Debunking our top 5 forecasting myths

Debunking our top 5 forecasting myths

Having worked with countless founders, developers and investors on building financial forecasts, I have encountered a few themes around (what I see as) misconceptions. Forecasting is seen as a dark art and this has been down, in part, to some common myths that we have encountered when we speak to business owners and founders. Below is my top 5 myths that we hear from our customers.

Myth #1 – You need to be an accountant or have a degree in Economics and an Excel wizard 🤓

Some financial knowledge is helpful and will enable you to interpret your financial forecasts quicker but accountants do not always make good financial modellers.  Much of financial modelling is in the structuring and design of the forecasts to make them clear, consistent and able to drive decisions making.  I know great financial modellers who have no background at all in finance but have learnt from building models. So on to Excel – we love Excel, it is the incumbent software and is a very powerful tool – no doubt, having some foundation in it will assist you to build the formula needed for a dynamic model but we will show you that even the most basic o Excel skills can build a model.  There are also means outside of Excel to build you financial model, in fact this is where we can shameless plug numberslides, our forecasting platform that we have built to enable users to build bullet proof financial models with no spreadsheets whatsoever! We have created numberslides to demystify financial forecasts.

Myth #2 – You need historical data and lots of it 📚

Historic data is one way to build the foundations of you model.  If you have the data available then this is your starting point and it should form the basis of your forward looking projections but if you do not have any historic data or enough to see any trends then you can still build a robust financial model.  In this case, you work from the bottom up, looking at the core drivers and building scenarios that allow you to flex and test business cases until you land on a scenario that you are comfortable with and is deliverable.

Myth #3 – It’s all finger in the air 👆

To a certain extent this is true but the finger in the air is supported by well thought out assumptions and business logic. We do not know what will happen next year, let alone in 5 years’ time but we are showing scenarios of what may happen and providing this backed by sound logic and is achievable then this goes a long way. We see it like your old maths exams when you were given marks for showing your workings. This also brings up accuracy and how accurate your forecasts need to be…

Yes, your model has to be accurate or at least have sound basis that backs your assumptions but no, you do not need to be as accurate as possible as how can you be? We are building forecasts that your audience need to buy into – now expectations may be different between an infrastructure investor and a business angel but the forecast is another tool to sell your vision.

Myth #4 – The more complex the better 🗺

This is not true – we want your audience to be able to make a decision based on your forecasts. This means that they need to understand it and in some cases test your inputs. We see it as a balance that fits around what your audience want to see. You want you forecasts to give confidence you have a handle on your numbers not that you are an Excel wizard. So something scribbled on a paper napkin is probably not detailed enough but endless spreadsheets linking to spreadsheets with rows and rows of inputs (but in some complicated business models that may be needed) is going to delay decisions being made.

Myth #5 – Once you have your forecast, you’re done ➰

This is a big no no – like any good business plan, your forecasts need to be reviewed on a regular basis. Things change, business pivot – this could be market pricing, government policy or you lose your first mover advantage – things outside your control will mean you need to review your inputs and make sure they still reflect your situation. Also, if you are fundraising, a key aspect of this journey is investor feedback from the one’s who passed – constructive feedback may lead you to change your business model, pricing or cost base – so keeping your forecasts fresh and up to date will set you up for success.

4 Important Things to Remember When Building Your Pitch Deck

4 Important Things to Remember When Building Your Pitch Deck

Building your pitch deck can be a right pain, especially when there are a million different versions out there that you could copy. Before you dive into the mess, remember this; your pitch deck has a job to do. Don’t get in the way of it delivering the right message to your potential investors – stick to these 4 important tips when building your pitch deck.

1. Your first pitch deck is always going to be terrible

Well, perhaps not terrible, just really…mediocre in hindsight. But that’s a good thing. We always look back and groan, but nothing is ever designed to be static. What you’re currently doing right now is one step in a thousand steps to get your start-up off the ground. It shouldn’t be the finished polished best-ever pitch deck of your life. Instead, it’s got to be good enough to get the job done.

