Your financial model is your numerical art piece- an exciting story that paints a picture of what your business could become. Your financial model will help Investors to ascertain how well your company will perform and if your business model will produce a solid return on investment.
Having the knowledge of what to look for in your financial model before you pitch to your investors is pivotal, and this article will address the key factors to introduce in order to seal the deal.
Assumptions are the most important ingredients for your financial model.
- Make sure that you list your assumptions separately, and integrate them into the spreadsheet. Doing this will ensure that the investor can do a sensitivity analysis if required.
- Your financial assumptions will be challenged. Make sure that sound logic has been applied to each assumption in order to be able to confidently ‘’defend’’ your assumptions which will in turn promote your credibility and expertise.
Diligently spending time on your spreadsheets to ensure that they are well laid out and tidy, will impress investors and will portray the pride you take in your work.
- If you are an existing company, add 3 years history (if available), and then forecast the next 3 years.
- If you are a start-up, forecast the next 5 years.
- Build the spread sheets in granular form, with the option to condense summaries into each of the financial years.
- The income statement, balance sheet and cash flow MUST all integrate.
Keeping your eye on metrics that matter is important to ensure that the Investors understand the key drivers of your business and what keeps it financially healthy. Key metrics will include:
- Gross profit margins.
- Cost of acquiring a customer.
- Capacity of assets- be sure to look to see if the existing assets are able to meet the budgeted demand.
- Human capital capacity- ensuring that you have an understanding of how many staff you need to hire.
Runway / burn
Your runway/burn is the amount of money sufficient enough to execute the business plan.
- In the case of a start-up your runway will look at how long the company can survive without any revenue.
- Investors want to see at least a 12 months runway.
Investors will generally apply common logic “gut” as well as looking at the financial model to test for “REALITY”:
- An example of ‘’reality’’ is to see if your business plan is possible to execute within the budgeted time frame, or if the plan is “blue sky”.
Investors will want to evaluate different valuation methods in order to establish the value of the business. These valuations will include:
- DCF- positive discounted cash flow.
- IRR- internal rate of return of at least 30%.
- X money calculations of at least 3 times.
So get ready to take out that easel and paint your financial picture to support your projections, and stimulate assurance in the investors. Always remember to ensure that your financial plan is measurable so that your team is able to deliver on your promises at the end of each month.
Voila! You are now ready to sell, sell, sell!
By Jeff Miller