- Before developing your financials, do pause and reflect about the important financial metrics you would want or need for your project.
- It is common to develop financial projections that are pure fantasy and it is recommended to spend time on high level understanding of what key variables influence the financial outcomes and why, and not in developing detailed financials.
- It is recommended to build a high level model of the key financial metrics, with clear emphasis on "assumptions“, logical connections and how both get tested and validated over time.
- Innovation projects in early phases are all about discovery and learning. As the IoT-EPI projects are at an early stage, with customer discovery still ongoing, the financial outlook can only be a set of very rough assumption based financial projections.
- Most available financial templates do not enable this high level planning, where it is most important to understand the key drivers for financial outcomes and "ball park“ them, i.e. estimate the level of magnitude.
- As the overall business model develops - like the determination how revenues are achieved or the magnitude of the key cost drivers change - these detailed assumptions are much less important than the large changes driven by business model developments.
- In addition, as the business model becomes clearer, based on more and more customer feedback, these rough estimations get better and better too.
What are these key financials?
- Revenue Streams: Key products or product families offered, pricing and expected volumes sold to which customer segments, expected year-on-year growth
- CAC or Customer Acquisition Cost: How much it costs to win a customer, and how much revenue a single customer generates (CLTV or Customer Life-time Value).
- Costs: the key cost components and their drivers, the fixed and variable components, and their change over time. All of these estimations help in calculating your break-even and Profit Margin.
- What investment is needed to develop, maintain and grow the offering and win customers, in terms of money, time and resources, or in other words when do I need how much to establish this business model.
- The combination of investment and profit margin results in metrics like Return on Investment (ROI), Payback Period etc.
- You can put a simple table together that summarizes these financial metrics, but understanding the underlying assumptions, and how these get tested and validated over time, is crucial for this to work.
Financial spreadsheets are valuable tools to manage business execution. For business discovery, they are only "a set of dreams“. Only financial models enable to understand the financial implications of business models. Together with scenario planning and other sophisticated tools, financials can be used to "pressure test business models".