| For most business owners and entrepreneurs, | | | | sure headings, labels, axis tabs, and so on are clear |
| preparing, and communicating the financial statement | | | | and legible. Nothing is better than a great graph or table |
| section of a business plan is like trying to give driving | | | | to convey a message clearly and quickly. But |
| directions to someone who doesn't speak the same | | | | remember, a bad graph or table can create much |
| language. | | | | damage and confusion too. |
| "Numbers" is the language most investors speak. But, it | | | | 6) Check you numbers. |
| is also the language that many business owners and | | | | Like typos, a wrong number can shatter your credibility |
| entrepreneurs don't speak or understand. | | | | instantly. It can cause your potential investors to lose |
| So how do you bridge this gap? | | | | confidence in your ability, or to question your |
| 1) Understand there is a difference between | | | | understanding of the business. Be sure the numbers in |
| "crunching" or preparing the financial statements and | | | | your plan agree to the correct model or version of |
| presenting them. | | | | your financial plan. Verify the numbers in your business |
| Preparing business plan financial statements often | | | | plan agree to all supporting documents. |
| requires expert knowledge of double-entry accounting, | | | | 7) Always include a statement of the sources and |
| taxes, merger and acquisition accounting, and finance. | | | | uses of cash. |
| Skills most business owners or entrepreneurs don't | | | | If you have teenagers, I'm sure you always ask them |
| have, except for perhaps the most seasoned or those | | | | where they're going to spend the money you're about |
| with accounting backgrounds. Presenting the numbers, | | | | to give them, before you hand the money over to |
| however, only requires that you understand how what | | | | them. The Statement of Sources and Uses does the |
| you plan to do translates into cash; and, what the | | | | same for investors. It tells potential investors how you |
| potential financial risks for the business are, and how | | | | plan to use their money. The statement accounts for |
| you'll minimize them. If you cannot demonstrate that | | | | all the money coming into the deal, whether it is bank |
| you understand these, then why would an investor | | | | debt, seller notes, personal cash, cash proceeds from |
| ever give you money? | | | | the sale of stock, and so on. It then explains how you |
| 2) Get help early on. | | | | intend to use this money, whether it is to buy an |
| Okay so you don't have any money to hire a CPA or | | | | existing business, buy certain assets, payoff existing |
| an accountant, and they just won't do it for nothing. | | | | debt, or payoff certain start-up liabilities, fees, and |
| Reach out to your local college. Find the head of the | | | | expenses. |
| accounting department or an accounting professor. | | | | 8) Include all three fundamental financial statements: |
| Then, see how your project might be used to help the | | | | income statement, balance sheet and cash flow. |
| class learn about accounting, starting a business, or | | | | Don't just provide potential investors with an income |
| building financial models. The point is; you need | | | | statement, it doesn't give them the complete story. |
| someone who understands how to build projected | | | | Also, be sure that all financial statements conform to |
| financial statements based on your specific plans for | | | | Generally Accepted Accounting Principals or GAAP. |
| the business. It is also important to find someone who | | | | Include at least three years of actual historical financial |
| can help you understand your financial statements. | | | | information, if available, and five years of projected |
| 3) Know the kind of investor you are seeking. | | | | financial statements. Although no one expects you to |
| This is the same as a writer taking the time to know | | | | be able to predict the future with absolute certainty, |
| the audience before writing a book. For example, a | | | | projections do provide insight into your thought |
| banker puts more weight on the business' liquidity, | | | | process, assumptions, and understanding of the |
| collateral, and ability to convert assets into cash quickly | | | | business and its markets. |
| if the business runs into trouble and a loan is called. | | | | 9) Maintain a good financial model capable of running |
| The emphasis on these financial measures is different | | | | sensitivity analyses to show how your projected |
| for a venture capitalist whose interest is more on how | | | | results will change as your assumptions change. |
| quickly your business can grow, the potential future | | | | This allows you and your investors to identify which |
| cash flow it can generate, and the potential for cashing | | | | assumptions are most critical to your future |
| out at an amount much higher than the initial | | | | performance. Each critical assumption needs evidence |
| investment. | | | | to support it. Also, include in your model benchmark |
| 4) Present only the numbers and measures most | | | | comparisons to other companies in your industry. |
| important to your type or types of investors in the | | | | Compare things like revenues per employee, gross |
| body of your business plan. | | | | margin per employee, gross margin as a percentage |
| Save the more detailed financial statements for the | | | | of revenues, and various expense and balance sheet |
| appendix and due diligence stage. Of course you need | | | | ratios. |
| detailed financial statements and projections to support | | | | 10) Use footnotes and descriptions to explain how key |
| your business plan, but don't think you need to share | | | | numbers were derived or the specific assumptions |
| them with potential investors upfront. Investors are | | | | behind them. |
| more interested in seeing if a few key numbers and | | | | As much as possible, keep these short and to the |
| financial measures make sense and that they support | | | | point. Don't get carried away footnoting every number. |
| your strategies before they waste time digging through | | | | Footnote only key numbers or unusual items. |
| your supporting data. If they are interested in moving | | | | At the end of the day, more business deals are not |
| forward with you, believe me, they will dig into your | | | | consummated because investors don't feel like they |
| financial statements. | | | | can trust the numbers for one reason or another. |
| 5) Use graphs and tables wisely to present financial | | | | Spend the time, effort and money to communicate |
| information. | | | | your financial statements clearly and convincingly. It can |
| Graphs are great for presenting trends and | | | | be the key to making your deal a reality. |
| comparisons. Keep them simple and uncluttered. Be | | | | |