Self-made millionaires tend to look at business initiatives very analytically. They strive to make thoughtful decisions about how to maximize the value of these enterprises, aiming to accrue more wealth. Their decisions tend to be part of a carefully crafted strategy, buttressed by a deep understanding of economics.
In contrast, many financial professionals are considerably more likely to get too caught up in the potential upside of their business endeavors. Consequently, it’s highly likely these projects won’t deliver the anticipated outcomes. What’s missing is some educated guesswork based on a solid logical foundation—simply “running the numbers.”
A written pro forma should be part of any business decision, whether it be taking on a partner or taking on a new venture. The same goes for marketing initiatives, such as a program to cultivate centers of influence. A set of financials needs to be calculated to help drive the endeavor.
A lot of professionals, however, are uncomfortable with developing pro formas for every business decision. Nevertheless, this is a skill that needs to be mastered—or obtained through a hired staff person—so you can dramatically increase your chance of becoming very successful. Constructing pro formas is made easier by following four guidelines:
• Never fall in love with a business initiative. “But it’s my baby.” I’ve heard this phrase many times. When the strategic and financial returns are not there, the business initiative should be dropped—fast—no matter how dear the venture may be to your heart. Many professionals fall in love with their ventures and stick with them even as they’re going over the cliff.
• Work the assumptions. Spreadsheets show the relationships between numbers. A competent MBA student can come up with any answer the professor wants. Self-made millionaires usually understand the importance of financial projections tied to business initiatives they’re exploring. Underlying every financial projection are assumptions, and astute self-made millionaires spend demonstrably more time and effort working through various iterations of these assumptions.
• Justify your assessments of various scenarios. Self-made millionaires are amazingly adept at logically justifying their assessments. Even when pushed, they can usually explain with considerable precision and accuracy just how they came to their conclusions.
• Rerun the numbers. Self-made millionaires readily recognize that changing circumstances will impact projections and the viability of business initiatives. They understand that the only constant is that circumstances are always changing. Hence, self-made millionaires tend to be constantly updating their estimates and projections.
Just as constructing pro formas can be very useful in providing direction concerning business development activities, they can be also highly insightful when it comes to any business initiative. All business decisions can probably be improved by running the numbers.
