Platt Perspective on Business and Technology

Building a startup for what you want it to become 21: moving past the initial startup phase 7

Posted in startups by Timothy Platt on December 31, 2016

This is my 21st installment to a series on building a business that can become an effective and even a leading participant in its industry and its business sector, and for its targeted marketplaces (see Startups and Early Stage Businesses and its Page 2 continuation, postings 186 and loosely following for Parts 1-20.)

I focused in Part 20 of this on three business development models that can be pursued when determining when a new venture has successfully left its early pre-profitability stages, and has entered into an initial growth phase with at least a modest level of consistent ongoing profitability achieved:

• A conservative model,
• A normative model and
• An aggressive model.

And to be more precise, I started this line of discussion with a categorical consideration of what types of funds, as identified in an accounting ledger would even qualify as potential profits according to each of these three models, with that accompanied by brief notes as to at least case-in-point examples of the types of businesses that might pursue each of these three approaches.

My goal for this posting is to continue to expand upon my Part 20 discussion of this set of business model understandings, by more fully exploring the issues of:

• Timeframes that they would play out in, and
• Levels of funds that might be withdrawn from a new business, when profit taking would make sense in them,
• And still meet business model-consistent due diligence requirements as would be set according to these business development models.

And I begin addressing those points with the question of timeframes, and how long a new venture has to show consistent monthly or quarterly profitability for it to be judged to have safely, formally left its early (pre-profitability, but revenue receiving) stage and to have entered its first early (reliable profitable) growth stage. Note: monthly, and quarterly timeframes are the usual gold standard intervals for financial reporting, in accordance with more common internationally agreed to Generally Accepted Accounting Principles (GAAP) requirements, and certainly where I have worked. So it is important to track performance according to these timeframes and certainly for reporting purposes. But for effective business development purposes, it is important to track performance to a granularity in time, that you find the most effectively informative in your planning and execution too – and even if you do more formally report business financials on a more standard monthly and quarterly basis.

These orienting notes bring me to a crucial question, that addresses what would enter into timeframe determinations here, and regardless of how or how often a business’ financials are monitored in a more strictly actuarial sense. And this question holds significance for all three of the business model approaches under consideration here:

• What are the key factors that have to be tracked for their impact on a business’ finances, from a risk management perspective, in determining when it has transitioned into an early growth phase?

A business’ financials per se are measured and assessed in large part in the basis of their internal bookkeeping records, and on measures and metrics that would go into them – and most commonly according to GAAP and related standardized accounting practices. And the most common circumstance in which more strictly external considerations would routinely enter in there, come from performance comparisons with “similar” businesses, as would be cited for benchmarking purposes.

I write here, however, of a context where a wider range of external considerations in effect determine the risk management criteria that would be used in making basic business performance evaluations – factors that would contribute to or influence stability and fluctuations in revenue received and funds expended, as they would enter into those actuarial accountings. Internal factors are still important here and particularly where this means how prudently priorities are set for expending available liquid reserves. But at least when you can assume prudent use of available in-house resources, external factors can readily come to dominate the determination of when this business development transition point has been reached. What are those factors?

The key word that arises when addressing that question is volatility:

• How much volatility and uncertainty is there in the marketplace and in market demand for what a business under consideration would offer there?
• Concurrently, how much volatility and uncertainty is there in the supply of raw materials and third party manufactured parts that would go into a business’ products, or that they would require in order to manufacture? This last point can mean tools and related items that do not end up in the finished products that are shipped out but that are required to produce them (e.g. injection moulds and other items when required.) The idea here is to include as full an inventory as possible of what is necessary to bring in-house in order to manufacture, ship and sell.
• Both of the above bullet points present sources of business expense that would draw down upon any available liquid assets, and both represent sources of business need that would ideally be met in as stable and predictable a manner as possible, and according to as reliable and predictable an ongoing timetable as possible. And this applies both to seasonal and seasonally shifting sales and purchases, and to steady year-around ones. Here, the antithesis of volatility is predictability and stability. (Note: I include lower than expected sales here as unexpected expenses, as sales that cannot meet expenses lead directly to loss, and to loss that can easily become unsustainable when they are faced before any real reserves can be built up.)

I only offer two vaguely stated, generic questions there, in my first two of those bullet points. Specificity is vitally important in this type of analysis, and that means you’re asking what factors would be most important to your new business and you’re explicitly taking them into account here. Let me give a working example to take that out of the abstract.

You have a new business that seeks to produce and market a line of gourmet condiments. And your product line prominently includes specialty citrus based jams and marmalades and the like (such as your special family recipe orange pomegranate preserves.) Weather, and particularly weather in the key citrus producing market that you have planned to buy fruit from, is going to be a crucial consideration for you here. And that is certainly going to hold true and as a major consideration for you, if there are prospects for crop damaging freezes affecting your preferred growers, in your first planned year for producing these products for market – where you might be able to buy from elsewhere but where that would mean significantly higher costs to you. Increased expenses to you, might or might not increase the price that you would have to sell at, depending on whether you could cut costs elsewhere in your business to compensate. But they would almost certainly change when you could safely conclude that your business has become consistently, reliably profitable as a risk management consideration.

• I have been focusing on a relatively narrowly defined aspect of overall business models per se here. But I switch directions with this example and this bullet point comment on it, to point out that knowing where you have to look for volatility and for potential volatility here, means thinking through your entire business model and in detail, and from an explicit risk management perspective.

With this general framework of understanding in place, I am going to turn next to consider the three basic business model approaches themselves, and how the issues that I have been discussing here in general terms, play out in them. I will at least begin to do that in my next series installment. Meanwhile, you can find this and related material at my Startups and Early Stage Businesses directory and at its Page 2 continuation.

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