In my world, it seems there are two types of business plans:
- Plan #1 has the obligatory 3-5 year annual financials, so the "numbers" box has been checked.
- Plan #2 is backed by a detailed, dynamic, well-thought-through financial model. It has the obligatory financials page, but shows the details in the addendum.
Plan #2 has a massive advantage over plan #1 because it really shows the founders have done their homework. They have taken all the product, market, sales channel, peer and competitor information and driven it down into a detailed, executable roadmap of how the product gets to market.
Once you go through the process of building a detailed financial model, you'll be able to answer the following questions:
Why are you asking for this particular amount of funding (good example of a successful answer here)? Exactly how far will your cash take you? Do you have enough cash to get you to the next major valuation milestone?
What exactly will you spend your cash on? Headcount vs. capital expenditures vs. outsourced consulting vs. marketing, licensing, etc...
Who are your key hires over the next year? When will they be brought on?
What are the details behind the revenue assumptions? Have you thought through the difference between revenue and cash receipts? What
When does the business begin to scale? Once you begin to scale, how does your business compare to your competitors, your peers? Are your key metrics in line? Are you being realistic on your scaling assumptions?
What public company are you modeling yourself after? How does their growth and financing scenario compare to yours? Are your valuation assumptions reasonable?
Have you done sensitivity analysis? What are your downside scenarios, and what actions do you take - and when will you take them - if you find yourself in one of these scenario? At any given point along the road, how would you circle the wagons and conserve cash?
Building a successful new business has a lot to do with focus and managing uncertainty. If you take the time necessary to really build out a great financial model, you will have gone a long way toward increasing your focus and managing the uncertainty. And your potential/existing investors will definitely notice.
Brian Royston
Royston Financial Consulting, Inc.
