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Test your Financial Assumptions!

Your financial projections need to be based on clearly documented assumptions.  You need to test those assumptions!  Otherwise, they are just wild guesses.

Some approaches to testing:

Compare to Others

Look at the history of other startups similar to yours in related markets to see how their revenue ramp and how there expense breakdown compares to yours.  How do you do that?  Check out acquisitions.  If a public company buys a startup, they need to reveal quite a lot of information about the acquisition in the 10K document.  Or find a former employee from a company that got acquired and see what you can learn.  Or find an entrepreneur at a similar (but non-competing) startup that is just a bit further along than your startup, and see what you can learn from them.

Consult a CFO

Another approach is to find a CFO who has experience with companies similar to yours – perhaps a contract CFO.  An experienced CFO can provide excellent “reality check” feedback if they have experience with similar companies.

Track your Metrics

Over time, you’ll collect more and more information to learn whether your assumptions are on target or not.  Be sure to look at metrics each month!  How many leads are your marketing efforts yielding?  How many of those close?  How long does it take?  If you keep watching the data, you’ll keep learning!

The more “ammunition” you have to defend your projections, the more confident you’ll be in making decisions.  And remember that being able to defend your assumptions will make it a lot more likely that you can convince an investor that your financial projections actually are attainable!

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