Make Your Financials Believable

So let me give you a few final words about what I call believability. This is probably one of the most important things that we have to do when we’re– especially when we’re talking to investors– that our financials have to be believable to investors. So if you go crazy and you start projecting revenue and you’re like, I’m going to just smash it out of the park. I’m going to be so big. It’s going to be incredible. And you look at your revenue projection, and you’re like– boy. An outsider looks at those revenue projections. They’re like, there’s no way you’re going to do this. So I want to make sure that you’re reasonable with your projections.

So let me help you a little bit with this believability. First of all, this just comes from years of sitting in board meetings and getting crushed by board members, so I’ve learned from a school of hard knocks how this actually works. If investors don’t believe your financials, they won’t invest. It will kill your credibility, and you going to have a really– you’re going to have an uphill battle to actually convince them that you’re really truthful and honest, and that’s the one thing you don’t want to be. You want to be credible when you’re talking to investors. All right, so you typically get one chance at this as well, so you don’t want to blow it, right?

So that’s why you have to have justified financials that you can defend. If you can defend your financials, even if they’re a little aggressive or a little bit high, that’s OK. As I’ve mentioned before, oftentimes entrepreneurs are too optimistic about their business, so keep that in mind. It’s usually harder to ramp up business than you think, right? I know. I don’t want to be negative here. I’m always very optimistic, but it’s going to take longer. So put that into the financials. Be a little bit more conservative. That’s OK. Can you really grow that fast? Ask yourself that question. It always takes more money and more time than you think. So try to factor some of that in.

You don’t have to factor it all in, right, because you’re still an optimistic entrepreneur, but I factor some of it in. And I want to make sure that you understand you’re not going to execute everything perfectly. So that has to be reflected in the numbers as well. You’ve got to make sure that you have room for some mistakes. That’s why you don’t want to overcommit and under-deliver. That’s like one of the worst things you can do in business. A couple of solutions that I want you to take into account– number one is I want you to look at the financials through the lens of an investor or an outsider.

And I want you to understand– I want you to try to see it the way that they see it. Ask yourself, are these projections actually reasonable? Are they really believable? Can that really happen? Encourage a few other people– advisors or other people– to take a look at your financials, and they’ll tell you whether or not you’re crazy or not, whether they’re outlandish, or maybe they’re too low. Keep in mind that’s another problem. If you’ve really project– you’ve been really conservative, that can also hurt you as well as I mentioned earlier. So one of the things that I recommend is that you adjust your assumptions, right? That you might want to slow down the ramp of the business overall.

Maybe this business doesn’t grow quite as aggressively as you’ve got in your financials, so ramp it down a little bit. Maybe some of the assumptions that you have in your marketing and sales programmes you can dial back a little bit. Maybe that SEM programme isn’t going to be quite as productive. Or that SEO may not grab on right away, so you’ve got to keep that into account. And then pad your expenses. So, I don’t want you to overpad them, but consider padding expenses if you think that’s going to be something that you could go over in. Let me give you my personal experience with my company Microcasting Networks, and this network is part of that.

So when I came up with the first version of my financial plan, it looked crazy. I looked at it, and I said, wow. We’re going to generate $30-plus million in the first three years of the business and we’re going to be wildly profitable. And I went, wow, I don’t think I can show these to investors. I actually went back to the plan. I started dialling down all my marketing assumptions, dialling way back. I increased my churn rate. I doubled it. I took my revenue projections down, and I actually bumped up all my expenses because I didn’t want to be that profitable. I didn’t want to show investors that good of a business because it would be almost unbelievable, right?

So after I took a look, I ramped down my expenses. I still had a great and very attractive business, but it looked just more believable. So even though I’m very optimistic and think I can do anything, by dialling it back down it really felt like I had a good set of believable financials. And that’s what I want for you. So some entrepreneurs have another problem, which is kind of the other side of the coin. They’re too conservative. Now again, I haven’t experienced that problem in my own life because I’m so optimistic, but we want to make sure. You’re so focused on making sure that your business is believable and achievable, the problem is it’s uninspiring. People aren’t interested.

Investors don’t want to invest in your business because it just doesn’t look very interesting. I don’t want that to happen to you. Investors actually– funny enough, investors want you to be a little crazy. It’s kind of interesting. And I’ve been sat down at the biggest investment firms– the biggest VC firms in the Silicon Valley for many, many years. And they’ll tell you to your face that you’re not aggressive enough. It’s not interesting, and they’ve told me behind closed doors, we want you to be a little crazy. We want you to get us excited. So it’s got to be that balance. It’s got to be believable, but it can still be a little crazy as well.

Now let me give you some solutions for this. Ask yourself, are you generally more a pessimistic person? This could actually cause the issue. You’re the cause of the issue. So let’s ahead and make sure that as long as you know that, you can be aware of that. So if revenue is where you’re more conservative, let’s look for some additional sources of revenue to beef up the plan. Can you expand your product line? Can you introduce new products faster? Can you ramp marketing faster or increase some of your assumptions? Now, if expenses are actually too high, maybe we try slowing down the business a little bit, or we don’t grow quite as fast to reduce some of those expenses.

That can be a way to solve this problem. So the ideal approach overall, whether you’re a little bit more conservative or you’re a little bit more aggressive, is the balanced approach. It’s just right. It’s got just right the level of optimism and pessimism built into it, and it’s very believable. So I want you to force yourself to run three scenarios. I’ve always found this is actually the solution to this problem. I want you to run an aggressive forecast, a conservative forecast, and a most likely forecast and then use the most likely forecast. By running the aggressive and conservative, it’s going to force you into that most likely one, and you’re going to feel really comfortable.

This is a disciplined approach, but if you do that you’re going to come out with a balanced approach for generating the best financials that are going to be the most believable. Now I’d like to wrap up with just a few final thoughts here. First of all, own your financials. I want you to be the owner of your financials, not somebody else. Master all the details that make up your financials and be able to answer the questions that I know investors are going to ask you. Conquer your fear or anxiety around getting these forecasts out. I’ve got to tell you that fear stops most entrepreneurs. Don’t avoid this. Dive in and just get more knowledge and more education.

We’re going to guide you through it all, and we’re going to make it easy. But you’ve got to also be motivated to do it. And without cash you can’t really create your dream. You’ve got to have cash. You’ve got to plan cash appropriately. Otherwise you never realise your vision, and I think that’s sad. So don’t forget, being in control of your financial strategy is going to make the difference between success and failure. I believe in your business. And I really want you to be successful. So go out and really master this.