SZE, the company founded by Sheena and Zeena, was 2 years old. SZE provided special technical inputs and services to colleges.
The founders now wanted to expand and bring more colleges into their client base. For this they would need to invest more money into the company. They were unclear about a) the quantum of funding that they should raise and b) about the process for fund raising.
They met Gyan, who was known to be somewhat of an expert in the funding scenario.
Gyan asked them what the money would be required for. This could broadly be split into two buckets, (i) one time, initial costs for expanding and (ii) repeat costs, such as salary costs for new hires etc.
Gyan, "Sheena, Zeena, do list these expected costs as well as existing costs over the next three years. This is the initial analysis and a simple spreadsheet will do."
Sheena, "I am not sure of the numbers and so how can I even put this on a spreadsheet?"
Gyan, "If you are not comfortable putting this into a spreadsheet, even putting it on paper will help. This is just a starting point. First, put down numbers that you do know or are comfortable with.
For example, you may like to start with a target, i.e the number of customers (colleges) you want to reach. Let us assume you have 15 colleges as your customers today and that you are targeting to triple this number in the next year, you can use this target as a starting point and plan how you will reach a number of 45 colleges by the end of the coming year. To illustrate, in 3 months you may put a number of 20, then in six months, 27 and in the last six months you may plan to reach 45 colleges. Of course, any potential investor would like to understand if your target is realistic. So, to justify that it is practical to reach this target of 45, at the minimum:
- You need to have a list of colleges and names that you will be marketing to
- You need to factor the average time required to connect with a college and convert it into a customer
- You need to estimate how many colleges that you reach out to, actually convert into paying customers
In all these cases, past data for conversion and pricing will be indicative but the future plan cannot be built based on past numbers alone. For example, if you are now a recognised name with a few well known colleges as your customers, you will have more conversions from your marketing team as compared to conversions in the past.
Next let us look at an example of a key cost, the employee cost. Assume that you need 2 technical employees (TE’s) to address the need of one college and that you have about 30 TEs on board now. So when you are looking at the employee costs, you need to factor:
- Hiring time and hiring costs for a TE, for example you may need to interview 15 persons before hiring one TE
- Training time and training costs for TEs, for example a TE may need training of about 3 months before he can actually be sent to a college
- Plan for attrition and absence of TEs, i.e. while 45 colleges can be managed with 90 TEs, you may need to look to hire 95-100 TEs to meet your target sales
Sheena, "This looks complicated!"
Zeena, "Yes, but I guess we can put some rough overall numbers for a start. Is that OK?"
Gyan, "Sure Zeena, this is just a starting point and you can focus more on getting the elements of cost factored in. At this first stage, try to get a grip on what could be the elements of key costs and in the next step, we can look at the quantum of costs in detail.
The advantage of working with a spreadsheet is that it helps you modify and work with it as you refine your ideas. It also helps you record your analysis over a period of time."
Sheena, "I suppose we can attempt this, at least the target sales and salary costs. However there are some costs which we may incur only if we have money. For example, technology and ERP costs. We would also like to get some specialists on board and they may require to be paid significant amounts."
Gyan, "You can build your financial plan in a flexible manner, i.e.
- In addition to looking at costs as one time and recurring, also list separately the cost elements as "Must Have" and "Nice to Have"
- Look at different ways in which you can fund activities and advisors, without spending too much cash upfront. For example, your friend, the successful entrepreneur, Christie, signed up with a senior marketing professional at 25% of the normal market rate, by offering a share of profits."
Zeena, "Yes, we have also been thinking on those lines."
Gyan, "Go ahead then, make a start. Once you put some numbers on the table, I can give you inputs on whom you may like to reach out to for funding."
Sheena and Zeena then decided to do as Gyan suggested. They would relook at their business and business model and put down a first cut of numbers and then revert back to Gyan for his inputs on whom they could approach for funding.
… Coming Soon… Part II of the Sheena and Zeena funding story…