Recently an entrepreneur was asking me how detailed I like the standard financial planning spreadsheet for a new business idea. Immediately I replied that I don’t usually do spreadsheets for new software ideas. Instead of spreadsheets with detailed financials, which I really like once the business is operating, I prefer to think through the financials of the new idea with big round numbers. Big round numbers make it easy to see if the idea is financially feasible, knowing that there will always be variations with the numbers in the real world.
Here’s an example of thinking through an idea with big round numbers:
- Software-as-a-Service (SaaS) application that costs between $250/month and $2,000/month with an average of $1,000/month
- Year 1
10 customers @ $12k/year = $120,000 revenue
- Year 2
35 customers @ $12k/year = $420,000 revenue
- Year 3
83 customers @ $12k/year = $1,000,000 revenue
- Year 4
166 customers @ $12k/year = $2,000,000 revenue
Assuming a SaaS company with 80%+ gross margins, typical hosting costs, and other normal metrics, if the product can be sold for $1,000/month, everything checks out as a viable business. Big round number aren’t as desirable for businesses with more complexity and sophistication but they work well for many tech companies starting out.
What else? What are your thoughts on spreadsheets vs big round numbers for startup financial planning?