2. Don’t spend a fortune on designers

Don’t try to counteract your shoddy numbers and shortcomings by getting some clever creative to add a splash of colour and some transitions. Keep the look clean and easy to consume. Save your pennies and pounds and focus on making sure your numbers stand out above all.

3. Keep it short and sweet

Your pitch deck is not a 100-page word-dump of all your ideas. It’s your vision in a sentence and it’s the bottom line of your business; you’re here to secure funding because you’ve got an idea that’s going to work. Use your pitch deck to deliver the most important bits. Forget the frills.

4. Social proof it

The power of social proof is one that was harnessed by multiple mega corps in their early pitch decks. Show off that you’ve got an experienced CFO or product manager on your management team.

Struggling to get started? You can throw together the basics in as little as 20 minutes with Numberslides. Don’t put your pitch deck off.

How Numberslides Estimates Your Business Valuation

How Numberslides Estimates Your Business Valuation

What Are Business Valuations?

A business valuation is a method that enables someone to determine the economic power or value of a business, a limb of a business, or a group of businesses. When undergoing a valuation, we are looking for a reasonably fair value that is a baseline value of your business. This helps make better decisions and set more informed goals. You’ll need to know the value of your organisation when you’re selling your business, trying to get finance to back your business, or arranging tax payments. You’ll even need to know this information if the business owner is implicated in matters of family law, such as divorce proceedings.

How Do You Work Out a Business Valuation?

Figuring out a business’s valuation is not an exact science. There are steps you can take to make a strict, accurate, and fair valuation which you can rely on with some confidence when talking to investors, potential buyers, or a court judge. Generally, there are a few basic rules to remember, and which we apply, when helping you work out your business valuations.

Whenever the business is up for sale, the buyer will always use a method of valuation that demonstrations that your organisation has a lower value than you may think, whilst as the seller, you will likely find a valuation method that demonstrates the value of your company is higher.

Which Method Does Numberslides Use to Value Your Business?

There are all kinds of ways to value a business. You can use discounted cash flows, multiples of EBITDA, perpetual growth, or Scorecard methodology. At Numberslides, we use the perpetual growth methodology. We aim to derive a Terminal Value of your business.

How to Calculate Terminal Value with Perpetual Growth Business Valuation

To calculate Terminal Value, we must start by calculating the Free Cash Flows to the business. These Free Cash Flows (known shorthand as FCF) are the cash flows that are left over after the business has paid off all its costs, expenses, and investments. Investments describe money spent to keep the business performing at its current level of operation.

Free Cash Flows are also known as ‘Unlevered Cash Flows’ because we are talking about cash flows that do not take into account any sort of debt finance (which means we are using someone else’s cash outside of the business’s own).

The perpetuity growth model assumes that cash flows grow at a constant rate continuously and infinitely.

The Terminal Value (TV) is today’s value or the present value of all future cash flows. We work this out with the assumption of perpetual stable growth. This is the basis for your business valuation.

The formula for working out Terminal Value and Perpetual Growth is:

Terminal Value = Unlevered FCF in the terminal (exit) / (discount rate – long term Growth Rate)

The Terminal Value that we produce using this formula includes the value of all future cash flows, even when they are not considered in a particular forecast period. This enables us to capture certain values that can be difficult to predict.

Which Perpetual Growth Rate Should You Choose?

When working out your perpetual growth rate, note that this rate is almost always equivalent to the inflation rate, and less than the economy’s growth rate. In acknowledging this, we must also acknowledge that this type of business valuation does have its limitations. As it is difficult to predict an accurate growth rate, we always choose the more cautious approach.

How Can I Increase the Valuation of My Business?

So, you’re numbers have come out pretty rubbish. Perhaps you’ve been a little over cautious. There are two things you can do to shake up your predictions.

