Most Important Business Questions – Financial Projections – Part 2
Published February 25, 2011 | 
What are your financial projections?
Exactly what you forecast and the methods you use depend on your business’s circumstances and objectives; before you’re finished you’ll most likely need to be aware of and develop several types of projections and budgets:
- A model that projects both the current year and a rolling 12-month period by month. This type of detail forecast should at a minimum be updated at least monthly and become the focal planning and monitoring instrument. Information presented in this particular model can be the catalyst for the preparation of the other types of plans described below.
- A long-range, strategic plan that looks over the horizon three to five years. One of the first things you should understand is that while the 12-month forecast often effectively reflects short-term business expectation and calculated plans, the long-range projection integrates the strategic goals of the company.
For startup businesses the initial business plan should consist of a month-by-month projection for the first year, and then followed by annual projections extending to the future a minimum of three years. Some investors might have a preference to see the second and subsequent years broken out by quarters. It’s fine to add the projections for years two and beyond to the 12-month forecast, but the numbers should always be more than just a simple extrapolation of the current year. Strongly consider including subsequent market growth along with seasonal trends to increase the accuracy and ultimate value of the plan you create. A consistent strategic planning process should complement development of the “out year” projections. - Budgets, normally covering one year.
Budgets transform goals into detailed actions and short-term targets. Budgets should always present details, such as specific staffing plans and individual line-item expenditures. Taking into account the amount of detail required, the size of a business just may resolve whether the same model used to prepare the 12-month forecast can be suitable for budgeting. Whatever the case may be, unlike the 12-month forecast, budgets should by and large be finalized and unchanging at the time they are approved. They should also be consistent with the goals of the long-range plan. - Cash forecasts. These separate the budget and 12-month forecast into even further detail. The focus is always completely on cash flow, instead of accounting profit, and periods may sometimes be as short as a week in order to dial-in, identify and isolate fluctuations within a month.
As a rule all projections should be separated out by months for at least one year. 
If you subsequently choose to include additional years, they normally do not need to be any more detailed than by quarters for another year and then annually if you add years after that.
Remember the projections always include an income statement and a balance sheet. Your expenses can be summarized by department or many times, major expense category; you can save line-item detail for the budget. It is important that cash needs should be very clearly identified, perhaps by adding a separate statement of cash flows. If your financial statements usually report financial rations or expenses as a percent of sales, calculate and report these as part of the projections, too.
Most Important Business Questions – Financial Projections – Part 1
Published February 22, 2011 | What are your financial projections?
If you don’t know where you are going, then you can’t lead anyone to the destination. Two critical milestones for any business are: 1) the point where in a given period more cash is coming into the business than going out, and 2) the point at which you finally recover your collective initial investment (including an adjustment for the time value of money). Financial projections should be realistic. Paint too rosy a picture and seasoned investors will run; more to the point, you might run out of cash.
It is important to commit to regular financial planning that also helps your business deal with trends and change, both inside and external to the business. The reason is that by frequently reevaluating the business’s strengths, its markets and competition, you put yourself in a position that is better prepared and able to identify both problems and opportunities. 
You are much more ready to act in response to new developments, more readily than simply plugging along. In other words, by doing the work needed to keep in a state of readiness, you actually are making your own luck. Remember the old axiom, “The harder you work, the luckier you are.”
But what is it that keeps creating projections and forecasts from just being another number-crunching exercise? Let’s take a look at three very good reasons to project you financials
- First, the financial plan transforms your business’s goals into precise and specific targets. It clearly describes what a successful and profitable outcome involves.
The plan isn’t simply a forecast or prediction, but it means a commitment to ensure the targeted results are reached and establishes important milestones and metrics for measuring and gauging progress. - Second, the plan presents you with a valuable and essential feedback-and-control tool. Variances from forecasted projections provide invaluable early warning of problems. When any variances do occur, the plan then can present a framework for the determination of the financial impact and the level of effects of a range of possible corrective actions.
- Third, the plan can predict any anticipated problems.
If for example, rapid growth produces a cash shortage due to excessive investment in receivables and inventory, the projected forecast should indicate this. Along the same lines, if next year’s financial projections are dependent on certain milestones being achieved this year, the assumptions should be clearly spelled out.
Business Plan – Appendix
Published January 17, 2011 | 
The Appendix is used to substantiate the balance of the business plan. Every business plan should have a full set of financial projections, and many times they are placed in the Appendix, with the summation of these financials in the Executive Summary and the Financial Plan.
Other documentation that may possibly appear in the Appendix includes (1) Technology: Technical drawings, patent information, etc. (2) Partnership and/or Customer Letters: Letters from partners and/or customers stating their interest in working with the company can add huge credibility and confirmation (3) Extended Competitor Evaluations: It’s a common fact that the majority of businesses have more than a few direct and/or indirect competitors. 
