If you want investment, you need to learn investor-speak.
Entrepreneurs come up with gazillions of great ideas every year. They all require financial, as well as human, capital to become successful businesses. Obtaining that financial capital is one of the biggest challenges of being an entrepreneur.
So why do some ideas get millions of dollars of investment, and others get nothing?
One part of the answer to that question lies in how you present your financial forecast to your potential investors. You need to present a compelling financial case for them to invest, just as you present a compelling case for the need for your idea and the likelihood that it will achieve market acceptance. Your financial forecast should have enough specifics to be credible but not so much information that your potential investors lose interest in as they wade through spreadsheet after spreadsheet. The numbers you present must comply with generally accepted accounting principles, because one day you will have to compare your actual financial performance to the forecasts in your pitch packet. That should be an apples-to-apples comparison.
How much financial information is enough? What is too much?
As a potential investor, I want to know what you are going to do with the capital I give you, and what I can expect to receive as you use that capital to turn your idea into a business. I don’t need to know the details of how you are going to spend every dollar.
Start by thinking about your business. Which activities are critical, and how much revenue will they generate? I suggest grouping the critical activities the way you will manage your business and then preparing your financial forecast using those categories. As a rule of thumb, if an activity is not going to require more than five to ten percent of your expenditures, or if it is not going to generate five to ten percent of your revenues, it probably doesn’t need a separate line in your financial forecast. Instead, lump those expenditures or revenues together with a similar category.
Make sure your financial forecast is on solid ground
Do not assume that cash coming in or going out of your business will result in revenue or expenses, respectively. When it comes to financial reporting, accounting and cash flow are very different things. Your potential investors will want to know your forecast for both. They will be the first to point out the errors of your ways if you tell them they are going to be the same.
Revenue is a particularly challenging and important number in your financial forecast. Make sure your financial advisor knows how your business should recognize revenue in accordance with generally accepted accounting principles, and prepare your forecast on this basis. If you and your financial advisor aren’t sure, seek professional guidance from a CPA who has other clients in your business.
Presentation can make all the difference
One of my pet peeves is financial forecasts that supply exact dollar amounts (e.g. $169,478 of marketing and sales expense) out into year three. If you are that good at predicting the future, you should probably skip going into business and just predict the future for a living.
Rounded amounts (e.g. $169,000) give your potential investors all the information they need and will help them stay focused on the big picture. I would also avoid truncating your financials ($169K or worse yet $.169M) in the early stages of your business and capital raising. Truncating will come later when your sales and operations are so large that the amounts no longer comfortably fit in your financial results.
Forecast a reasonable profit within a reasonable period of time
Potential investors are expecting to earn a return on their investment. They are taking a risk by investing in your idea and they expect to be rewarded for doing so. If your financial projections do not show revenue growing faster than expenses after the initial start-up phase, you probably should re-think your business model.
On the other extreme, the “hockey stick” growth curve is tough to achieve and most likely not realistic in today’s economy. If you are projecting hockey-stick growth, you will need to be prepared to defend it with very convincing and reliable market data. Remember, you are starting or growing a business, not a charitable organization. That means you should be forecasting a reasonable profit within a reasonable period of time.
Make sure it all syncs
Finally, make certain that your financial projections are in sync with the language you use to describe why an investor should give your idea serious consideration. If you say that there is a huge market for your product or service, your financial projections should show that you are going to capture a reasonable share of that market over time and do so in a way that provides capital for future investment and provides a return of capital to your investors.
After you finish your financial projections, put them away for a day or two and then take them out and look at them without the rest of your pitch packet. Do your financials tell potential investors what you are going to be doing and how you are going to do it? Do they present convincing evidence that will entice an investor, or do they just raise a lot of questions as to what your business model is all about? Hopefully they are convincing, not confusing, and will add to the excitement your would-be backers already feel.
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