· 3 min read
What fits your business best, a business plan or a cash flow plan?
As a one-man business, a cash flow plan is good enough. Same thing for the early stage of a company.
But once you reach product-market fit, your revenues are 7-digit, and your sales pipeline is stronger than just a few contacts from the founders’ network, projecting the future becomes more important and more feasible.
If you want to attract growth investors or even start to think about an exit, you will need a much more detailed business plan alongside your cash flow plan.
There are two ways to project the future: optimistic or conservative. Both have their advantages and disadvantages, and maybe the style of the business plan also depends on the country in which your business is located: In Switzerland, my home country, people tend to be cautious and discreet; in the United States, things are called bombastic even if they are mediocre.
As the Founder & CEO of Yonder, I have experience with both types of projections. Let’s look into the details.
Optimistic projections
Optimistic projections are built on modeling the past with actual numbers, calculating some KPIs, and then extrapolating them into the future, using industry-standard values for the core KPIs.
Both revenues and costs are extrapolated into the future, following the logic that if you increase the sales force, sales will also increase.
The result is an impressive growth plan, first and foremost on the top line. But of course, the materialization of this impressive growth plan needs upfront investment.
When using an extrapolation on industry-standard KPIs for your business projection, always remember that you’re basing yourself on historical data. I leave it to you to judge if the past is a good guide for the troubled times we are living in.
Conservative projections
Conservative projections are built on little upfront investment, and managing your cash needs on funds collected from operating the business. When the forecast becomes more positive than projected, you can make additional investments, but not before.
The result is a less impressive growth plan on the top line, but a much more impressive growth plan on the cost side: People will wonder how much you can achieve with so little.
Furthermore, by constantly adjusting your conservative earnings projection, you can effectively respond to any changes in the macro- and microeconomic environment.
Side-by-side comparison
Now for the interesting part. We have modeled our business using both optimistic and conservative methods. Below is a screenshot from our revenue and cost models:
Revenue and cost models in comparison (source: author)
The solid bars show our conservative projection, using the cash flow plan as the basis. The black line shows our optimistic projection, being much more aggressive on the cost side, leading to higher revenues.
Which scenario do you think is more profitable? Here is the EBITDA comparison:
EBITDA models in comparison (source: author)
Surprisingly, the EBITDA is comparable for both models – the black bars represent the conservative projection, and the grey bars represent the optimistic projection.
Conclusion
So, which model is better now, the optimistic or the conservative projection?
It depends on factors such as investors, geographical markets, and personal taste.
But irrespective of what social media tells you about entrepreneurial success, there is more than one way towards success.
This article is also published on the author's blog. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.
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