Financial plan is most critical in a business plan. Developing a detailed set of financial projections will help to demonstrate to the investor that you have properly thought out the financial implications of your company’s growth plans. Private equity firms will use these projections to determine if:
• Your company offers enough growth potential to deliver the type of return on investment that the investor is seeking.
• The projections are realistic enough to give the company a reasonable chance of attaining them.
Investors will expect to see a full set of cohesive financial statements including a balance sheet, income statement and cash-flow statement, for a period of three to five years. It is usual to show monthly income and cash flow statements until the break even point is reached followed by yearly data for the remaining time frame.
Ensure that these are easy to update and adjust. Do include notes that explain the major assumptions used to develop the revenue and expense items and explain the research you have undertaken to support these assumptions.
Preparation of the projections:
• Realistically assess sales, costs (both fixed and variable), cash flow and working capital. Assess your present and prospective future margins in detail, bearing in mind the potential impact of competition.
• Assess the value attributed to the company’s net tangible assets.
• State the level of gearing (i.e. debt to shareholders’ funds ratio). State how much debt is secured on what assets and the current value of those assets.
• Include all costs associated with the business. Remember to split sales costs (e.g. communications to potential and current customers) and marketing costs (e.g. research into potential sales areas). What are the sale prices or fee charging structures?
• Provide budgets for each area of your company’s activities. What are you doing to ensure that you and your management keep within these or improve on these budgets?
• Present different scenarios for the financial projections of sales, costs and cash flow for both the short and long term. Ask “what if?” questions to ensure that key factors and their impact on the financings required are carefully and realistically assessed. For example, what if sales decline by 20%, or supplier costs increase by 30%, or both? How does this impact on the profit and cash flow projections?
• If it is envisioned that more than one round of financing will be required (often the case with technology-based businesses in particular), identify the likely timing and any associated progress “milestones” which need to be achieved.
• Keep the plan feasible. Avoid being over optimistic.
Highlight challenges and show how they will be met. You might wish to consider using an external accountant to review the financial plan and act as “devil’s advocate” for this part of the plan.
Financial plan should be consistent with market information provided in the business plan.