Stop Operating by Feel (part 1): Why Knowing Your Numbers is so Important
One of my favorite reality shows on TV has it all…
Intrigue! Drama! Mystery! Cliffhangers! Joy! Heartbreak!
No, I’m not talking about the Bachelor. I’m talking about Shark Tank. Not only is it the one of the most entertaining 41 DVR’d minutes on TV, but it also teaches you about business, finance, invention, pricing, sales, negotiation, winning, losing and perseverance. And if there is one thing entrepreneurs on the show must know, above all else, it’s THEIR NUMBERS. Don’t know your margins or sales or costs? This is, without question, the quickest way to be eaten alive in The Tank.
Why is this? Can’t I just tell a great story about my amazing product that is flying off my virtual shelves? That is certainly important, but what is more important is to know that you have a business that can make money over time. The only way to know this is to KNOW YOUR NUMBERS. You can create the most incredible product in the world, but if your gross margins are stuck at -10%, you’ll never make a profitable business out of it.
I would suppose that modeling and knowing your numbers is one of the most neglected aspects of building and running a new startup. Why? Because it’s hard, imperfect, never-ending and probably not a skill that many new founders of product companies have honed. It also might have to do with being in love with what is, most certainly, the greatest idea in the world. How could this NOT make money?? Product ideas don't need to be profitable, but the companies built to sell them most certainly do.
If you are going to raise outside money from angels or professional VCs, you MUST have a financial model that shows, at least in theory, that this is a viable product you can sell to a large enough market to make money. But that, frankly, isn't the majority of new product startups. Most of them are bootstrapped and don't have the luxury of time that comes with outside money — time that allows you to make mistakes, learn and improve. So, while a financial plan is not required for a bootstrapped startup, it’s of the utmost importance to ensure you understand the numbers behind your idea.
Once you’ve started selling and your customers are buying, it’s important to review and revise, on a monthly cadence, how your business is tracking towards your forecasts. Is the product I thought was a bestseller really THE ONE? Did I anticipate all of my production costs correctly? Are my shipping charges in line with my predictions? Are my margins improving with volume? With all the moving parts of a high-growth business, it can be challenging to find the time. Hire an obsessive bookkeeper and a CPA who sweats the details. Find an experienced operator who understands how to build a smart and stable foundation to support your growth.
Great ideas don’t become successful businesses just because people are buying what you’re selling. If your merchandise will never turn you a profit, your wonderful idea will fizzle out before you even have a chance to NOT know your numbers on The Tank.