About twenty-two years ago, just before I started my first business from my college dorm room, my very first step was to prepare three years of financial projections. My father had pounded it into my head that if you want to be an entrepreneur you better learn to run your business by the numbers. While I had no idea exactly what that meant back then, I was determined I needed to do it.
My father had tried to get me to memorize the difference between a profit and loss statement and a balance sheet back when I was in high school. I remember him quizzing me on the definitions of cost of goods sold, gross profit, the difference between general and administrative expenses versus sales expenses, assets versus liabilities and net worth. I memorized it all like a champ, though it did not mean much of anything to me at the time– other than it made my father smile.
While attending Northwestern, as a music major, I also had taken Accounting 101. I already knew what all the words meant on the profit and loss statement and balance sheet, and, I had received an A in the class. In my mind, what more could I possible need to be prepared to undertake building a three year projection as a young entrepreneur?
But it was only when I began to create, and regularly massage, both of these essential financial reporting tools that I really learned how they make a business work.
I remember, as if it were yesterday, how incredibly painful it was to do my first three-year projection. What would next year’s sales be? I had no idea. I was having trouble with next week. And how much would the telephone and delivery services cost? What about marketing expenses- how much and what kind would I spend money on? Oh, and how much profit would I make?
I cannot begin to tell you how very hard it was for me the first time to write down on paper my guesses and use them as predictors of the future for my new start-up. I felt both ashamed at not knowing better what the answers should be, frightened that I would be completely wrong and miserably fail, and at the same time, when I completed my projections, assured that on what felt like a hard final exam I would be handed a really good grade.
But what I quickly found out was that even though these projections would never earn me the A’s that so assured me in school, this seemingly lifeless document was far more than a final exam and totally possible of evolution and change before my very eyes. ( No letter grade for a class in school could ever do that!)
As soon as a few months of transactions and expenses had gone by, my lifeless final exam projections became a working real living entity. All of a sudden my guesses were being measured against reality. As each day, month and quarter passed I found a new way to measure, which allowed me to get more comfortable and risk making some new guesses against items on the profit and loss statement and balance sheet that were beginning to show signs of being far more concrete.
While there certainly were many times over the course of the first year’s projections I was shocked at how “off” my guesses were, what I learned by risking and guessing soon became a far better understanding of how my business worked. In time, I became a far better guesser, learned where to focus my energy to improve my business, and learned to trust my projected numbers as leading indicators, eventually, of what I might expect to have happen.
You need to start with projections- so start by guessing. It works!