While the Competitive Analysis segment of the plan evaluates the most direct competitors, addition of a more comprehensive list and narrative in the Appendix demonstrates that management accurately recognizes and comprehends the players in the marketplace. (4) Customer Lists: Together with a list of strategic customers that the company is serving, in addition to their rank and/or type or quantity of product/service being offered.
Other Possible Components of a Comprehensive Appendix
Here are some examples of what else might be found in this section:
- Tax returns of principals for the last three years, if the plan is for new business
- A personal financial statement, which should include life insurance and endowment policies, if applicable
- A copy of the proposed lease or purchase agreement for building space — or zoning information for in-home businesses — with layouts, maps, and blueprints
- A copy of licenses and other legal documents including partnership, association, or shareholders’ agreements and copyrights, trademarks, and patents applications
- A copy of résumés of all principals in a consistent format, if possible
- Copies of letters of intent from suppliers, contracts, orders, and miscellaneous letters of intent
In the case of a franchised business, a copy of the franchise contract and all supporting documents provided by the franchisor- Newspaper clippings that support the business or the owner, including something about you, your achievements, business idea, or region
- Promotional literature for your company or your competitors
- Product brochures of your company or competitors, or photographs of your product
- Market research to support the marketing section of the plan
- Trade and industry publications when they support your intentions
- Quotations or pro-forma invoices for capital items to be purchased, including a list of fixed assets, company vehicles, and proposed renovations
- References
- All insurance policies in place, both business and personal
You do not have an obligation to work each or any of these items into your business plan. Understand that not all plans have need of this exhaustive a level of documentation. Bear in mind this list is a starting place for items and information that you may well want to incorporate in your business plan.
Once again, the appendix performs a supporting function. It does not present new materials, and it does not function as a filler section. It ought to further convey your business idea in a highly proficient manner.
Financial Plan – Validating Assumptions and Projections
Published January 14, 2011 | 
The Financial Plan must also describe the key assumptions such as, operating margins, penetration rates, headcount, and so on. It is crucial that these assumptions are reasonable. For example, if the business is classified as a networking infrastructure business, and the business plan forecasts 80% operating margins, investors will question the assumption as inflated or exaggerated. This is because investors can quickly retrieve the actual operating margins of similar publicly-traded networking infrastructure firms and discover that not any have operating margins this excessive.
As mentioned previously, while every business is distinctive, each has similarities to other businesses. Assessing and developing financial projections based on those of similar firms will to a great extent validate the practicality and reliability of the financial projections.
Strategic Source and Uses of Funds
The Financial Plan must feature both the sources and uses of funds. The sources of funds for the most part consist of outside investments (e.g., equity-based capital, debt-based capital, etc.) and operating revenues. The Uses of funds may well contain expenses concerned with marketing, staffing, technology development, office space, and so on.
Exit Strategy
All equity investors to a great extent wish for and are highly motivated by an obvious portrait of the business’s exit strategy, or the timing and process through which they can “bank” on their investment. 
This portrayal best comes into focus when the strategic valuation and liquidity drivers of the business are plainly described. An exceptional process to achieve this is through descriptions of equivalent business’s that have had winning liquidity dealings either through acquisition, or merger of public offerings.
The most frequent exit strategies in business plans are Initial Public Offerings or acquisitions. While the specific process of exit is not always critical, the investor frequently desires to see the evaluation to appreciate the team’s driving force and commitment to creating long-term value.
Financial Plan
Published January 13, 2011 | 
The Financial Plan describes how the implementation and execution of the company’s vision will produce great financial results for the investors. By itself, it is the segment that investors frequently expend the most time and energy analyzing.
Detailed Streams of Revenue
The Financial Plan must in words impart the revenue model of the business and include each area in which the business receives revenue. These revenue streams may possibly include, together with others (1) Sales of products/services, (2) Referral revenues, (3) Advertising sales, (4) Licensing/royalty/commission fees, and (5) Data sales.
The comparative significance and relevance of each revenue stream ought to be noted to help investors better ascertain the business. 
For example, the investor(s) may not have faith in the businesses capability to immediately produce substantial sales of its data. This would be a difficulty if this were the business’s primary revenue stream. Nevertheless, by making a note of in the plan that data sales will only comprise 2% of total revenue and will not begin until Year 3, the investor’s apprehension would be eased greatly.
Pro-Forma Financial Statements
The Financial Plan should numerically feature the revenue model through both historical if relevant and pro-forma projected Income Statements, Balance Sheets and Cash Flow Statements.
It is crucial that the numbers used in these statement flow directly from and commencing with the analyses in every other section of the business plan. For example, the applicable market size (found in the Industry Analysis) ought to be reflected, as should competitors’ operating margins (found in the Competitive Analysis), customer purchase costs (Marketing Plan), employee requirements (found in the Operations Plan), and so on.
A summary of the financial projections must be presented and accessible in the text segment of the plan, while complete projections must be found in a separate financial section or Appendix. For existing businesses, the Financial Plan ought to make a note of any substantial variations (e.g., increases in margins) between historical and projected results.