Planning to Finance, or Financing to Plan?

Little Pond

OK, Big…our last posts were way too long. Let’s talk about the world of budgets, plans, and bank statements in 500 words or less.

Before we jump into how to manage budgets, let’s keep it real.  In the seed capital stage, no budget is truly sacred or secure.   The CEOs that are good at stretching a dollar are an asset, but the reality is that it is tough to follow a plan when managing through scarcity.  Most of the CEOs I know are quite frugal and have a respect for other people’s money.

Things change for the better when an emerging company completes an A round.  Angels and other financial sources are going to expect the company to manage dollars and keep to commitments.  So instead of talking about budget management, here are some good practices for the A round targeting activity (i.e., coming up with the plan). Let’s call it Use of Proceeds Planning 101:

  • Plan company inflection points!
    Have a plan to test the most important assumptions; if you are knocking down key business assumptions on investor dollars, then you better have plans if they prove false. Stage some specific feedback points during early development and let stakeholders know the situation.  Get your BOD involved in analysis of these key points.
  • No crystal ball?
    Then why are you submitting a budget without miscellaneous?  Most pragmatic investors will support a budget with 10-15% targeted to miscellaneous.  Nostradamus you are not. Keep a few extra dollars in the bank for the unknown.
  • Everything will take longer than you think!
    If your budget is time based and your valuation drivers are activity based…you already have a problem.  Make sure you can knock down some key risks/assumptions, achieve milestones, or gain traction with your budget. Do not just ‘fund’ time.
  • It’s really a mini business plan!
    Thought you were done with business planning?  Forget it.  Each round (e.g., Seed, A) is really a commitment to a group of externals to do something that is likely to resemble a business plan.  See our post on Trajectory Management…or contact me if you have questions.

If you have to find emergency dollars for legal support, you will invariably steal funds from the best laid plans.  So goes life in the Little Pond. I think it much different than the typical budget for a project in the Big Pond.  What say you, Big?

Big Pond

Who are you calling wordy?  Is accretive even an actual word?  Does anyone really use it in normal conversation or are you just trying to sound smart?  Ok, here I am three sentences in and I haven’t even touched on our subject yet.  Maybe I do have a problem but now I know and knowing is half the battle.

Anyway, it seems to me Little, that what we’re talking about here is opportunity cost. Scarce resourcing isn’t only a problem in the Little Pond, we have our fair share of that in the Big Pond too.  In order to determine which causes to pursue and which should be left to the curb it is necessary to consider the full benefits and costs of the initiatives you’re pursuing.

In many organizations, this determination is still made by instinct or by following the loudest voice in the room.  However, increasingly, organizations have become more rigorous and analytical in their decision making processes in order to make the best possible decision based upon all available information.  In the Big Pond, the tool for opportunity cost analysis is the business case.

So, what should you consider when building your business case?  This is an area where the Big and Little Ponds are really quite similar, they just sometimes use different lingo.  So let’s call it Business Case Development 101:

  • Do your homework
    When developing your business case it is important to evaluate all potential benefits and costs.  You must consider not only new revenue streams and implementation costs but also potential positive and negative impacts to ongoing operating costs and the likelihood of revenue cannibalization.
  • All praise the almighty “Swag”
    There is inevitably some guesswork involved in every business case but do your best to ground it in reality through analysis of similar efforts within your organization, your industry, or other industries that can act as a realistic analog.  Always clearly document and explain your assumptions to ensure management is onboard.
  • Plan checkpoints
    As you move along the lifecycle of your project you should be planning to gather additional information on the potential benefits and costs of your effort.  Many projects fall down by regularly reporting on their implementation costs but failing to report on other aspects of their business case.  This can lead to a nasty surprise for the organization once your changes are put into effect.
  • Estimate and Reforecast
    Some of the aforementioned guesswork and assumptions will inevitably prove inaccurate.  It is important to regularly re-evaluate your assumptions based on project decisions and new information.
  • Budget for the Unexpected
    No complex effort goes exactly as planned.  Use the knowledge you’ve obtained from analyzing your assumptions and cost levers to make educated guesses about where costs could run over and plan for some portion of the overage.
  • It’s really a mini business plan!
    If you’re living in the Big Pond world you might not think you know how to write a business plan but if you have your project charter, governance chart, timeline, resource plan, and a business case you’ve got yourself a mini business plan.

Wait, were we shooting for 500 words total or each?

  • BigPond

    SVS - Great question, business casing is not an exact science. There is inevitably some estimation and guesswork involved. How far to take it often depends on how large the investment is, how obtainable the needed data is, etc. As you correctly point out, the most important aspect is to ensure you've thought through the variables and documented your assumptions.

  • SVS

    Big - There's no denying that business plans are crucial to planning, managing, and executing on major (or minor!) intiatives. Most initiatives will fail if they haven't through through all the elements of a business case (and put them down on paper). But in organizations that want to see results yesterday, what is the right balance between how much time you should spend on building the business case versus actually executing on the plan. Does the case need to be perfect and watertight, or is 80% OK? Where do you draw the line?

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