Logic Must Manage Emotion

February 26th, 2009 by Sharon Larsen

Rich opens Chapter 4: Got Gas? by suggesting that would-be entrepreneurs let logic manage their emotions. 

 

 

Emotion, one of the greatest sources of success for an entrepreneur, can also seriously hinder performance. As excited as you are to take off on your new adventure, you have to do the logical things first. Starting a well-fueled venture requires three steps. You have to file the flight plan, make sure the runway is long enough, and, most important, check your gas tank.

 

I recall speaking with a young entrepreneur who planned to launch a new, progressive technology. Talk about excited—he was like caffeine on steroids! On the verge of quitting his current job, he had convinced one of his best friends to do the same and jump on a plane ride to…well, where was unknown. This new technology needed a year to eighteen months of development time, followed by an intensive, costly marketing effort. I listened patiently, admiring his passion for this venture, and then started poking at him a bit.

 

“What funding do you have available?”

 

“How are you going to pay your salaries?”

 

“How much have you allocated for market penetration?”

 

My questions came like a dagger to his heart. He had not made the effort to measure the required runway, check his gas tank, or even file a flight plan. He and his would-be parachute pal had earnestly worked themselves into an emotional lather, saying, “Let’s do this thing,” and left logic behind. Sadly, the dagger was neither sharp nor penetrating enough. He disregarded my counsel to create even a simple pro forma, figure the cash requirements, or take a quicker path to profitability. Three and a half months later, I received a call from him:

 

“Rich, my family is starving. What can I do?”

 

It was one of the saddest things I have ever heard.

 

Let’s take a moment and pick this story apart. What, specifically, is the flight plan? What is the gas? And what is the runway?

 

  • The flight plan—your basic business plan—includes your pro forma, or your financial projections of what you expect to happen. (This does not need to be a six-month exercise in futility, but a document that fleshes out the basics.)
  • The gas is your cash reserve, used to execute your business plan.
  • The runway is the time needed to realize your business plan, to get profitable, or, at the very least, to stabilize.

 

The flight plan, the gas, and the runway are interrelated and equally important.

 

The pro forma seems to scare the most people. A pro forma is a simple document that projects cash flow, balances, and income statements. You do not need a CPA to create one. Use a basic Excel spreadsheet and simply begin outlining your monthly projected incomes and expenses. Keep it simple, but make sure it is thorough.

 

Here is a sample of a pro forma I have found incredibly useful in my ventures. Generally, I draft three versions: a conservative, a realistic, and an aggressive model of my cash flow. I then operate based on the conservative model. Once you have written a one-year pro forma, do the same thing for three years. You don’t need to spend too much time on this exercise, just enough to get a sense of where you can and want to go financially. Focus on your cash flow. Income statements and balance sheets come in handy for later reviews, but cash is your gas. Track it carefully. Once you begin operating the business, compare your performance against the projections of the pro forma each month (or each week, if necessary) and adjust accordingly.

 

Pro Forma Income Statements – By Month – 1 Year

 

 

 

 

 

 

Jul

Aug

Sep

 

 

 

 

Licenses

 $   -

 $   -

 $   -

Maintenance

   -

    -

    -

Sales

   -

    -

    -

Cost of Goods Sold

   -

    -

    -

Gross Profit

   -

    -

    -

 

 

 

 

Software Development

   -

    -

    -

Salaries

   -

    -

    -

Selling Expense

   -

    -

    -

Office Expense

   -

    -

    -

Other

   -

    -

    -

Total SG & A Expense

   -

    -

    -

Operating Profit

   -

    -

    -

 

 

 

 

Interest Income

   -

    -

    -

Earnings Before Taxes

   -

    -

    -

Income Taxes

   -

    -

    -

Extraord. Item: Tax Refund

   -

    -

    -

Net Income

 $   -

 $   -

 $   -

 

Once you have gone through this exercise, you will have a better idea of how much gas and how much runway you actually need. After all, even the best logic doesn’t do much good without a solid cash reserve and financial plan.

 

Porter’s Points: Logic Must Manage Emotion

 

  • The same drive you need to start your business can run you right into a wall if you forget to meet the requirements of logic.
  • A pro forma is a simple statement that predicts cash flow for one to three years. It doesn’t have to be very in-depth, but it should cover your bases and give you a good overview of your income statements, balances, and cash flow.
  • Draft the pro forma and direct your drive toward that. Rather than a fluffy goal, shoot for something tangible and hold yourself to it.

 

 

The next principle is “numbers don’t lie” – we’ll start next week with that concept. 

 

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