  1. Switch up the cash flow; more specifically, look at the way your company currently generates cash flow; is there any way that you can improve that ability? Can you perhaps increase revenues or reduce some of your expenses?
  2. Reduce the company’s risk; any reduction of risk lowers the business’s cost of capital and will therefore increase value.

If you make these changes and still don’t see a significant improvement in the numbers then it may not be enhancing value.

Is there a particular valuation model you’d like us to use? Contact us using the chat bot on your screen and let us know!

What Is Operating Profit?

What Is Operating Profit?

Defining Operating Profit (aka EBITDA) 💰

EBITDA stands for Earnings Before Interest Taxation Depreciation & Appreciation.

This can also be calculated by:

Revenue – (Direct + Indirect Costs) = EBITDA

In other words we are asking “what did you sell” minus “how much it cost you to supply your goods/services” plus how much it costs to run your business”.

This shows how profitable your operations are including all your core expenses. As profitability is a key determinant of long-term survival, this is an important KPI. The operating profit margin is normally the first port of call for any investor as it shows how well the business is covering your costs. If you can reduce your costs while keeping your revenue constant, the margin will increase.

Read more about direct costs here and read more about profit margins here.

What Does EBITDA Really Mean?

Operating profit is also known as EBITDA. This is where the profit and loss (P&L) makes the necessary accounting adjustments (and some “paper” i.e. not actual cash adjustments) to get to the Net Profit (the bottom of the funnel, often referred to as the bottom line).

Let’s look at each word that makes up “EBITDA” one at a time:

  • Earnings
  • Before
  • Interest: when you take a loan out, you normally pay interest at an agreed % rate
  • Taxation: if you turn a profit you will pay corporation and other taxes. The rates are dependent on where you are
  • Depreciation: when you buy a physical asset (e.g. a car), its value goes down as it gets used and the reduction in value is recorded
  • Amortisation: when you invest in a non-physical asset (e.g. patent) it will lose it’s value over time and the reduction in value is recorded

And now let’s work down to Net Profit:

From EBITDA, we take off Depreciation and Amortisation which gives us:

EBIT (Earnings Before Interest and Taxation)

Next we remove the Interest to get:

EBT (Earning before—you’ve guessed it!—Taxation)

Once we remove the taxation, we get to:

Net Profit and that’s it: the Bottom Line.

What Does This Mean In Practical Terms?

Now that you’ve seen EBITDA explained, how does it apply to your business? 

Lucky for you, Numberslides will take you through everything you need to build your revenue and cost forecast and build your very own profit and loss (P&L) statement. With this you can make all sorts of assessments of your business and by comparing P&Ls to previous ones, you can begin to set targets and spot opportunities and challenges. To determine how healthy your P&L is, you should benchmark yourself against the competitors in your market. Numberslides does this for you by comparing your P&L to thousands of companies in similar sectors. It’s important that you understand Operating Profit and EBITDA, but it’s even more important that you apply it at the right time, to truly understand your numbers.

The Best Business Planning Software for Your Startup

The Best Business Planning Software for Your Startup

Business planning software is all the rage these days, with smart features, cloud access, and a series of tools to mix your financials in with your plans. But for start-ups, building the best business plan starts with the basic numbers of your business.

What Is A Business Plan?

Business plans are documents that tell an ongoing story about your business. They are often ‘living documents’ meaning they are dynamic and responsive to changing marketing conditions and your business’s needs. Business plans help owners and founders have direction and set goals. They also help investors understand if the business is going to make money and is therefore worth their time and investment.

Find Business Planning Software that Is Founder-friendly and Investor-friendly

If you’re looking for the best business planning software for your start-up, make sure you find something that really fits your needs. Start simple, by inputting numbers for your business to help build your forecasts. You don’t need long tutorials or to be an expert in fancy jargon. Make sure that you understand each element of the financial forecasts you’re building and why they are important.

