3. Know your numbers:
Make sure you, or someone in the management team, understands the financial implications of what you are trying to do. It is very important that you can present the business case of your enterprise to organisations providing funding, to your board and to other stakeholders.
The key to understanding the potential of your social enterprise business model is a good set of numbers. This in turn helps you to communicate the potential of your business to others, including to individuals or organisations providing funding or to your board.
Some business models can be adequately presented on the back of an envelope, while others require more detailed spreadsheets to model – or mock-up - the monthly cash-flows.
A financial forecast is the best tool you can use as a sanity check of the business model. Rather than predicting the future, a good financial model should answer the following question: If all my assumptions about sales, costs and overheads are correct, will my social enterprise be sustainable?
How to produce a financial forecast in five simple steps:
1. Sales projections:
Estimate your trading income from sales over the next two or three years by:
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Consulting directly with your customers
- Circulating online surveys among your customer groups
- Researching similar products/ services available in the market
- Testing your product/ service in the market by selling on a small scale
You must also take into account the supply and distribution of your product/ service: Can you deliver enough to satisfy demand? Can the product/ service reach your customer quickly enough to result in your resulting sales figures?
If you have any grant income, this can be added to your sales figure. Make sure you understand when the funding is transferred into your account and under what conditions.
2. Direct costs:
Estimate the cost incurred in the delivery of your product/ service. This includes anything that you do not have to pay for, unless you are delivering your product/ service, e.g. if you are an event organiser, you will only pay for the event hall if you are organising an event. That’s a direct cost. So is the petrol for the van, used to deliver the sound equipment to the venue, and production cost of the flyer advertising the event.
Costs such as marketing for your event organising services, on the other hand, are overheads. These would be incurred even if you end up not delivering any events and are dealt with below. The direct costs you estimate should be related to the sales you plan to achieve.
3. Overheads:
These are the easiest costs to estimate, as they are not related to the amount of product/ service that you deliver. Office costs, printing and stationery, salaries, marketing, auditing and bank charges are all overheads, but you can probably think of plenty more. You can use historic accounts of a similar organisation as a good starting point.
4. Cash-flow timings:
One factor that can make the difference between success and failure is the timing of your cash-flows. If your suppliers like to charge up-front, but your customers only pay a month after purchase, you need enough cash to cover the difference during that period. Go through each of the incomes and costs you have identified above and make sure you are aware of when you pay and will be paid. This must be factored into your forecast.
5. Financing:
Once you have estimated all the items above, you should be able to calculate how much cash you need to get your business off the ground or take it to the next step. If you plan to raise a loan to cover this step, don’t forget to include interest and capital repayments in your cash-flow.
Another factor to bear in mind is the lead time: it can take months for a loan application or other funding request to be processed. Make sure your social enterprise can survive for as long as is needed before you can access the loan funding.
Whether or not you are confident with numbers, it is well worth running the forecasts past your treasurer, accountant or business advisor. This is likely to highlight the strengths and weaknesses in your assumptions and allow you to gather more data. This also helps with preparing for difficult questions from individuals or organisations you have approached for funding.
If you’d like to know more about understanding your numbers, please email info@sparkchallenge.org.uk.
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