Startup general interestVenture Capital

Financial forecasts in a business plan

By December 4, 2009 11 Comments

Yesterday I was going through my backlog of business plans when I made this tweet, which a couple of people have since asked me to elaborate on.

image A lot of what I write both here and on Twitter is to help entrepreneurs figure out how best to pitch to us, and whether their business is likely to meet our criteria, and this Tweet is the same.

My main reason for the Tweet yesterday was to say that if your business is still very young and it is too early to be able to know when revenues will come with sufficient confidence to put them against specific years then you are overwhelmingly likely to be at too early a stage for our current investment strategy.  This is not a comment on the chances of  success or otherwise.  It is simply a function of our strategy.

While I’m on the subject of financial forecasts here are a couple of other thoughts:

  • Being specific about the periods when you expect revenues to come shows confidence and diligence in planning both of which enhance credibility
  • Summary financials are sufficient – for most businesses seeking venture the future is very uncertain and detailed projections only merit consideration once you are into due diligence
  • As a rough guide summary financials should include revenues (maybe broken down into a couple of key streams), two to three lines of Cost of Goods sold (if that is significant for your business), up to five lines of overheads, profits, net cash flow and cash position.  Often times less detail than this is sufficient.
  • It is also a good idea to write a brief summary of how the forecasts have been built up – e.g. based on page views, assumed CPMs and assumed sell through and costs based on headcount

One of our CEOs recently told us that if you torture a spreadsheet long enough it will tell you anything.  This is more than true and worth remembering during financial planning exercises.  The numbers are important but there generally isn’t a need for reams of detail – the key is getting the balance right.