Sep 242010
 
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One common mistake that entrepreneurs make when planning for their business, is assuming that they will be able to perform better (usually in a whole variety of operational aspects) than their competitors.  This is a pet peeve of many investors I know and it has come to be one of mine as well.  The bottom line is that if you are going to project operational and financial results based on assumptions that you will greatly outperform your competitors, you must have a rational justification for your assumptions – not just that you’re “better” than them.  How will you as an early stage company, for example, outperform GE in your throughput on the widgets you manufacture?  Crazy you say that someone would make such an assumption – maybe yes, maybe no – but you’d be surprised how often I’ve seen this assumption (or similar) in the business plans, Private Placement Memorandums and financial models I’ve reviewed..

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Aug 092010
 
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You can make most financial models, especially complex ones, say whatever you want them to say.  It’s usually just an issue of tweaking one or two key variables that drive the model, and you get the results you are looking for.  So what does this mean?  There are a couple of key points here.  First, don’t create an over-reliance on financial models that by their very nature can be made to say whatever you want them to say – in other words, don’t kid yourself.  This is not an argument not to build and use financial models; rather it is a suggestion that you should use them very carefully.  Second, don’t focus excessively on the results of the model (revenues, profit, etc) without first closely examining and questioning all assumptions, especially the key ones.  In most models there are a handful of variables (assumptions), sometimes as few as one or two, that drive well in excess of 50% of the variation in the results.  Consume financial models responsibly and you’ll be a lot better off in the long run.  They should be used to help you pursue the right path, not to lead you to see a garden of roses where one doesn’t exist..

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