| Entrepreneurs are frequently advised to make sure | | | | if nearly everyone is sending out forecasts that would |
| the financial projections in their Business Plans are | | | | be very difficult to achieve, and investors know this, |
| "realistic" before they present them to potential | | | | how do you separate your company from the pack |
| investors. But what does that really mean? Some | | | | and demonstrate your numbers at least have some |
| entrepreneurs interpret that advice to mean their | | | | shred of realism? |
| projections should be ultra-conservative. Taken to an | | | | You do this through the assumptions you present. |
| extreme, this means you are presenting what amounts | | | | Financial models for the Profit and Loss Statement are |
| to worst case scenarios to investors, which isn't | | | | based on certain assumptions about unit sales, sales |
| exactly the way to draw their interest. | | | | price, margins, number of customers, marketing cost |
| And that brings up another frequently used strategy: to | | | | per customer-there are many different types of |
| prepare two sets of projections, the best case and | | | | assumptions you can use. What impresses investors is |
| worst case, or conservative case and aggressive | | | | the logic you used in selecting the assumptions. Can |
| case. Presenting two sets of numbers just invites | | | | you show your assumptions are based on the real |
| investors to conclude you are unsure of your forecast. | | | | world of your industry or niche, or were they just pulled |
| They want to put their money behind sure-footed | | | | out of the air? The more details you can present |
| entrepreneurs who present an image of confidence. | | | | about how you arrived at your assumptions, the more |
| These two points need to be taken into account when | | | | realistic they will seem to the investors to whom you |
| building your financial models and developing your | | | | are presenting your plan. |
| projections: | | | | One of the easiest red flags to spot in a financial |
| 1. Investors know that most entrepreneurs inflate the | | | | forecast is pretax income as a % of revenues that |
| numbers, due to the naturally optimistic nature of | | | | looks outlandish, say 80%. That tells the reader of your |
| people who start companies. There's nothing wrong | | | | plan that you have either grossly underestimated your |
| with that optimism. Pessimistic individuals would never | | | | costs of doing business, particularly marketing cost, or |
| take on the risk of starting a business. Given this | | | | you have been wildly optimistic in your estimates of |
| optimistic bias to the numbers, investors discount the | | | | how quickly your revenues will grow. You need to |
| profits in the forecast, sometimes by as much as 50%. | | | | scale your pretax income back to a number that |
| 2. Sophisticated investors know that the risks inherent | | | | companies similar to yours have been able to achieve. |
| in early stage companies are so high that results | | | | With a start-up company there is no way you can |
| inevitably vary from forecast. Happily, in some cases | | | | prove that you will be able to achieve the forecast |
| the company exceeds their forecasted results. But in | | | | results. There are too many risks, too many variables |
| many cases the results fall short of expectations. | | | | outside your control. Thoughtful assumptions for your |
| Let's suppose you reviewed 100 Business Plans from | | | | financial models-meaning you can show where the |
| start-up companies. You would find most of the | | | | numbers came from-go a long way to reassuring |
| projections fall into the aggressive or best case | | | | potential financial partners for your company that your |
| categories. Some might even be outlandish, a forecast | | | | P&L forecast is realistic. |
| of $1 billion in revenues in three years, for example. So | | | | |