So when you tell them, "oh well, I guess we will make like, a million bucks in Year One, maybe", rest assured your audience is going to send you back to the drawing board because, quite frankly, you don't have a clue.
On the other hand, if you think you can tell investors your exact net profit in Year Five right down to the penny, well that's a sure sign of dementia. Nobody can tell the future, even investors realize that.
There's one thing you should know, if you haven't realized it already: any investor who's made it as far as the financials is genuinely interested in your business. But nobody is taking your word for it.
Investors realize they are reading a business plan, not a term report. They want to know you have a clearly defined revenue model and a good understanding of the market as well as the internal operations coupled with your personal goals and objectives, so you have some extra breathing space to make an argument.
Any professional investor conducts what we call in the industry - due diligence. This means they may even go as far as draw out an entire financial projection all by themselves to see whether your numbers match up, in addition to verifying every piece of information presented.
So what really strengthens your case are extrapolated results from a test market sample of actual sales revenues, benchmarking with your closest competitors at each stage, demand-supply gap, industry statistics regarding key performance metrics, industry beta and growth rates etcetera.
If the last sentence didn't make any sense, that's perfectly okay. You don't have to be an auto-engineer to drive in a race. Basically put, your financials should show you have big ambitions that you are willing to work hard for, but are firmly grounded with real evidence.
So if your gaming app is going to have a million users by the end of Year One, your financials will talk about monthly downloads and user retention that are within acceptable limits for your app category and comparable levels of marketing spend by your competitors. Or if you're selling hot dogs in a food truck franchise, maybe you can use the trial month's sales as a base for your initial sales projections.
It is recommended that the numbers should not be hard-coded in your forecast because you may want to update them regularly. Ideally, your workings should be in the form of a financial model that updates the P&L, Balance Sheet and Cash Flows based on basic input parameters. For example, an increase in the conversion rate for Q2 should immediately improve your revenues and marketing ROI.
Having said that, try not to turn your spreadsheet into a monster. List all the key drivers in one place and the effect it has on each line item before concluding with your projected financial statements. All your assumptions should be clearly explained and no questions left unanswered. Use charts to discuss complex issues and keep your language crisp and clear.
A final sanity check is essential before locking it down on paper. You may realize that sales are growing way too fast or your margins are unrealistic. Customer acquisition costs are also frequently assessed for credibility. In case any of these are out of whack, revise and re-revise your model till it all makes sense.
Now that you have a presentable set of financials, you can also determine a reasonable valuation for your business. I will be discussing more about this in my upcoming articles.
If you need help coming up with a set of realistic financials, we'll be happy to chip in our expertise. Please contact us for more information.