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Financial forecasts in a business plan

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.

  • http://twitter.com/davidsmuts David Smuts

    Interesting tweet Nic. For funding growth companies you're absolutely right about that too (to an extent). I keep telling Entrepreneurs that VCs don't fund seed stage, only growth, but for some reason they seem to believe otherwise!

    The only comment here is that if you have a growth company which is about to launch into a new market or new product then often forecasting new revenues are contingent upon launch events, which of course are contingent upon new funding. In this case it makes absolute sense for a growth company to forecast like a GANNT chart Q1, Q2 etc.., It's how we forecasted in Cardinal Health, having learned the bitter experience of forecasting dates which were contingent upon resourcing (or VC funding in your example).

    I wouldn't throw away a business plan solely because it did not forecast by specific dates. I can usually tell if an investment is too early by looking at the exec summary before I even need to waste any time reading the forecasts.

  • http://www.theequitykicker.com brisbourne

    Hi David – the catch with this line of thought is that funding contingent launch events are fraught with risk – ie the funding can happen and the launch event doesn't go as planned for some reason. It is better to find a way to part launch and get some progress so the next (maybe full) launch is simply the next stage in an existing plan. Then put some dates around it and build enough time into the schedule to raise capital. If it ends up slipping a little because funding takes a little longer than expected nobody will mind that much.

  • David Smuts

    YES good point about risks with new launches. So tell me, if a company like Spotify for example, was raising a Series B (or is it C?) round of funding to launch in the US and their revenue projections for the US were obviously contingent on funding being raised in this funding round, are you saying as a VC this would be too risky? that you would expect Spotify to get some US excposure (market traction) first before commiting risk capital for a full launch? That seems just to cautious to me, I know many VCs would turn this down as too risky, but then there are others who think the opportunity outweighs the risk. Interested to know what you think?

  • http://www.theequitykicker.com brisbourne

    No – I'm saying that they should put a date for the US launch in the plan and start raising money 6-9 months earlier so they will have the money in the bank in good time. If the funding takes longer than expected the forecasts can be revised.

  • http://twitter.com/davidsmuts David Smuts

    Interesting tweet Nic. For funding growth companies you're absolutely right about that too (to an extent). I keep telling Entrepreneurs that VCs don't fund seed stage, only growth, but for some reason they seem to believe otherwise!

    The only comment here is that if you have a growth company which is about to launch into a new market or new product then often forecasting new revenues are contingent upon launch events, which of course are contingent upon new funding. In this case it makes absolute sense for a growth company to forecast like a GANNT chart Q1, Q2 etc.., It's how we forecasted in Cardinal Health, having learned the bitter experience of forecasting dates which were contingent upon resourcing (or VC funding in your example).

    I wouldn't throw away a business plan solely because it did not forecast by specific dates. I can usually tell if an investment is too early by looking at the exec summary before I even need to waste any time reading the forecasts.

  • http://www.theequitykicker.com brisbourne

    Hi David – the catch with this line of thought is that funding contingent launch events are fraught with risk – ie the funding can happen and the launch event doesn't go as planned for some reason. It is better to find a way to part launch and get some progress so the next (maybe full) launch is simply the next stage in an existing plan. Then put some dates around it and build enough time into the schedule to raise capital. If it ends up slipping a little because funding takes a little longer than expected nobody will mind that much.

  • David Smuts

    YES good point about risks with new launches. So tell me, if a company like Spotify for example, was raising a Series B (or is it C?) round of funding to launch in the US and their revenue projections for the US were obviously contingent on funding being raised in this funding round, are you saying as a VC this would be too risky? that you would expect Spotify to get some US excposure (market traction) first before commiting risk capital for a full launch? That seems just to cautious to me, I know many VCs would turn this down as too risky, but then there are others who think the opportunity outweighs the risk. Interested to know what you think?

  • http://www.theequitykicker.com brisbourne

    No – I'm saying that they should put a date for the US launch in the plan and start raising money 6-9 months earlier so they will have the money in the bank in good time. If the funding takes longer than expected the forecasts can be revised.

  • http://twitter.com/Suzane_Fadrik Suzane Fadrik

    First and foremost, a business plan is never started by the executive summary. The exec summary is the last thing you write; it summarizes all the content of the business plan.Secondly, the business plan is not an idea only<a href= http://www.prime-targeting.com/expert-entrepren…> Famous entrepreneurs. It may start with an idea, but the content is aimed at showing how you will make a success of it. As important as your idea – if not more – will be the management team you put together to bring it about. It is very important to demonstrate your understanding of the competitive environment and to show that you have thought, and can explain, of a clear proposition that makes you unique against those competitors. As important is how you intend to fight off competition if your idea/product can't be ring-fenced.

  • http://60minuteforecasting.com/ Financial Yan

    Great thought on financial forecasting. That spreadsheet torture part is so true.

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