An Innovative Forecast: Is Your Company Investor-Ready?
A leading Colorado-based company specializing in space technologies that also have applications here in our local communities came to us for assistance with valuing their company. J.C., the CEO knew that their small, 10 person company needed to raise capital if they wanted to continue to grow and reach their full potential.
They were also interested in putting together an employee incentive program. Their industry is very competitive, particularly for engineers so they wanted to give their employees a financial incentive to stay with the company through the early stages of business.
The management team had healthy revenue projections based on current contracts and proposals, but were unclear about their expenses and margins. They needed help creating a reasonable forecast.
J.C. reached out to Quist to help them prepare for the upcoming meetings with investors.
Preparing Your Company’s Forecast:
Determine if a top-down or a bottom-up approach is best for the company.
In a top-down approach, management estimates the size of the market available for their business, identifies relevant factors in sales trends, and estimates what percent of the market the company can capture.
Companies that experience little deviation in cash flow from one month to the next or start-up companies that do not have any accumulated sales data may benefit from a top-down approach.
Conversely, a bottom-up approach is typically developed from spending plans by various groups within the company. A bottom-up forecast looks at factors such as production capacity and department specific expenses. A bottom-up forecast may benefit a seasonal business that experiences significant variation in cash flows throughout the year.
Use historical results as a starting point.
Management identifies the salient economic variables that correlate with its historical revenue and profitability. Specifically, management determines:
- Is expected revenue growth due to an increase in price or volume or both?
- Is revenue growth achievable given the current state of the industry and the health of the customer base?
- Which operating expenses are fixed vs. variable? Will fixed expenses grow over time at a rate of inflation or another index? For variable expenses, how will costs vary over time and will increases or decreases accrue directly to the customer?
- If new products or services are in the pipeline, have all corresponding expenses been accounted for including additional overhead requirements as well as additional research and development and capital expenditures?
Benchmark the company’s forecast assumptions to industry data.
If Management’s forecast is in line with industry growth and profitability, there is a higher likelihood the forecast is reasonable and achievable.
If the Company’s forecast outpaces industry revenue growth or profitability, investors want to understand how the company is uniquely positioned to achieve above market financial benchmarks.
After further discussion with J.C., he faced three major challenges:
He needed a better view of resource management.
The company was growing fast, with new contracts on the horizon, and contracts they were fulfilling. Management needed to better understand what people and resources were needed and by when.
He did not have a roadmap for preparing the financial forecast.
Clearly a top-down approach was going to make sense. Working with Quist’s business professionals, a game plan for preparing that financial forecast was developed.
He needed to use readily available industry benchmarks to determine if the company’s long term forecast was reasonable.
The aerospace industry is fast-moving, with many new players entering the market. J.C. needed to be sure that his long-term forecast was reasonable before he could convince investors, or even his own employees.
J.C. took advantage of Quist’s Forecast Modeling solution, which walked him through a series of questions to capture major inputs and assumptions for the forecast.
Within a few days, the management team was able to finally see their margins and resource needs. They also had a cost for salaries and impact of benefits leading them to understand the total costs for their employees.
Now they were ready to work with investors to raise capital, and work with their employees in creating long term value.
Want to know more about preparing your company for raising capital or creating an employee incentive plan? Visit us at Longmont Startup week July 22 to 26. Go here for more information.
Quist is thrilled to be able to offer entrepreneurs an efficient and cost-effective way to create company forecasts. Leverage our team so you can continue to focus on what you do best!
Have questions about valuing your business? Quist Valuation can help. Let’s set a time for a free 30-minute consultation. We can discuss the specifics of your business and identify the next steps needed to assess the value of your company. Schedule your free 30-minute consultation here.
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