The Financial Plan : High Growth Potential Ventures

Financial Plan

The Financial Plan is a quantified vision of your project upon which much of your credibility with investors will rest – get it right and you will give them confidence.

1. Financial business plans – the financial statements

Business is fundamentally about numbers: cash, assets and profit. Investors need to understand the financial dynamics of your project and this is done through the production of three financial statements, and illustrative projections of these:

Profit & Loss Statement – this shows the underlying profitability of the operation. It is not a statement of the cash situation, or of the company’s assets and liabilities – it only includes operating performance.

Cashflow Statement – this shows the movement of cash and how it is used to fund operations in the Profit & Loss Account, and in the acquisition or disposal of assets in the Balance Sheet.

Balance Sheet – this is a statement of the company’s assets and liabilities at a any particular point in time – including money owed to suppliers and others (creditors), by customers (debtors), to the bank (Overdraft & Loans), Fixed Assets (Equipment, Land, etc.), the investment by shareholders…

These three statements interact and provide an overall picture of the financial dimensions of the project.

2. How to start the financial planning process – break even analysis

For early stage companies, the best way to get started is to ‘play’ with the main variables of a project in order to understand how they interact and the effect on profit. These are:

Fixed costs and overheads – the main costs that will be incurred regadless of sales volumes – such as staff, stationery, insurance, accountancy fees, etc.

Variable costs – these are costs that vary directly in line with sales – for example the material costs to produce a widget – each widget will incur these costs, and ten widgets will incur ten lots of this cost.

Sales prices – the price you expect to sell the item for, or are thinking of selling at.

Sales volumes – the number of units you expect to sell, or require to sell to cover your costs.

Profit – the point at which you will begin to make profit, or your target profit amount.

3. Establishing how much money you need

The easiest way to do this is to use a financial model and insert the costs and other numbers into it – but no funds. The maximum cash deficit will then be your basic financing requirement. You will then need to build in a contingency element to allow you cope with delays or other unforseen eventualities.

Resources do not come out of thin air so you need to establish that the amounts you are seeking are feasible and can earn the investor a good return. You will need to make revisions in line with this financing requirement and jump back and forth until you are comfortable with the plan and its financial, and financing, implications.

To establish costs get quotes for major things – such as a marketing campaign. This not only informs you but provides evidence to support your financial data.

Cash is the lifeline of business. Establish the on-going cash consumption of the project, or “burn rate” (the rate at which the business burns cash) and include it in your plan. This should exclude capital expenditure (that is expenditure on long term assets, ‘Fixed Assets’). The burn rate provides clear guide of cash requirements should a delay be encountered.

4. Explaining the assumptions behind the numbers

Numbers are just that. They need to be grounded on clear assumptions so that readers can see the reasoning behind them. By providing strong and clear explanations of the reasoning, ideally supported by evidence, investors will gain reassurance that careful thought has gone into the financial plan and that your team is financially literate:

Your business plan will state how many staff you have, your production systems, etc., and the financial plan needs to be consistent with that.

You also need to explain how you have arrived at your sales forecasts so that investors can see your reasoning and make a judgement on that basis.

Describe the costs involved in production and how much it costs to produce each unit for sale.

Explain also the detail of sales channel costs and margins for intermediaries.

5. Finance and investment structure – what equity is available for investors

State how much money you are asking for and what you propose to give investors in return for it. You should use a summary table to explain how the funds will be used, for example:

Area of Expenditure Finance Required
Office Equipment 20,000
Production Tools 50,000
Working Capital & Stock 40,000
Marketing 50,000
Overhead 100,000
Contingency 40,000
Total Finance Required 300,000

You then need to state what investors will receive for meeting this fiancing requirement. For example, a second round funding may offer 20% of the company and have the following investment structure before and after funding:

Shareholders Pre-Financing Post-Fiancing
CEO / Founder 50% 40%
Other Managemnt 30% 24%
Current Investors 20% 16%
New Investors 20%
Total Equity 100% 100%

You will then need to discuss how do you expect investors to get their investment and return and when. Will this be through a trade sale, a flotation, or a management buy-out?

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