Lengthy plans consisting of pages and pages of hopes, dreams, and a few business assumptions are no longer appropriate for investors. Instead, find a business planning software that will radically transform your ideas into actionable steps, making it easy for you to follow your strategy, and for investors to see where you’re headed.

Top 5 Best Business Planning Software

1. LivePlan

Pros: This program is probably the most well known of all business planning software. LivePlan is super customizable, integrates with Xero and Quickbooks, and offers financial services too that calculate your financial outcomes for the next five years. You can build a step-by-step plan using templates that are built to reach specific goals.

Cons: Rigid templates mean you are forced to shoe-horn your business into a template that might not be appropriate for your start-up. Also, sometimes too much detail can ruin your business plan

Costs: Free trial available and then either monthly or annual subscription. 

2. GoSmallBiz.com

Pros: A cross-over between a self-onboarding platform and a consultation service, GoSmallBiz offers multiple tools from website design through to legal support. Business plan reports are customizable and there is also a business mentoring service available too with help from real CEOs. There’s online calendar management to schedule appointments and events and you can generate financial projections and statements for your business.

Cons: Whilst there are hundreds of sample business plans available, you may be forcing your business to fit a template, rather than finding a template to enhance your business. You cannot export your data and many users are so familiar with Google or Microsoft Calendars that GoSmallBiz’s calendar functionality can seem a little obsolete.

Costs: A cancel-anytime monthly subscription is available. 

3. BizPlan

Pros: Another good contender that’s really user-friendly is BizPlan. Like LivePlan, you can sync your data with accounting software. Use drag-and-drop industry-specific templates to build in-depth presentations with really nice graphics. Share your financial plans with investors online in just a click of a button or use the real-time collaboration features to work on your plan with your team. 

Cons: PDFs can be fiddly to export and the platform isn’t responsive so you may have difficulty accessing it on mobile devices. You may also need to have a certain degree of knowledge regarding all the financials to get the most out of this program.

Costs: Monthly or annual subscription or a single lifetime payment.

4. PlanGuru

Pros: PlanGuru is stuffed full of excellent features, grounded in financial forecasting software with rolling forecasts and strategic planning. Learn everything you need from PlanGuru University and build flexible budgets to suit your start-up of any size. For established businesses, you can import historical data to help build some of your financial forecasts. Get stuck? Use their services (charged by the hour) to help bring expertise to your models and business plans.

Cons: You might get a bit lost with the snazzy features of PlanGuru, depending on your own financial forecasting knowledge levels. You may need to invest time using their learning tools to get the most out of your business plan.

Costs: PlanGuru is at the more expensive end of the spectrum with monthly subscriptions available.

5. Numberslides

Pros: Whilst Numberslides is not strictly a business planning software, the platform offers the fundamentals of all that business planning really is. It helps you answer the questions; is your business viable and what does your cash flow look like? The features of the online platform include building financial forecasts and using live market sensitivity analysis on your predicted financial outcomes. You can also create a bespoke set of financial documents that help you build your best ever business plan. By simplifying the steps for inputting all your numbers, Numberslides helps you optimize your business plan. You don’t need to be an expert in accounting, economics, or business strategy. There are no templates to force your business into, and you can give anyone (business partners and investors) access to toggle your numbers.

Cons: This is financial forecasting software with limited business planning software. If you need software to help you build your business plan (including strategies and actions, your competitive edge, products and services, marketing strategy), you may be better off with software that focuses mostly on business planning.

Costs: Multiple plans, billed monthly or annually.

Getting the Most Out of Business Planning Software

It might seem tempting to sign up to business plan platforms and start plugging your numbers and goals into the website, but be warned, sometimes the sense of busyness we get from this is actually a trap. Before choosing a software, you need to ask yourself what you want out of the software in the short-term and the long-term.

