FolienKnecht – a case study (b)
Business model testing (Is it profitable? Is it scalable?)
Regular checks are important for a start-up. Have your previously set goals been reached and if so, can the business be scaled further? We usually measure the scalability by starting with relatively small trial cases that cover a broad range of marketing measures. Can we generate sales through Google Adwords, mailings, e-mail marketing, tele-marketing, direct marketing events or any other method? If there are a couple of measures that allow us to generate sales with a positive return e.g. if we spend 50 cents we can generate 51 cents in revenue we know that this potentially could allow the business to scale. Once we have found a method that seems to work, we scale the test case – if we can generate EUR10,000 in revenue by spending EUR500 through adwords, could we also generate revenue of EUR100,000? As an eCFO you need to push this test case as quickly as possible to make sure that the business model actually is sustainable and has significant revenue potential. If not – kill it quickly.
eCFO Tips: Make sure that management teams can differentiate between expenses and investments. In our company everybody gets a VOIP phone installed on their computer and uses a headset for calls. We do not have actual phones anymore. Nevertheless, the FolienKnecht team requested to spend EUR40 for an actual phone – it took a long discussion for them to convince me that this was a necessary expense and approval took a while. At the same time I suggested that they should get together with the city of Hamburg and sponsor a networking event. Sponsoring fees here were a small 4 digit amount and they asked why I did not have a problem with such a comparatively large amount, versus all the hassle for the EUR40 phone. The answer is easy – for a start-up it is essential to spend money on the RIGHT things not on those that are nice to have. As an eCFO it is your responsibility to ensure that this principal is actually enforced and that every expenditure is measured.
Investments and financing
I admit – this is a special case since FolienKnecht is a services business, a powerpoint designer, which can grow through its own cash flow generation ability. Therefore, I just needed to make sure that I fully understood the cost structure and what was needed to bring the business to break even cash flow generation without raising significant capital. As with most agencies it is possible to grow with this easy formula: “one employee needs to generate enough cash to pay the salary of two, two for four, four for eight and soon growth is possible”. In addition, your cost structure will mostly consist of salaries and some marketing investment but both cost items should quickly generate revenue. What is more important is that you create structures that are highly efficient and streamlined for cash generation.
For any other type of venture that require significant start-up capital I would suggest that you calculate your financial needs, then add 30% of that total to your numbers and you are good to go. Once you have determined your financial needs, raise a little bit of capital yourself and build a prototype. Investors are much more likely to give you money (even for a higher valuation) if you can show them a working prototype vs. a slide presentation with nice ideas on it.
Overall, I hope that these posts provided some operational examples of how to implement the measures I described in previous posts. As always I am looking forward to receive your feedback and comments!
FolienKnecht – a case study (a)
Enough of all the theoretical posts! Here is a more interesting, operationally focused case study. I think that my previous posts have theoretically highlighted various aspects of being an eCFO but what does it mean for operational reality? In order to further highlight this I was able to get permission from one of our venture teams to write about them in this post.
Here a quick description of the business model:
FolienKnecht (German for “PowerPoint slide servant”) is focused on providing high quality outsourcing services. Its first line of business is creating, designing, and improving PowerPoint presentations. (www.folienknecht.de; Spanish: www.ppt-express.com)
Its second business line has recently gone online with a video creation/design offering (www.videoknecht.com) and it also provides a range of other outsourcing services through www.165euro.de. The business was initially tested through an intern and eventually bringing it into fully operational mode through incubating it within our company (www.etribes.de).
Timeline of development
FolienKnecht was incubated in the beginning of January 2012. We found a very capable management team consisting of two guys. One is the intern who developed the project and the other is an experienced entrepreneur. Both were willing to take this project forward with the eventual goal of founding a company and creating a business outsourcing company with multiple revenue lines from various business services.
Operationally, they received support from our incubation structure but this case study will focus specifically on the financial aspects. If you are interested to read a case study from another perspective you can find additional insights (sorry, in German only) here: http://www.kassenzone.de/2012/05/30/powerpoint-malerei-outsourcen/
eCFO tasks for a new venture
As the eCFO in our holding company it was my responsibility to take care of the financial aspects. In this role I helped the management team to develop a strong financial understanding to ensure that the company eventually developed into a financially strong independent entity.
Team
Within the team responsibility was shared between the two founders. In start-ups everybody does a little bit of everything to make sure that things get done quickly. This is necessary and a good starting point but fairly quickly set roles should be developed. I asked the founding team to provide only one contact point for all financial questions, analysis, and data points.
Basics
Our incubation services take care of all central basic services. This ranges from office space, to laptops, water/lots and lots of coffee and other basic things you need to run a business. In addition, we take care of central services such as accounting, HR, recruitment, and legal consultation. These services are initially provided free of charge to speed up the incubation process. However, it is important to make sure that the entrepreneurs are aware of the actual (expensive) services the venture incurs. The company therefore needs to track these expenses and needs to start to implement liquidity controls, budgets and financial planning. This is best done through an Excel spreadsheet that mirrors an actual P&L statement.
Controls
Initially, we determined the basic costs incurred by running FolienKnecht and set clearly defined goals we needed to reach in order to move all activities from our incubator into the new entity. Spreadsheets and preparation of financials are also important controlling functions. Here it was important that once a clear goal had been defined, the necessary measures were put into place to ensure that it could be tested on a monthly basis whether or not the venture was successful. We came up with a simple P&L statement that showed expenses, income, and sales funnel in an excel spreadsheet. This is a quick, slightly dirty, way of preparing the necessary financial information. In addition, we provided access to our billing software so that every bill can be generated by the management team but, more importantly, so that they can understand payment cycles and all connected liquidity concerns. If you are incubating a business within an already existing structure, you need to make sure that from the get-go the management team feels the same constrictions and problems it would feel as an independent business.
eCFO Tips: Especially in a start-up environment do not get bogged down in the details. If you are looking to establish financial goals do not say EUR9,287 because your business plan spits out that number – instead just define easy to remember goals e.g. we need EUR10,000 revenue per month with at least 30% EBIT. Do that for 3 months in a row and this business starts to be viable. This is an easy rule for not only you to remember, but it also sets a financial target the management team can work towards.
To be continued in the next post …
Here you can find an example of their work:
FolienKnechte
eCFO news for start-ups! 