A discussion about forecasts and Cash Flows
Sergio Eduardo de Ilzarbe, CFA
Helping SAAS founders gain deep understanding of their business
“Prediction is difficult, especially when dealing with the future”. . .Danish Proverb
As a standard step in any diligence process investors ask entrepreneurs for a forecast. Entrepreneurs are so busy trying to grow the business, create a product, deal with vendors, clients and new employees, among a million other things. And then suddenly somebody is asking them to know how the future is going to be like!!!
They suddenly find asking themselves how much they are going to be investing in online marketing, servers or the cleaning service. They know whatever answer they give is not certain. And for most entrepreneurs this is just a step, fill the forecast, provide a forecast and then take it out again at year end only to find out how wrong it was!
If the forecast is going to be wrong, what is the use of it?
- Investors want to see that you really understand how your business work
They know it is impossible to nail the numbers exactly right. They want to see that you understand what levers to move and which results to expect after moving each lever. They want to see that you understand how your business model works. That you understand how you want to use the money they gave you and that it makes sense.
- After you show that you understand how the business model works, then the forecast can give directions, what the path is should look like.
For instance, if your model assumes that every 1 sales person you hire revenue will grow by $50k per month. 3 months from now you will compare the actual sales to that expectation and understand the difference, is your sales strategy wrong? Is your assumption wrong? Do you have to fix your product? The answers to these questions are not easy, but without the model you will never be able to ask the right questions.
- Your forecast is going to be dynamic, as you change your product, pivot, and aim to a different market, hire more people, change the teams, etc.
When making these decisions you can use the model to test different scenarios, will my sales grow by $50k per sales person or $30k or $70k? the difference will not be trivial. How much can I expand my budget on certain areas without compromising my runway?
At airCFO we partner with our clients to help them build these models and provide answers to these questions.
With your input we will help create this forecast and understand the impact of different scenarios… For instance for your payroll expenses.
All this information will feed your cash flow forecast and have a clear view of how your runway will change under different scenarios. We believe this is the most important use you can give to your forecast.