Justifying Your Financials

Here’s a very important thing. You can’t just plug numbers into a spreadsheet and kind of guess– oh, I think my revenue this month is going to be this, and it feels like it’s going to be this. You can’t do that. You’ve got to justify. You have to have– everything in the financials has to be justified, and you have to have assumptions that go onto that. So you’re not going to know it. You can’t predict the future. I get that. But your assumptions are what drives the financial statements and what we call creates a justified version of your financial statements. That means that everything in the financials are justified. They’re not made up.

So we know things like conversion rates, the cost to acquire customers, things such as that. We know your pricing strategy– how much are you going to charge your customers we need to know. Your product strategy– what is the different products or services that you’re going to offer, you’re going to provide to your customers. You need to understand that because you need to understand the cost of developing those products. You need to understand the cost of delivering those services or even delivering those products as well. I love to look at the competitive strategy as well– go back to the competitive strategy because that provides you a guideline on what other people are doing out there as well.

Marketing strategies actually drives both your revenue model and your cost model. Because marketing is such a big expense for so many businesses, it’s very important you understand the cost associated with that. But also it drives your revenue model, or at least a part of your revenue model along with your sales strategies. We’re going to marry those two together, what we call customer acquisition, and that’s going to drive our revenue model. I’ve got to tell you, that’s probably one of the most important things that I have to make sure you get right is your revenue model and what drives the revenue model in your revenue projections because that drives the entire business.

All right, we also have to understand things like the cost of selling. How about your distribution model? What channels of distribution are you going to use? What price are you going to charge these channels as well? And how your margins work out so that everybody is going to take a piece of the pie? You know what’s interesting is if you use a certain distribution model– let’s say you’re distributing food into a local grocery store. Well, in some cases you actually have to go through a distributor. You actually have to pay a manufacturer’s rep or a broker. Then you have to pay the retailer.

By the time you start paying 10% here, 5% here, 50% here, all of a sudden there’s nothing left for you. So we’ve got to make sure that that doesn’t happen to you, and we understand these things. And that’s why we do what we do here. Also the execution strategy, like your staffing plan, your startup costs– remember again that all the strategies we built is the journey. And the destination is the financial plan.