Ask ten investors what the most important section of a business plan is, and you are likely to get back a variety of answers. For some, management team is the section to which they turn first. Others begin by reading about the market opportunity and your proposed solution to determine their level of interest. While others take a more holistic approach and claim they focus equally on nearly everything in the business plan. There is no “right way” or consensus on how to review a business plan, this certainly makes sense.
I recently sat down with an investor who spoke to me for nearly an hour about his approach, which is to first read the executive summary, and then spend a substantial amount of time studying the financial plan and projections. His contention was that because everything in the business plan ties directly or indirectly to the financial projections, it is a great place to start. From there, you can work backward to parts of the business plan for which you need clarity and additional detail.
Is this approach the correct way? For some yes, while for others probably not. But it does emphasize one important point. The financial plan and projections aggregate data from every part of your business plan so be sure you don’t ignore them during your business planning process.
So what should be included in the financial section of your business plan? Your goal is to clearly and concisely describe your current financial picture, your projections for growth, your funding needs (how much, when, and for what purpose), and how you intend to pay the capital back.
Your business plan should provide the following financial information:
- Historical Financial Statements, if appropriate
- Income (Profit and Loss) Statement for 12 Months as well as for 5 Years
- Balance Sheet for 12 Months as well as for 5 Years
- Cash Flow Statement for 12 Months as well as for 5 Years
- Financial Assumptions (this is the key!)
- Break-Even Analysis
- Sources & Uses of Funds (how much cash do you need and how do you plan on spending it?)
- Sensitivity Analysis showing Pessimistic, Planned and Optimistic scenarios
- Capitalization Table (how the shares of stock are allocated)
- Identify potential sources of funds
- A projection of your company’s value after five years is also very useful
Be sure to provide your reader sufficient detail on your revenue model. You can do this one of two ways. First, you can estimate the total size of the market you want to target and then estimate the share of this market you want to capture. This is commonly referred to as a “top-down” forecast. Second, you can identify the customers you want to target and then estimate the revenue you will generate from each of these customers. This is commonly referred to as a “bottom-up” forecast. Best case, is to take a look at your revenue potential from both directions, and then work to merge the two into a conservative, yet realistic revenue forecast.
Yes, financial projections are simply a guess. But, if you have done your homework and can back up your financial model with sound assumptions and reasonable analysis, you may be on your way securing the capital you need.
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