Last week, I went over the first five sections crucial to a financial plan. The next four sections are just as important and include fundamental information you will need to present when you meet with potential investors. Remember a financial plan is necessary when you want to attract outside funding but it is also an adaptable plan that helps you set profit milestones, gauge your business’ future progress and set up your company’s ideal financial trajectory. Here are the final four parts you’ll need in your financial plan:
The Use of Funds section shows how you will use the money that you’re raising to get to your next step, whether it’s a product launch, the next fund-raising push, or another milestone such as profitability. Almost every investor will want to know how much money a startup is looking to raise, the milestones it hopes to achieve, and generally, how you plan to use that money to meet a particular milestone.
The discussion between entrepreneur and investor regarding use of funds needs to be very open and detailed. Just stating “it’ll be used for marketing or hiring staff” doesn’t suffice. It is absolutely crucial to know the details of how much money you need to raise to get you to the next big step and exactly how you intend to use it.
Valuation is the worth of your business concept today. It’s a relatively arbitrary concept based on perceived value. You as the business owner are going to have a higher perceived valuation relative to an investor, who will set a much lower value since the business is most likely unproven. If you’re going to be selling equity in your business to raise capital, you will need to determine a valuation for your company.
First off, while the “friends and family” group may be more lenient in terms of expected returns, most sophisticated investors aim for a 10x return on their investment within five years. This means if they were to put $10,000 into a company, they would want to exit with at least $100,000. Projected investor returns depend on a future valuation, which depends on the sales forecast or income forecast or both. Most investors look hard at the sales and profitability projections so that’s why your assumptions are critical.
Second, and more important, investors tend to care more about the product-market fit, management team, and other factors to determine whether the company is going to make it. If you’re going to be selling equity, keep these considerations in mind as you document what you’re willing to give up in exchange for financing.
An exit strategy is exactly that: the method by which an investor or business owner intends to “cash out” of the investment. Examples include an initial public offering (IPO) or being bought out by a larger player (trade sale). It could be you don’t plan on exiting, that you have found the job you want to stick with. In that case, if you do have outside investors, you may want to make a plan for buying them out. Either way, having a clear exit strategy is key.
The financial plan section of your business plan is the key variable that investors will use to evaluate your company. This area is how investors will know whether or not they stand to make any money in investing in your company. This section should be approximately four pages; you can skip around in presenting different areas but make sure that you retain a cohesive set-up. Make sure to focus on statistics, back up your numbers with relevant evidential research and present with compelling facts. Be as precise and realistic as you can be and be ready to explain why you chose the values you did.