Many startups fail as a result of one thing - running out of cash. Overcome this challenge…
Headed to the investor pitch, have you packed your financial model?
A credible business plan requires a financial model
A well thought out, professionally-prepared financial model that supports your business plan forms an integral part of your toolkit when trying to demonstrate to potential investors that you are ready for the responsibility of accepting their investment dollars and delivering on what you’ve pitched to them.
When approaching potential investors, you will be asked to provide a business plan, and included in that business plan will be your financial plan. A financial plan should usually be supported by a financial model, of varying levels of complexity, whether that be high-level financial projections with limited support, or a full scale, professionally-prepared and integrated financial model.
- A solid financial plan should capture as much information about the business plan as reasonably possible – the team, the value proposition and technology, the market, milestones and the competition – and translate these into measurable, financial values. Things like:
- What is the target market for your niche product / service, and how large is it? How do your sales projections compare to this (i.e. market share) and is this reasonable?
- What is your development timetable? How much development expenditure is required initially, and on an ongoing basis?
- What is your product launch schedule? Are marketing and sales expenditures expected to be higher in the early years?
- What are your expected revenue streams? Are they accounted for and when?
- What do your expenditure assumptions reflect (staffing, development, consultants) and are these actually enough to support the level of activity and growth you have projected?
- How do your operating expenses compare to your projected revenue over time? What operating expenses will be fixed, and which will be variable?
- Have you included all (or most) foreseeable operating expenses?
- Will your projected headcount be sufficient to support the level of growth you have assumed.
Outline your financial growth strategy
It is frequently the case that a due process has not been followed when preparing projections for your start-up business, and the resulting figures do not reflect either the company’s strategy or the realities of delivering that strategy. A financial model provides a robust framework to map out your assumptions and support the process of producing financial projections. The process of preparing a financial model with the assistance of a professional can be incredibly insightful for founders, challenging you to consider the key drivers of the business, while informing you of key data such as spending levels and timing and the cash burn rate.
During a pitch to a potential investor, it might not always be necessary to mention every little detail in the financial model (remember that investors are time-poor and may only glance at your high-level figures). But they will most likely request a copy of your financial model prior to or after your meeting, and challenging your figures during the pitch can be a sort of due diligence for investors to see if you have done your homework and have taken the trouble to understand a crucial part of running a business – financial management.
Investors will also want you to explain how much funding you need and where it will be going. Having undergone the financial modelling process, you will develop a significantly improved understanding of your numbers and preparedness for those investor meetings.
But it is also worth thinking about what investors can bring to the table apart from money.
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Stuart Reynolds is the founder of Fullstack Advisory, an award-winning accounting firm for businesses leading the future. He is a 3rd generation accountant who specialises in tech companies, crypto and entrepreneurs.