Show Me The Money


Written on June 30, 2010 – 11:47 pm | by Michael Harris

             [NB: Swearing at the end]

Nearly everyone with the slightest interest in going into business knows that they need a well-written, well researched, well considered, business plan. But there is this one pesky section that some entrepreneurs and new business owners often do not give enough importance to: the financial forecast. Your business plan is that all-important document which acts as a roadmap for the future of your venture and is the first thing a bank or a potential investor will request when contemplating investing in your endeavour. It naturally follows that your potential lenders or investors – who are debating whether or not your company is seaworthy enough to put their money on the line with – will be rather interested in your company’s financial forecast and plans for the future.

That being said, there is often plenty of speculation on the part of the entrepreneur about the worth of including a financial forecast in their business plan. This scepticism generally stems from the question of accuracy, or to be more precise the question of how accurate the financial forecasts of a new venture could possibly be and whether or not these semi-guessed estimations are truly relevant and worth the effort.

It must also be said that the confusion about the importance of financial forecasts is not always solely due to conjecture about its worth; those who are not necessarily financially-minded may simply be confounded by how and why to include something that some might deem to be little more than guesswork.

However, while the numbers in your business plan may be estimated and assumed, they certainly are not simply guessed at or made up. They need to be well considered, researched and justifiable so that they will stand up to any reasonable scrutiny. And, if it just so happens that your current forecast really is comprised of a bunch of made up numbers, you might want to rectify this before submitting your plan to potential funding sources.

Keep in mind that your potential investors will use your business plan as their primary tool in weighing up the risk of investing in your company. You want to ensure that you look good on paper, but you also want to make sure that your figures are as accurate as possible. Now, when it comes to a financial forecast accuracy is decidedly relative, but you absolutely must be able to support your estimations, and your numbers must be able to stand up to questioning. When you accomplish this, you will be in a solid position to win confidence, win finance and start down the road to success.

The financial projections in this section should include a profit and loss forecast, cash flow statements and a sales forecast. Investors know that many entrepreneurs and new business owners will overestimate their sales potential which is why they often ask numerous searching questions to establish the validity of the figures – they will then take these answers into account when reviewing a business plan.

Now, while optimism is clearly one of the things that have gotten you where you are today, your potential funders will need to see that you also have a realistic streak. A good rule of thumb is to include three sets of figures within the forecast in your business plan. The first showing an optimistic view of your sales, the second a realistic view and the third a slightly more pessimistic view. This kind of honesty and acknowledgement of real life potential issues can go a long way to winning the trust of your potential investors.

Most importantly, you need a business plan that has an accurately estimated financial forecast where every figure is qualified, that you fully understand and that can be shown to potential funders. Whether you are presenting your investment opportunity face to face with your bank manager or in a pitch to potential investors, they will always have to answer questions about your expected turnover and profits. All too often entrepreneurs flounder over the difference between net and gross, turnover and profit, or simply knowing their figures. Excuses like, “I didn’t prepare this, my accountant did” or, “I’m an ideas person not a finance guru,” will not cut it in these meetings where they expect any entrepreneur to be able to multi-task at least to the extent of understanding and being able to justify the figures in their business plan.

If you have been on the fence about whether or not to include a financial forecast in your business plan, it’s time to climb on down to the side that knows just how important these documents really are. Besides, this side of the fence is where all of your potential investors are standing and, if they are considering investing in your company, they will be delighted that you have decided to join the party.

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