I talked in my last post about the value of numbers in running your business. For many entrepreneurs financial information looms largest when they prepare a business plan. I am still looking for as many people as possible to share your opinion on both these challenges –– final reminder I promise.
Some sort of financial forecast is integral to any startup business plan. There is no need to explain to founders why this matters. A good business plan can be the key to unlocking investors' wallets. I meet a lot of entrepreneurs who are focused on this stuff. Yet more often than not, they are a bit sheepish when it comes to the numbers.
In the glory days of amateur rugby the spirit of the game sometimes overcame the urgency for results. At these rare moments, Bill McLaren sometimes used to quote a mythical Irish wit “the situation is desperate but its not serious.” (See origin)
Financial forecasts in startup business plans remind me of this philosophy. A set of financial projections is essential to the whole fund raising process. But in truth they don’t count for much. Investors make decisions based on the team, the market size, the level of innovation/ disruption and maybe the business model.
Financial forecasts - why bother?
There is a good reason that financial projections don’t figure high on this list. In early stage, innovative businesses, the link between forecasts and reality is pretty tenuous. The business has no track record to act as a guide. The risk of failure is overwhelming. Most VCs and angel groups invest in 1-3 out go every 100 business plans. Then expect only 1 in 10 of those to succeed. No-one has the expertise or experience to beat these odds.
Investors talk all the time about being risk takers. And they are but that is not a good paradigm for how the process works. The key factors in any investment decision are all about reducing risk. The best chance of success lies with having a great founding team. A huge market also reduces the risk of failure. And so on.
Nonetheless, preparing a set of financial forecasts is an essential part of the process. You have a choice. Get lost in the process and pray that no-one asks about your numbers. Or use it as an opportunity to think about your business plan and enhance your credibility.
3 ways your business plan numbers are different
The way to tackle this is not to think about getting the forecast right. It will be wrong - get over it. These numbers are different for three main reasons:
The Chairman's view
The key to business plans is not precision. It is storytelling. A good financial forecast is driven by the business plan. The revenue numbers reflect the market opportunity and the sales model. For example, enterprise SaaS leads will take a lot longer to turn into revenue than SMB free trials.
Cost calculations are the same. Once you explain your business model, the structure of the cost base should be clear. Your audience will know where their money is going to be spent.
More important, investors want to see how that translates into growth. Its like filling up a car. Easy to do but hopeless if you don’t know where to find the accelerator pedal.
A lot of entrepreneurs take professional advice when producing a business plan. Nothing wrong with that. Remember you are not selecting for technical skills. These are important but easy enough to find. You pick a designer than can make your story come to life in pictures, fonts and colours. Select an advisor that can paint your business by numbers.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.