Page 137 - 6 Secrets to Startup Success

116 6 SECRETS TO STARTUP SUCCESS

KNOW YOUR FINANCIAL KEYS

Intimately tied to your core concept is a set of financial keys that re-
flect the trajectory and health of your venture. Most founders don’t
possess financial modeling skills, and detailed financials won’t be nec-
essary for all businesses. But every founder can work to understand
the right numbers and ensure that the necessary calculations are
done, even if these are sketched out on a legal pad or the back of an
envelope. Entrepreneur Bob Reiss, in his book Low Risk, High Reward,
calls this ability “numeracy,” the numbers equivalent of literacy, and
likens it to understanding a second language. “Numeracy is a way of
thinking,” he writes. “Thinking in numbers is a vital, vital skill.”5 If
your financial projections do require complex calculations, partner
with a talented finance pro who can help you conduct analyses at the
right level of rigor and detail.

The first purpose of these financial keys is to determine whether
your core concept is economically viable so you can avoid pouring
your time and your passion into a money-losing business model. Just
as important, understanding and focusing on the right numbers allows
you to monitor and improve your concept as you go. It gives you a re-
liable instrument panel as you fly through the early startup fog.

Depending on the size, stage, and complexity of your venture, you
will need to develop a system of financial forecasting and tracking
that works for you. Regardless of the type of business you are launch-
ing, however, the following financial keys will provide a solid founda-
tion for growing a healthy venture:

9 Understanding profitability dynamics

9 Building pro forma financial projections

9 Mastering cash flow

UNDERSTANDING THE PROFITABILITY DYNAMICS – Grasping the factors
that will drive profit within your particular business model is the
starting point for building a compelling math story. Investors and
owners use several common metrics to think about profitability and
returns, including return on invested capital (ROIC), return on assets
(ROA), and return on equity (ROE). Tools for calculating these meas-

American Management Association • www.amanet.org