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Vetting the idea – Financial Analysis
OK, so you have an idea. It’s keeping you up at night. You understand the competitive landscape. But, does it make sense financially?
I have to be honest, at this point, if the idea is keeping me up at night, this step is more about figuring out what it’s going to cost me to build it, launch it, market it; versus how much money I’m going to make from it.
So, what’s it going to cost? It’s time to build a cashflow statement. Again, I usually use Excel or someother spreadsheet application and across the top I list the months/years. Down the side, I list the monthly expenses and (potential/estimated) revenue streams. I, then, calculate what my ending cash is.
Expense Categories might include:
- rent
- salary
- taxes/benefits (if paying salaries)
- recruiting fees
- commissions (on sales/affiliates/joint ventures)
- credit card processing fees (for subscription or product sales)
- travel, meals, entertainment costs
- advertising, promotion costs
- conference, seminar costs
- consulting fees (accountant, attorney, other experts)
- dues/subscriptions
- equipment leases
- insurance
- postage
- repairs & maintenance (cleaning company)
- supplies
- software support
- telephone
- utilities
- capital expenditures (computers and equipment)
Income/Revenue
- Subscription Fees (based on estimated # of subscribers)
- Product Sales (based on estimated # of sales)
- Advertising Revenues
- Consulting Fees
Lastly, document the assumptions that you use to calculate the revenue. You may want to run both worst case and best case scenerios. This is typically easy if you use formulas in your spreadsheet.
I usually do at least one year, just to see how it plays out. If you are looking for funding, you need to do 5 years. (More about that next post.)
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