Key Elements of Business Plan Financial Projections 


The financial section of the business plan is an area that receives significant scrutiny from capital providers. It is also typically one of the most challenging undertakings for management, especially for an early-stage growth company. The key is to understand what financial information investors will expect to see and then to focus on the modelís critical inputs and accuracy.

Going through the exercise of developing detailed financial projections demonstrates to finance providers that management has given adequate consideration to the financial requirements and profit expectations of the venture. Investors will look at the projections to see if the companyís growth potential meets their return requirements and assess the likelihood of the projections being realized.

The company should produce a full set of integrated financial statements including income statements, cash-flow statements and balance sheet data for a period of three to five years going forward. Historical statements should also be provided, if available. Income and cash-flow statements are usually shown on a monthly basis, until cash flow breakeven is achieved, and then may be presented on a yearly basis.

The modelís inputs are critical to the production of the financial projections. It is good practice to place these inputs in a separate section that drives the modelís outputs rather than Ďhard codingí numbers into the body of the statements. This makes it easier to change key assumptions, e.g. rate of sales growth, and review the impact on the projections. For the actual production of the working model, a qualified consultant may add value, although ultimate ownership and understanding must ultimately rest with management.

In conjunction with the financial statements, investors may expect to see certain outputs explicitly stated. This includes the amount and timing of anticipated capital needs, and how management intend to source the capital, e.g. management investment, equity raising, bank loans etc. Incorporating a sources and uses of funds section may enhance clarity as well as highlighting key ratios, such as debt to equity. When using a business plan to raise equity, a company can also forecast different exit scenarios to demonstrate potential investment returns.

It is important to keep in mind that it is highly unlikely that a company will grow month to month and exactly achieve its projected numbers. Investors are aware of this and will run a number of scenarios when attaching a value to the business. What management can control however, is the quality of the modelís inputs and investors want to see that the driving factors are the result of careful research and realistic expectations.

Producing financial projections for three to five years into the future may appear to be a daunting task, but it is also a necessary one. Tangible funding and growth numbers forces management to focus on the best use of limited financial resources and provides a benchmark for evaluating progress. A business plan should always express confidence and optimism, but in this section, realism should be the main theme.

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