Everyone’s favorite part of the business plan is the financial section. Okay, not true. Really the only people who enjoy creating financials are quaint jocks. But it is the favorite section of the venture capitalist who wants to know if he can get a return on his investment and the loan officer who wants to be assured that the lent funds are going to be paid back.
When I review a business plan for funding, I always look at the financial statements first. It’s very easy to see if the person has no clue as to what they are doing by looking at the statements. The corollary is not true… meaning just because the financial statements are complete and rational the person doesn’t necessarily know what he or she is doing. That’s why the plan is longer than just three pages.
How to show that you have no clue as to what you are doing
Revenue grows at a 45 degree upward angle from day 1… and ends at $50 million in year five. (The rumor is that VCs expect $50M by year 5. Don’t be fooled, VCs expect that you have a good business plan, can execute well, and have a large market).
Your expenses could not support any business, much less a high growth business. Have a good understanding of what your expenses will be. Recognize that if you hire people, you don’t just have to pay salaries, but taxes, health insurance and other benefits, workman’s comp, and each of these people will need some square footage, a desk, a chair, a computer, a telephone, an internet hook up, etc. You will need to hire lawyers, accountants, and possibly other professionals. You will need to market your product in some way.
Your balance sheet is a mess. It doesn’t balance. You have no accounts receivable. You don’t take into account accumulated depreciation into your PPE purchases. (That’s plant, property and equipment.)
You neglect to have a cash flow statement. Your cash flow statement doesn’t tie into your balance sheet or income statement. You have revenues misclassified as investment (ie counted twice). The cash at the bottom of your cash flow does not match your balance sheet.
How to at least get past that first hurdle
Develop a realistic revenue model that you can support through your operations and sales plan. If you have to build a manufacturing facility or even outsource manufacturing, it may take some time before your products are ready for sale. If you are selling into someone else’s manufactured product, understand how they buy. You may have to wait an entire cycle before you are able to sell them one product – that could be 18 months.
Develop a realistic set of expenses. Look at public companies that are doing similar things, your expenses should fall within a reasonable range of theirs. If ten companies in your industry spend 15% of revenue on marketing, you will have to have a good explanation for why your marketing costs are only 5%. Additionally, in the earliest stages, your G&A expenses are likely to be higher.
Understand the payment patterns in your industry. If it is standard for customers to pay 60 days after receiving an invoice, it is unlikely that you will be able to convince your customers to pay upfront.
Make sure your financial statements are put together correctly – balance sheet balances, cash flow ties in with the balance sheet and the income statement. This is a skill just like fixing your car. If you don’t know how to do it, do bluff – hire someone to build the statements for you. This does not have to be an expensive accountant or consultant. You can probably find a local MBA finance student who can do it for you as long as you provide the appropriate numbers.
Having a clean, realistic set of financials is a lot like wearing a business suit. It won’t get you a loan or an investment, but it makes sure you don’t get kicked out the door before you even get the chance to pitch.
