Please I need this Thursday......

An Introduction to Financial Forecasting for Creative Professionals

This week we will focus on the concept of financial forecasting, using a startup entertainment business as an example. For creative people, the task of forecasting can feel overwhelming and worthy of outsourcing to "a numbers guy." However, it is more important for a creative entrepreneur to develop their own skills of forecasting (at least during the beginning stages of a new business venture or project). A lot of what I will say this week is meant to get you to buy-into this reality. When I first started forecasting financial statements, I was working as an equity analyst for a $7 billion investment firm in New York State. I was in a group that covered technology companies/stocks, most of which were brand new during this first wave of the technology boom.

My job was to use extensive research and forecast what a company will make over the next five years. At first, I was quite nervous generating a forecast, because my perfectionist personality was looking for "correct" answers but I soon learned that no one else at my firm or anywhere else really knew what was going to happen. Did I just guess all those numbers? No, I had to make educated guesses based on detailed assumptions that I was able to explain to an investor. Forecasting relies mainly upon the skill of planning.

One anonymous quote said this about planning: "Planning is the substitution of ERROR for CHAOS." In other words, if you don't plan the specifics of a new business or a new project, when it comes time to launch the business/project you'll find yourself in the middle of a chaotic situation. On the other hand, even if you do generate a detailed financial forecast and execute that plan, life still never turns out like you planned it to, which means you can expect to encounter errors in your plan. But having errors is better than having chaos, and so financial forecasting & planning (which enables you to be proactive instead of reactive) is the substitution of errors for chaos. You have to give yourself permission to tell a story about your future, without exactly knowing the precise outcome, well enough to explain how you got your numbers but not so precise or perfect as to totally delay launching your business or project. The best entrepreneurs are the ones who take their unconventional out-of-the-box ideas, generate a solid but imperfect plan, and run with it to get their product or service into the hands of customers quickly. The sooner they do this, the sooner they can start generating feedback and adjust/adapt their plan in order to better create value.

This is the entrepreneurial process at its finest, however many businesses lose this edge once they become larger and institute rules, regulations, and red tape which were originally based on the best motives and solid thought process, but unfortunately become the company's own worst enemy over time as the rules become focused on enforcing the rules instead of on the reasoning or purpose the rules were created for, or the goals that these rules were based on in the first place.

Before President Eisenhower was president, he was General Eisenhower, the strategic planning of the armed forces. Eisenhower and his team were instrumental in locating the gold (and valuable works of art) that Hitler stole during World War II. You can learn more about this topic by watching the movie The Monuments Men. After World War II, Europe was basically destroyed, and in desperate need of funds for rebuilding. Since they had the idea to rebuild, but didn't have the money they needed, they obtained this financing from an outside source - the United States. The US offered to loan them the money, in exchange for some collateral (assets which could be taken in the event the borrower fails to make regular and timely payments). Guess what the collateral was... the GOLD. So all this gold left the hands of Europe, and was taken to Fort Knox, and consequently the US Dollar became the strongest currency on earth - mainly because our currency at that time was directly connected to the value of (and exchangeable for) gold. That was one of the largest transfers of wealth in human history.

General Eisenhower is quoted as saying "plans are useless, but planning is indispensable (which means you cannot live without it)". My interpretation of this quote is as follows: although life never turns out as planned, the planning process itself is vitally important to the future success of your business or project. The real "gold" in the planning process is not the plan itself. The real "gold" is in the process that you had to go through in order to get the plan. To complete a proper financial forecast, you have to discover the answer to some very important questions about your own business model and the dynamics of the market you are competing in. For example, you have to find out how much you can charge for a product or service; whether or not you can sell it for a price higher than what it costs to create or purchase; how much capital from an outside source you actually need in order to launch your new business or project, and many other extremely valuable insights. This planning process teaches you how a market works, and it is so valuable that even if you act on this knowledge, roll the dice, launch your product or service, and completely fail (the Small Business Administration has said that only 44% of small businesses will stay alive for four years or more), it is possible to take what you learned, adapt, and try again another time.