Short-term goals might be:

  • Understanding if your ‘back-of-a-napkin’ business plan is viable
  • Collecting all your ideas for this business down on paper to check each potential ‘limb’ of the business

Long-term goals will look a little different:

  • Understanding your business’s viability over the next 5 years
  • Accurately forecasting your business’s cash flow for the next 2-5 years
  • Predicting your business’s growth over the next 5 years to help secure investors

Find the Right Business Planning Software for Your Business

So, there you have it, five good options to consider for your business. Remember that before you start thinking about your marketing strategy or what your team will look like, at the very heart of every business are the numbers. If you don’t get those right, you’ll be struggling with an uphill battle every step of the way. Frequently, we sign-up to software without understanding what we want from it and without realising the true potential of the software either. Pick a software that will allow your business plan to speak to your financial forecasts, and you’ll be able to build your business with confidence in your numbers and your goals.

How to Forecast Sales to Show Growth

How to Forecast Sales to Show Growth

You’ve worked through the numbers and still, somehow, your sales forecast doesn’t show growth. We’ll look at the reasons why this might be happening. Then, we’ll offer a list of tips on how to forecast sales to show growth.

What Is Growth in Sales?

Ultimately, you want to demonstrate growing revenues and profits each year. (You’ll also want to demonstrate a well-planned cash flow). You do this by producing financial statements that predict year-on-year growth.

Why Investors Need to See a Sales Forecast That Shows Growth

Investors might love the idea of your business, but they’ll only ever invest if you can demonstrate good returns on their investment. Investors want reassurance that they can get their money back. The company needs to grow in value, in order for the investor to enjoy the returns when either someone new buys the company or the company goes public.

What Happens When Your Sales Forecast Doesn’t Show Growth?

So what’s happening that’s causing your forecasts to fall short of the growth you’d like to see?

There are two key questions to explore when encountering a poor growth forecast.

1. Are You Being Ambitious Enough? 🦸

Do you have big goals, or are your predictions for profits a little low? Make sure you give yourself a chance when doing your financial forecasts. Sure, there’s no point in fabricating your numbers to something completely unattainable, but equally, you can set reasonably high targets for your profits.

2. Are Your Goals Strategic? 🔀

Do you have a fixed point in a longer-term (for example in 3 or 5 years) where you plan to be? Is this point arbitrary, or does it arrive at the end of an extensively thought-through plan? What happens beyond this marker? What makes this an important milestone? Sometimes the profits never materialize because your business plan is hastily re-investing assumed income on the next step of your journey.

You Need a Long-term Strategy for Good Sales Growth

As a founder, you need to have a plan to play the long game. In other words, you need to be able to look ahead in 3 to 5 years from now and be clear about your strategy. There’s absolutely no point in picking a number or having a lofty goal, without thinking your plans through. To build an effective long-term view of your business, you must have smaller steps built into your plan. If you don’t have an incremental view of how to grow your business, you will struggle to quantify your goals and explain the practical steps that will get you there.

A healthy business should always be growing in some way or another.

How to Build Your Long-term Strategy for Growth

If you’ve fiddled with your numbers and still are hitting poor profits margins or volumes with little growth, don’t panic, there’s still hope. You can reset your business strategy to ensure your sales forecasts show growth by going back to basics with price and volume.

  • What are you selling?
  • How much are you charging for it?
  • How much are planning to sell?

Think about our earlier points on your ambitions for the business.

  • Do you need to increase prices?
  • Perhaps you’re not being bullish enough on the volumes you plan to produce.
  • Can you increase production?

Build Flexible Financial Forecasts to Find Your Optimum Growth Strategy

As you try to work out your optimum business strategy, you’ll need a forecast where you can easily adjust your numbers. If you don’t have a forecast where you can toggle these variables, you won’t be able to test all your possible outcomes. Business plans, financial forecasts and cash flow forecasts are not rigid, yet our strategies to build these tools typically are. So, we created Numberslides. It’s a clever software, available online where you can add your numbers, adjust your variables and find and fix any problems in your sales forecast.

Numberslides can help you build credible financial projections and sales forecasts that show sustainable and achievable growth. Plus, you can understand your projections and share them with future investors too.