Enron Financials

After going through many business plan presentations, watching the presentation of financials by different teams can be a spectator sport. Most of the time, their financial assumptions and cashflow managements can give you a good ride for humour. By looking at the spreadsheets of how the teams break down their numbers, you can tell how realistic and pragmatic they are through handling investments. So, here are a collection of snippets which I like to share about what I called “Enron financials”.

Good Businesses are about Sensible Numbers and Facts

By the way, most investors are former accountants or bankers. If there is one thing which you don’t want to screw up, it is the financials section. Numbers are the easiest way to tell whether an entrepreneur is sensible or not. In fact, the reality in business is to make money, and if you cannot explain how you make money, please start applying research grants for your idea. If you come up with wrong numbers to support your claims, your credibility with the investor is gone within the first moment you share with him or her.

In a business plan, the financials section will contain three things:

• 1. Financial Assumptions: How many units of the product or service you are making? How much is one unit product or service? What is the cost price to manufacture one product or create a service? What is the selling price of the product and the service? How many customers are you reaching out to? Are you targeting a general market or a specific niche market? How much do you need and what is the breakdown of the money required for your investment?
• 2. Financial Projections: What is your return of investment (ROI)? What is your pre-money and post-money valuation? What is the company’s EBITA?
• 3. Investment and Equity Options: How much equity would you be selling for the money that the investors bring in?

Numbers are very important, yet some entrepreneurs can make such ludicrous statements or silly innocent mistakes:

• 1. We are targetting at the 8 billion customers out there: Take a step back and ask yourself, are there really 8 billion people on earth? The last time we check is about 5-6 billion. How did that extra 2 billion came in, via outer space? It is not funny when entrepreneurs bring out numbers which don’t make sense. For example, you can’t be selling 4.6 million computers to 4.6 million Singaporeans and be claiming that that as a market. You need to make sensible numbers.
• 2. Our company is valuated at S$100M: That’s another outrageous claim. To date, most companies in Singapore that succeed at least in getting some investments and having sensible returns, are usually valuated between S$2M to S$4M. very few companies can be valuated at S$100M, because Google, Microsoft, and YouTube are rare and far between. Besides, the real reason why the company cannot be valued so high because the market coverage with just Singapore as the test market is too low. After all, we have a very small market.
• 3. We will start production by bringing in the machines within the first 9 months and make profit within the last three months of the year.: It is not practical to assume that the logistics are easily resolved if you are setting up a company responsible for production of a particular product. Even if you get the machines in, your managers and workers will have some time to work on the calibration of the machines. Then, they assume that the production will go smoothly and then the factory can produce enough goods such that they make profit within a year. It is quite unbelievable because most startups usually go through an average of 1.5-2 years to pass the valley of death. Usually, they would wait till the 3rd year to go cashflow positive.

The problem with most people, including the scientists, is that they don’t make very sensible financial assumptions. They don’t realize that 80% of the startups die within the first year because of bad cashflow management. If you don’t start thinking about how you can start creating revenue while getting the business to run, you will run the risks of getting the company destroyed. One will think about the Enron scandal, where the company collapses because of creative accounting and bad financial practices.

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