Start-ups: looking at financial viability

So, you have been working on a bright business idea for some time, one which could change the world, or at least some part of the world, and now it is time to make it a reality. At some point this will require financial investment, with either personal savings, or it may mean sacrificing the house, or perhaps it might involve raising capital through friends and family networks, or more formally by attracting venture capital providers. This will require the business to be financially viable.

Financial viability should be a key consideration regardless of who is providing funding. The business must generate revenue and be capable of scaling and generating profits after an initial start-up phase. Whether you’re funding your business, or looking for debt funding or capital providers, it is important that you know the financials and the supporting assumptions inside out.

While there are many great organisations who can do market research for you, and accountants who are great at compiling forecasts, it is you who will be looking in the mirror, facing the bank or other funders. It is you who will be driving the business, at least initially. You need to be all over the underlying assumptions and why they are supportable. Because in the long run, it will cost you less when you do take the work you have already done to a market strategy agency, and/or an accountant.

So, how do you determine financial viability and develop a business plan and forecasts?

What is your value proposition?

Essentially this is why people would pay for your product or service rather than maintaining status quo or using an alternative product. What is your critical point of difference? How easy is this to copy? Is it protectable in any way, or is it the first mover advantage that is your strength?

Based on the above, who is your addressable market?

This is a quantification of the potential customers who could foreseeably have a need for your product/service. This should be categorised by geography (if the plan is to go global). The next step is to narrow down the market you can capture, and for this you will need to know what your channels to market are (see below).

Where is your addressable market?

Will you start local? This may be easier, however, if most of your addressable market is located somewhere else in the world, just start there. It is important that you verify and justify where the global demand is. We may have general ideas of where we want to scale based on a demographic or a perception of where other businesses may have scaled. But this is your business, and you should not take for granted that this will be the same for you. This may mean doing research on the industries in the country/state you are targeting, similar products/services available and their price points, or even complementary products/services which you could use as a channel/JV/ or other collaboration.

What will be your channels to market?

How will you reach your addressable market and sell to them? Will you use retailers, online channels (independently built or existing online retailers) or complementary service/product providers? Why would your channel support your service/product – and what is in it for them? If your product is online or an application; how will it be marketed to reach the relevant audience? And what is your channel to your channel? Channel to market is key as it can often define your addressable market.  There should be a plan, and ideally there should be some traction in terms of relationships built, or conversations had, which strengthen your assumptions. Depending on where you are on your journey, you may have started trials with some channels, or even some potential customers. You should at least have a plan B, and ideally a plan C and D…

What is your price point / revenue model?

The price point or revenue model is also very important. There must be some compulsion to a potential customer to invest or buy your product. This may be more complicated than it sounds, as there are many data points to refer to when building a revenue model. The easiest way is referring to pricing of similar products/services, however this may not be relevant if your product is the first to do what it does, or is otherwise a disrupter in the industry. This may mean research into what costs/time your product is saving a customer. You should also look at other disruptor products/services and what margins are able to be derived for those products (i.e., benchmarking). Obviously, disruptor businesses will not be directly comparable so judgement must be applied. My personal view here is that with pricing models, it is more dangerous to start too low rather than too high (within reason of course).

What are your direct costs/costs of supply?

Costing is often the easiest part of the financial exercise, unless you are building a highly technical product. The cost here can be time – as it will almost certainly take 100% longer than you allow for. Are there capacity considerations which may mean that you are vulnerable to cost increases? How will costs change with scale and how much scaling capacity is there in your current plan?

If you take one thing from all the above, it should be optimising your product to fit into the market you are targeting. Research on market strategy, as mentioned above, can be done online. Yes, it takes time to trawl through the information, it may seem daunting, and not as fun as dreaming about changing the world.

However, the process of building the financials determines the viability of your proposed business. This is key. Not only for attracting investment, but more importantly in terms of whether the investment of your time and/or money is warranted. It may be that it clarifies areas where more thought, or product improvement is required. It may be that it provides necessary direction and focus.

Finally, take what you have done to someone to query and challenge. This may be a friend, colleague, or someone in your network with some relevant skills that you can trust to be honest. It may be your accountant or business advisor. We are also happy to help, so please feel free to get in touch.