Entrepreneurs often wonder what investors are looking for from their financial projections. I always tell them that it is those projections that are most important – it is what an investor looks at first. It is not just how much money you are going to make that they are looking at; instead, it is how well you understand the business and its operational potential.
Your financials “prove” your concept and show the investor how you “think”.
What are the keys to a good financial forecast?
Show how your business will build momentum over time. It could be a matter of months or even years before you show a profit. Don’t set unrealistic goals for yourself and don’t try and “pie in the sky” it when courting investors.
Be aggressive, never conservative
Projections are for you as well. Being conservative will not get you “pumped” and drag you out of bed in the morning to chase your goals. Now, do not be unrealistic, just don’t show “lame” growth.
People buy goods and services
Projections should always start with the number of customers and then go through average spends to get to revenues. Never just have a number without the reader of your forecast being able to see where it came from. Be logical.
Percentages should be easily defensible
You should know your industry; so make sure that your forecasted costs and margins stay within the industry average. For example, if typically in your industry the cost of goods sold is 33% then you should not stray far from that. The professional organizations that represent your industry will have these percentages if you don’t know them.
Ask for the money you need.
If your business projects a loss in its first year, include that shortfall in your “ask”. You need start-up money and working capital. Don’t expect an investor to cover your salary; you will have to suffer a bit during lean times.
Show a funding timetable.
If you are looking for an investor, don’t expect to get ALL the money up front. Expect to see it come in as you have projected in your financial projections.