Founders often come to the Accelerator at ICA without much experience in financial management. In fact, it's the area most founders say they are the least confident in. When we talk to these entrepreneurs they might share that they don’t know what they’re looking at when they receive the long spreadsheets of numbers from their bookkeepers, and that they would rather just stay focused on the things in their businesses they’re good at.
At ICA, we work with founders to get more comfortable with the numbers side of running a business. We decomplexify financials and so you can feel empowered to read them like a pro. Having a solid financial model is like being able to tell the story of your business, and it's incredibly useful for decision-making, planning for the future, and finding aligned investors.
Building financial models might seem complicated, and it can be, but a good financial model starts with the basics. Here’s the five things ICA advisor, and CEO of Cienga Capital, Esther Park, tells entrepreneurs to get started with for building effective, impactful financial models:
1. Learn to read your financial statements.
Take the time to learn how to read the financial statements from your business. Ask your bookkeeper to give you an overview of the statements they send over and identify which numbers are the most important indicators for the health of your business.
2. Know the drivers of your business.
It’s critical to know the real mechanics of your business. Investors will want to see that you have a confident grasp of exactly how your business operates, and by knowing these drivers you will be able to make better, more informed decisions about your company. Know the assumptions that drive your business, and the key factors that affect them. On a high level, these can include: sales (e.g. how much revenue can one sales person generate, what are relative sales by channel), gross margins (i.e. sales minus cost of goods sold), overhead capacity (e.g. how much revenue can you generate with existing capacity and at what point will you need to invest in more space, machinery, and/or people), and breakeven point (i.e. what minimum level of revenues is required to be able to turn a profit).
3. Cash is king.
Learn to manage your business from a cash flow standpoint. If your business is seasonal or cash needs are lumpy, knowing when to conserve cash and when you can utilize it is key to avoiding surprising cash flow crunches. When planning for the future you should know exactly how much cash you need to actualize your plans. A good monthly/quarterly and annual cash forecast will tell you how much capital you need to raise, and the expected timeline to return that capital. It’s not too different than a Profit and Loss or Income Statement, but accounts for other items, e.g. excluding non-cash items like depreciation, and including capital expenditures and principal payments on loans.
4. Get a (better) bookkeeper.
To get started with financial modeling, it’s best to first clean up your existing accounting. You need a good basis to build from. Ensure your business and personal expenses are fully separate and that you understand—and can explain—each line item. Your financials should make sense to someone else, and ultimately tell the story of your business and how it works. As the business owner, its important to have a good grasp of the accounting for your business yourself and to work with a bookkeeper who can help with the rest.
5. Build in contingencies.
Deflate your revenue expectations and inflate your expenses. Most companies don’t actually perform to budget or projections, and this kind of planning hedge will hopefully keep you head of the game.
Esther Park is the CEO of Cienega Capital, a regenerative investment firm utilizing an integrated capital approach to systemic change in the areas of soil health, regenerative agriculture, and local food systems. She is a mentor with the Accelerator at ICA and works closely with our companies to ensure their financials are investment-ready. Work with expert, mission-driven pros like Esther, in ICA’s accelerator programs! Applications for our upcoming cohorts of the Lab and the Accelerator close this Friday, May 20. Learn more and apply here.