Q. Dear Zenagos, I have been doing event planning on the side on the weekends, and I want to turn it into a real business. How do I know if I need an investor?
There is no shortcut – you need to make a financial plan. The best time to raise money is before you need it. At that moment, before you have started operating, you (and any potential investors) can be optimistic. Anything is still possible. However, once you have started operating and then landed in a position where you desperately need money, investors are likely to see your situation as evidence that you are not a good financial risk.
So, you are asking the right question, and you need to get the answer now. Specifically, you need to know what your likely revenue will be, what your regular (“fixed”) operating costs will be, what the (“variable” or “direct”) costs of creating your product or offering your service will be, and what it will cost you to acquire each new customer. And, you need to forecast these numbers for the next three years. If that idea gives you anxiety, you are in good company. For many people, even the discussion of finances (or any kind of math) causes a tightening in the chest. Many entrepreneurs just avoid that feeling and wing it, launching their business without sitting down to struggle with the numbers. However, as we discussed in our June 10, 2022, blog entry about self-financing, jumping into business without a financial plan is a recipe for failure.
If you are among the vast majority of entrepreneurs who have never taken a business course or are not comfortable with math, you are going to need to get some assistance. You need to find a mentor who has business finance experience to walk you through the process of making a financial plan. It doesn’t need to be a hugely complicated thing. If you already understand your business, you ought to be able to get it done in a few hours with some help. Once you have a draft, your mentor can help you think through best- and worst-case scenarios, so you can evaluate how much money you really need to start your business, providing a little cushion in case you make a few mistakes along the way.
If you resist creating a 3-year financial plan, you will have only yourself to blame when you get into financial difficulty. It is a lot tougher to get out of financial trouble once you are in it. At that point, solutions will be elusive. As one financier we know likes to say, “You can’t nail jello to a tree.” Take advantage of this moment to dig into the numbers and make a plan that will work for the next few years, so you can not only launch your business, but sustain it.