Guess, Guestimate, Estimate, Cash

Numbers, numbers, numbers…. They may not be your best ally yet.

Getting used to uncertainty when starting out

When starting something new in business, whether it is launching a new product, entering a new market, or a beginning your journey as company founder/owner, you will always encounter a lot of unknowns. Unknown costs, unknown effort, unknown customers and dreamt of sales. These customers, cost and revenue numbers are unknowns that together define the future success of the business, and they need pinning down before you waste too much of your own time or cash.

And whilst you can’t pin them down completely, you can nail them within a factor of 10.

Many, many people like you face real fears of looking into the future and putting a number on it. You might be thinking “how do I know how many items are going to sell?”, when no-one has the same product as you, where the competition lacks that special touch, when you are creating a whole new product category?

Uncertainty often stops people planning sufficiently

Sometimes you might be required to do just that, put a number to it. People such as funders, banks and investors will ask for these numbers. And in reality you as a founder should also be curious and confident about how successful your new idea and product is going to be as a business, before you put more time and effort into the venture.

The level of uncertainty often stops people undertaking sufficient planning, planning those things which will lead to a successful, sustainable and investible business.

Is this a joke?

Guess, guestimate, estimate, cash…

With my clients I work to build confidence about their financial models by talking about the 4 stages of future certainty. I call them Guess, Guestimate, Estimate, Cash. The aim with any financial model is to strengthen confidence in the numbers, from a pure guess to numbers that will turn into reality. From a Guess to Cash.

Guess

That's it, the first number is often a real guess. You may not have a whole lot of experience with numbers or your market. It is a number plucked from the air. It is a start.

Guestimate

You've had conversations with suppliers, with buyers, with people who might pay money for your new product or service. You've researched how many of the inferior competitive product was sold in the first 6 months, pieced together from conversations, magazine articles or company accounts. It is now a qualified number. It is better than a guess, but it may be exactly the same number as the guess that you first wrote down. But now you can have more confidence in it.

Estimate

You've sat down with a number of people within one of your niche customer segments, and they have agreed to buy a product for the price that you need to sell at (including space for VAT, other peoples margins and your envisioned cost reductions, another blog), you might have made and sold some samples or prototyped your service.

You might have spoken to two or three retail stores or buyers/agents and they have given you a considered opinion on purchasing based on a price and set of features/functions that you have described. With trade/wholesale buyers you have discussed first & second order quantities and what marketing efforts are expected of you to achieve that, and for direct market sales you have found the kickstarter quantities of similar products in your space.

With suppliers you have spoken to them in depth about your new product, and they've given you a competitive and inclusive quote. You've spoken to two more people by phone and they have also given you a proposal and the numbers are similar. You have discussed how you will be satisfied and what you are expecting (not the same thing).

Now this is as close to reality as you are going to get. This is a great place to be. You should now be examining these numbers to see if your business is really going to be viable, sustainable and successful. To be asking yourself questions about whether further cash injection into the business is going to be required and will pay off. And having grown your confidence in your numbers, you can ask yourself “what if” questions. What if – I sell more items, What if – I don't. And you will be wise enough to answer those questions and plan for them.

So Guess, Guestimate, Estimate, Cash. A tough journey if you've never done it before, but, get used to it, you'll be here again. More information is good, but you don't need everything to start modelling the finances for your business.