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