecasts usually begin with low salaries pre-revenue. Perhaps you are able to offer equity or other sweeteners for people to join early.  However, if you are paying below market, you will not be able to keep good people for long, as they need to be able to pay their bills and support their families.  At some point in your budget, you will need to pay competitive salaries and consider adding benefits and bonuses.  You will also need to consider when to hire executives to take over specific functions as your company grows, as successful companies often outgrow their entrepreneurs’ skill set in specific areas. For example, a great entrepreneur may not be the best person to run a sales department of over 20 people working in various jurisdictions.

Be very conservative.  Timing for each phase of your business plan will always take longer than you anticipate and costs are likely to be higher.  By developing a monthly cash flow forecast, you now have a solid understanding of your cash needs for the first 2-3 years of your business.  Ideally, the capital you have access to from your own savings and friends and family should get you to the point where you have a fully completed product and proof of concept.  Trying to raise funds with outside investors before getting to this stage is extremely difficult and will likely require you to give up a majority ownership in your business. 

At the risk of sounding self-promotional (well, we are a financial consulting company after all), it is this very process that entrepreneurs often struggle with, especially if they do not have accounting expertise.  We have helped many clients with this process and in fact, provide financial forecasting services even for mature businesses with over $10 million revenue.  We highly recommend that this process be completed by an individual trained in finance and accounting.  The budget is an absolutely critical step for every entrepreneur and can potentially save you from drowning tens of thousands of dollars into a venture that had no legs to begin with.