You Don’t Need an LLC, You Need a Forecast

The first piece of advice we usually see on social media when someone is starting a business, is to go form an LLC.

Please do not do that.

The first thing you should be doing is to test and see if your business idea is viable.

This is done with a financial forecast (which is a component of a larger, overall business plan). We always start with the forecast because if the forecast doesn’t make sense, there’s no point creating a business plan.

A financial forecast is a projected model of what your business looks like in the future. Basically it’s creating a “future” profit and loss statement based on assumptions of your business model. These assumptions are things such as - the price of what you’re selling, how many you’re going to sell, and the cost to sell it.

The forecast is important because it helps test the reasonableness of these assumptions.

Let’s say you want to sell a product for $10.

The cost for you to make it is $5.

You want to profit $10,000 per month.

A financial forecast will help show you that in order to do that (assuming you have NO other costs associated with your business, which wouldn’t be true but let’s keep it simple) you would need to sell 2,000 products a month (or 67 a day).

Given the market and what you’re selling, is that reasonable?

Let’s say no, but selling 1,000 is. Then you know to get to that $10,000 mark, you either need to raise prices, lower costs, or a combination of both.

Once you create a financial model that is reasonable, THEN it’s time to start actually setting up the business legally. The cool thing is once you launch your business, you an actually compare what’s happening with what you projected, and continue to make adjustments accordingly. When you get to that stage, we call this a “rolling forecast”, meaning each month you’re updating your forecast based on new assumptions or information you have from operating the business.

From that, you can then make strategic decisions within your business. Maybe you’re only moving 500 pieces of product a month, would investing in some advertising help? Maybe one type of your product far outsells other types, should you focus on just selling one product?

Maybe you’re now selling 1,500 pieces of product a month, do you want to expand and hire an employee?

What does that do to your profitability long-term?

Your business is just a math equation needing to be solved.

The key is figuring out the correct variables to get to the answer you want.