One question I have been repeatedly asked in all entrepreneurship events recently has been How important is Financial Projection for a startup? Like all subjective questions, the answer can range from Å“highly important Â to Å“not important at all Â. I have never seen any investor writing a cheque without looking at the financial projections, neither have I seen them making the projections the sole base for investment decision. It does not matter whether it is a 1, 3 or 5 year projection. All investors know that the 1st version of projections are going to change still we insist on projections to determine how well prepared the entrepreneur is.
Let me list down the important things to keep in mind while building the financial model:
Clearly Stated Assumptions
While all models contain balance sheet, cash flow, and profit and loss statements in fair details, the basis on which it is arrived at should not be missed out. This can be easily captured in a simple sheet containing all assumptions. Give some thought to the important factors if the market size is a billion dollar and growing by 50% a year, then the revenues sheet should show how fast you are growing. Investors have low attention span, and by looking at the assumptions list, they form an opinion on how thorough the entrepreneur is. It also gives an idea to the entrepreneurs on what the likely cash requirement is and when it may be required.
Make the model flexible
One exercise I have frequently done while arriving at the investment decision is make all revenue numbers 0 and cost projections 1.5 times then look at how long the cash will last. The scenario is extreme but gives an idea about how the business is likely to shape up. Startups can look at building an aggressive, a conservative and a realistic model. If the model is flexible, it is sure to attract investor attention.
Projecting a revenue over 10 Crore in Year 1
I have never seen a startup achieving this magic number in year 1 and the higher this number, the less its credibility. Large numbers do not impress investors â€œ what impresses them is a solid plan to execute (which means team expansion plans, sales and marketing plans etc. ). Spend lot of time with your customers and be realistic in revenue projections â€œ thats how you will get the real revenues.
Basics of Accounting
During our days as accounting students, we would introduce a Å“suspense account Â just to match the assets with liabilities. In real life financial projections, make sure assets = liabilities, ending cash balance for year 1 is opening cash balance for year 2 and all statements are linked perfectly! Excel is a powerful tool, but do not hard code numbers so that they match up.
Professional look and feel
After all the hard work is done, spend a little time in Å“beautification Â of the statements â€œ not cook up the numbers but use the fonts, colours, style etc. to make the projections look professional and easy to follow.
I am sure with all this and a little more, you will be able to attract investors and get your next funding! All the best!