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Many sources of business planning advice that included saying "financials don't matter for an Internet start-up" are now peddling instant profitability as the only golden rule. If you've heard either of these versions, start looking for new advice.

Sure, in the public perception, the pendelum for profitability has really swung the other way, but for most sensible investors, the ideal situation is still somewhere in the middle, and a crisp financial plan is as crucial as its always been. Any nascent company should have a simple, well-articulated idea of its revenue and profitability potential, of its market opportunity, and of its near-term cash needs. The numbers won't pan out exactly, but the modeling process gets the company thinking about its long-term economic viability, and its path to profitability.

The Revenue Model
For an unproven business, a simple revenue model is way better than an overly complex one. With all that future uncertainty, the fewer assumptions you make while arriving at your revenue figures, the more robust your projections. Clearly, the details of the model vary widely across businesses, but finally, revenue is simply the sum of (price X demand) across your product lines, so there are some broad guidelines worth following. Again, keep the model simple -- as your company takes off, and you get real demand and price sensitivity data, you'll have plenty of opportunity to refine and extend it.

Projected Expenses and Cash Needs
Most startups will need seed or venture financing to begin operations in earnest. Projecting your expenses and cash needs is one part of deciding how much money you need to raise (the other part is estimating your valuation). This projection is fairly straightforward, once you figure out how many employees you will need over the first six to twelve months of operation. At the very least, it'll suggest different expense categories, and generate a spreadsheet template for your expenses. I've been through this process many, many times, and have wisdom to share, if you're interested;)

The crucial number that this gives you is your monthly burn rate -- the amount of cash you'll be burning each month. As you begin operations, dividing your cash position by your burn rate lets you know how many months you have left before your business needs another round of funding, or before you need to reach cash break-even.

If you want to get more elaborate, some useful links: At the very minimum, make sure you have revenue projections for two to three years, and cash flow statements for six months to a year. If you're looking for seed funding, developing an income statement and balance sheet to parallel your revenue model may be unnecessary, since you have to undertake the somewhat onerous task of estimating things like the implied value of founder and employee stock, and operating and marketing expenses into the distant future. Keep it simple, unless a potential partner/VC asks for more detail.

Copyright © 1999, 2000 Arun Sundararajan. All rights reserved.