A client recently came to us, after setting up a new project. He is in a tight spot. The actual results are far far away from the projections that were made in over enthusiastic zeal. And today he is worried. There is no working capital to fund the initial losses, nor does he have funds to make the necessary tweaks to the project.
This is what went wrong:
- The projections were made without any scientific basis. Simply because I am offering a product does not mean I will be able to sell. Even assumption of 10% capacity utilization can be wrong if demand is 0%.
- No sensitivity analysis was done to test the product if one or all assumptions did not work out as projected.
- The Entrepreneur himself had no experience about the new business that he was starting. He did not do sufficient homework.
- Even the investors that he roped in, (who happened to be his friends) did not grill him about the various assumptions that were made.
- He did not leave sufficient room for flexibility in the project. Entire 100% project was implemented based on personal fancy without any market survey.
- Pricing in a Tier 2 city can be different from that in Tier 1 city. People might not have the ability and/or the willingness to pay the price that people in Tier 1 city pay.
However, the fundamental mistake was NOT having a business auditor who would question him. Just because you are the owner does not mean that your decisions cannot be questioned. Many times asking the right questions is more important than knowing the answers. If you cannot ask these questions, then better engage a professional and give him the right to question your decisions.
aipichai.wordpress.com 