Money In, Money Out
Your goal in Jetpack for Changemakers Step 4 is to gain clarity on the elements of your financial model and what would be required to reach monthly breakeven. At this stage, you’ll need to work up estimates on funding requirements to design, build, and get your solution to market.
Maintain Your Discipline
Before you dive into the financials, update your lean canvas, golden circle, and Gaddie pitch (by now you can tell your story in your sleep). Keep your fundamental documents up to date. That way, whenever you create a pitch deck or a proposal, you have them to hand. Having a single source of truth will help you stay on top of things once the workload dials up.
Hurry, Hurry. Don’t Rush
While there’s nothing wrong with a rough ‘back of the envelope’ calculation to gauge your startup’s viability, you really need to have some data to hand. It’s also worth investing time and attention to do your financial model properly. A robust financial model is a must if you are serious about delivering social impact. You won’t make any change in the world if you can’t meet basic costs.
Get Your Ducks in a Row
You’ll need to know:
- Who your ‘customers’ are: the people you deliver value to – not always the same as people who pay money, although they could be.
- That there are enough of them, willing to pay money.
- What they are buying: the value you are delivering and the form that you’re delivering it in, ie product, service. To put it another way, ‘your offer’.
- What they are willing to pay: While money is not the only way that people pay to receive value, this step is all about the financials, so you’ll need to know the monetary amount.
- How they will pay: how and where does the money ‘change hands,’ which could be via one or any combination of physical and digital channels.
- How often they will pay: once-off payment, regular subscription, etc.
- Payment terms: full payment up front, deposit with remainder when certain conditions are met, payment on delivery, 30 days after delivery, etc.
Don’t Have it All? Start Anyway
If you don’t know or have all of this information, that’s OK. Make a best guess (or an assumption). The important thing is to capture that assumption. You can validate it later. You WILL validate it because your startup depends on it. You’ll also get asked for assumptions by any investor, philanthropist, or supporter worth their salt. They will want to see your financials and they’ll look at your assumptions.
You now need to sit down and work on the following:
- Once-off set-up costs
- Minimum cost to operate on an ongoing basis. To keep things simple for now, just do a monthly average. As your model gets more refined, you can get specific. Unless you have a significant outlay, there’s no need to get dollar-specific.
Start with Clay, Progress to Stone
Be prepared to iterate. You won’t create a perfect financial model on the first attempt. You’ll need to do some modeling. This is another word for ‘scenarios.’ As you create your first model, you’ll discover what you don’t know. Whenever you share it with others, they’ll ask questions that will cause you to have to revisit the model. You are embarking on an iterative, ongoing process.
3 questions, no simple answer
Exactly what you model will be driven by the nature of your startup. The important questions at this stage are:
- What is the cost to enter the market, ie to get your startup up and running?
- How much does it cost to run your venture for 1, 2, 3 years
- When will the venture become profitable, ie when does it generate more money than it costs to run?
How to forecast income?
Chances are you have some idea of the size of your customer base and some notion of how many you can realistically attract and convert to a sale. When it comes to finance, that’s a key assumption. Make sure you note this carefully, taking into account:
- What evidence supports your estimate?
- What assumptions are you making about your customer growth?
Profit or surplus, up to you
Profit is not a dirty word. If you’re uncomfortable with the word or the idea of turning a profit, think of it as a resource you’ll use to increase your social impact, because that’s what it is. And if you don’t like the word ‘profit’, you can always say ‘surplus’.
Look after yourself
If you’re working in or on the venture, you’ll need to sustain yourself, unless you have an alternative source of guaranteed income. Don’t fall into the trap of thinking that you don’t deserve a decent salary because you’re not interested in creating a business for purely commercial means. At the very least, you need to ensure that you have factored in enough remuneration for you to meet your needs. It’s easy to burn out when you’re starting up. It’s soul-destroying if you find yourself working long hours, without getting a fair level of income. Remember, you need holidays and things outside of work, to keep you motivated and fresh.
Use the Right Tools for the Job
You don’t need any fancy accounting software. Google sheets and google docs are free and will enable you to build your model and to share it with others, as you develop it. Take time to investigate some simple models and templates. You can be lucky and find some online that are relevant to the industry, market, product or service you’re startup delivers.
Repetitions, Repetitions, Repetitions
You’ll likely create a spreadsheet and some accompanying notes. Once you have even a very rough model, you can go out into the real world and do some investigation, to help refine your model. Get quotes to find more realistic costs. Tweak your model.
Find someone with experience and insight into the industry you’re entering (if that’s not you). If you approach them the right way, they may even offer to help you to adjust your model and assumptions. At the very least, they’ll share insight and tips to help you build a better model. Each time you learn something, tweak the model. Here’s some guidance on approaching supporters, including mentors.
How to Sanity-Test Your Model in 10 Seconds
If you can’t find someone, step back and look at the major influencers of your financial sustainability. A good question to ask, as you shape your model is ‘what are the major costs and factors to break even?’ When you’ve identified these, ask ‘is my model realistic?’ For example, if you’re opening a cafe, you should know how much it costs to sell a coffee.
Let’s say it costs $1 to make and sell a coffee. If you’re selling them for $3 each, you make $2 profit. Now, how many coffees do you need to sell to break even? If it’s 20 coffees a day, that’s probably realistic. If it’s 1,000 a day, you might want to revisit your model and assumptions.
Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.
– Charles Dickens
It takes as much energy to wish as it does to plan.
– Eleanor Roosevelt
And finally, when it comes to financial modeling, use your gut instinct for ideas and inspiration or for that uncanny knack of feeling that something isn’t quite right but whatever you do, don’t rely on your gut for financial management.
Step 5: Structure and Story. Gain clarity on your legal structure and funding options.
These articles are written to capture the essence of the six steps of the Jetpack for Changemakers program. We’re sharing them to provide a guide of what we have found to be most effective for purpose-driven startups. If you are interested in gaining a more in-depth understanding, along with the accountability and personalised guidance from experienced coaches to complete each step, please get in touch with us. We would love to chat about your options.