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TL;DR

I have been tasked to reevalute the possible financial potential (and by financial potential I mean possible cash-flow, profit, return of investment) of the startup I work in as an R&D engineer. My question: how does one go about doing it? Any tips and strategies would be very helpful.

A more detailed description

I am an R&D engineer in a small startup of 4 people. I have been with the company for more than four years and haven't been doing any finance related work in my life (I'm 26, if it is of any relevance here). Recently I have been tasked with reevaluation of financial potential of the startup (and again, by financial potential I mean possible cash-flow, profit, return of investment or other relevant metrics). Although the analysis will be beneficial to us, the main purpose to do it is because I'm being sent on a business trip next month. During the trip I will be presenting our business model to potential clients and investors. To be more specific, the task includes devising possible optimistic, realistic and pessimistic company growth scenarios. This information will be used in two ways: 1) internally within the startup, 2) during the above mentioned trip. Let's also assume that any finance related information about the company will be available to me.

Questions:

1) How do I go about evaluating (in terms of strategy) current and possible future financial state of a startup?

2) What are the most important things I should consider?

3) How do I get best accuracy in my assumptions?

Ideally I am looking for an answer from an experienced person (someone, who has been doing something similar to my task).

I also apologize for my lack of knowledge in finance terminology. However, I hope the question is clear.

  • Watch a bunch of Shark Tank episodes. – Mattman944 Nov 10 '19 at 14:32
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    I'm voting to close this question as off-topic because it does not relate to personal finance. – Rupert Morrish Nov 10 '19 at 20:47
  • Voting to close as too broad because any useful answer will fill a whole textbook. – Money Ann Nov 10 '19 at 22:17
  • Why are they getting an R&D engineer to do this? Your only hope is to talk to the people in the company who actually have the information you need. – Simon B Nov 12 '19 at 23:07
  • You're an engineer, you google how to do things just like everything else :) – xyious Nov 14 '19 at 20:30
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1) How do I go about evaluating (in terms of strategy) current and possible future financial state of a startup?

You don't. You lack the experience and knowledge of business history to be able to frame outcomes. For example, the inventor of the FM radio died in poverty because RCA records, which owned the patents on AM radio, used its power to work daily to destroy him. It even caused multiple congressional hearings to be created to destroy him. You also do not know the historical accidents that made Microsoft the mega organization that it is. You are also missing the history of the majority of historical businesses in that most businesses fail. You do not know how much you do not know.

It would be like an accountant asking, "what do I need to know to design my own computer chip or build a damn across navigable water. I have a month." You are missing too much.

You should seek out someone who is very experienced so that you can describe what you are doing, and they can push back at you. Even if you were a 26-year-old accountant, I would tell you that you do not know enough.

You also cannot hand this off to an outsider. It is the interaction between the principals and the experienced consultant that will work out the answer to this.

2) What are the most important things I should consider?

If you can answer EVERY question in The Entrepreneur's Guide to Preparing a Winning Business Plan and Raising Venture Capital by W. Keith Schilit, then you have your answer. If there is ONE missing question, then you are not ready to start.

It is an old book, but it has an immense advantage over new ones. You cannot use the Internet, copy or paste into it.

3) How do I get best accuracy in my assumptions? This is an ill-posed question. Let me give you an example. If you assumed ten thousand people would buy your object, then it doesn't follow that this is similar to an assumption that you need a circuit that will carry a particular load of electricity at a specific voltage. They are not of the same type at all. They require different qualifications to assess. They also may carry different consequences to the firm.

What you need is a lot of highly qualified feedback. Start, however, with the book in question two. It will expose to you how much is being assumed. It will also expose to others how much you think you know but do not know.

Overnight the book to you. Sit down with the principals and hash it out. Unless all you are doing is the marketing of a product, you do not want this to be rosy or pessimistic.

If you came to me as a venture capitalist and gave me a rosy picture, I may well say yes if I believed you were being rosy and optimistic if I thought it may not go badly. But I would put in two provisions.

The first would say YOU MUST DO AT LEAST AS WELL AS THE PLAN. In other words, I would make you execute it word for word.

Second, if you fail to execute with the outcomes you promise. I get to take the business away from you. I also get your house, your car, all your money. You can keep a minority position in the firm. You will continue to work on salary for me, and I basically get all your stuff.

You do not want to make yourself look any better than you really are or someone will hand you a contract that says "I promise to do all of this." They will make you put your money where your mouth is.

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You need to create a business plan. That involves analyzing and quantifying quite a few different items which are very complicated. If you don't have any previous experience or education on this type of work, you should refuse doing it. If you show up in front of potential investor or client with a half baked or amateurish business plan, you will do more harm then good.

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Consider four levels of result as cash-burn, revenue, free-cash-flow, and income. Then set the company at the highest level that it reaches.

If the company reaches "revenue" then it has a price-to-sales ratio or if the company reaches "income" then it has a price-to-earnings ratio. Then the obvious question is "price" as what is the company valued at ? For instance a company is usually valued at more than "book value".

A company might be valued among negotiators as some-number-of-years times yearly-earnings. But then consider "earnings growth" from one year to the next.

A "debt-to-equity" ratio might not be needed since a book-value has already been determined. But "number of outstanding shares" is needed if per-share calculations are wanted.

Oh, free-cash-flow without net-income could mean that the company has some amount of non-cash expenses. "Goodwill" could mean that something like a website, software, leads, trademark, or patent has been given a significant value but the goodwill must have an annual depreciation which is a non-cash charge on the income-statement. Or a major purchase would take cash from the balance-sheet but put an item of value on the balance-sheet. So the major purchase must has an annual depreciation which is a non-cash charge on the income-statement.

Tax forms account revenue and expenses to calculate net income.

Of course a company has a "balance sheet" for book-value and an "income statement" for net-income.

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