Successful Entrepreneurs Need To Know Their Numbers
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In a context where novelty, innovation and ‘sexy’ are revered, I’m not sure why I still get surprised when I am repeatedly engaged by entrepreneurs who do not know their numbers.
Too many entrepreneurs are more obsessed with convincing me that there is a gazillion-rand market for their thingamabob than they are with really knowing the numbers that would support a viable business.
Selling a million thingamabobs may be great when it comes to bragging rights with friends but if you are selling them at a loss then those bragging rights come at a hefty price.
Nothing is more off-putting to a potential investor than an investee who doesn’t know their numbers. Great ideas are plentiful but profitable and sustainable ideas are much rarer.
Below are six numbers that every entrepreneur needs to know off by heart, backwards and in their sleep.
1. What are your setup costs?
Establishing a business is often more expensive than entrepreneurs anticipate. There is a tendency to underestimate some costs and entirely overlook others when designing a business model. Often simple costs such as rental deposit, insurance, IT setup and software licences are left out of the calculations.
One hundred per cent of the businesses I have come across for investment have miscalculated their setup costs by anywhere between 25 and 250%. Really examine your numbers to ensure you calculate the true setup costs as best you can.
2. What are the costs of your product
Literally every startup I have come across has miscalculated the cost of their products. Basic items tend to be regularly omitted including duties, transport costs, breakages, storage and insurance.
You need to factor in every single cost associated with your product and not just the obvious ones.
3. What is your breakeven point?
Your breakeven is a function of three things: the rand value of the revenue required, the number of units or combination of units required; and the time in months that it will take to achieve the breakeven point.
Investors will certainly interrogate the practicality of your breakeven numbers before they will take the decision to invest in your business.
4. What are your gross profit percentages?
Investors want to see that you really understand your gross profit (GP) percentages and how they are affected by volumes (cheaper input costs for higher volumes) and downward pressure related to competitors.
Static GPs in a spreadsheet indicate a lack of deeper understanding of positive and negative influences on GP percentages.
5. Do you know your industry numbers?
Any investor will want to know that you understand your gross profit, net margins, volumes, etc. relative to the rest of the market. A gross profit of 40% may seem great but becomes far less impressive when you find out that the market average is 60%.
6. What is your payback period?
Investors are more likely to invest in a business that has a shorter payback period than one that has a longer and more uncertain one. Not only do you need to know your payback period, you also need to justify how your arrived at it.
In general, payback is a function of free cash flow or dividends. Entrepreneurs are naturally inclined to shorten the payback period but savvy investors are usually sceptical about the underlying calculations that inform it so expect a huge amount of interrogation around this.
Pulling it all together
While there are many other numbers you need to know or be able to calculate, in my view, these are some of the most important. Bear in mind that investors know that a budget is simply a best guess so they will forgive subtle inaccuracies.
What they will not forgive is gross omissions in calculating the numbers or if you leave them with the impression that numbers are not important to you.