Write the Financial Section of a Business Plan for Investors
Writing a Business plan for investors is an important and hard step for any entrepreneur. The financial section of a Business Plan is probably the toughest part to write. Indeed, most entrepreneurs are not very familiar with finance. Yet, the financial part is critical in the Business Plan because this is the section that investors master the most.
As investors and startup advisors ourselves, we would like to share with you some pieces of advice on how to write the financial section of your startup Business Plan.
To do so, we are going to explain to you what an investor is looking for in a financial section. Demand forecasting and planning are very important aspects that an investor would look for. Therefore, you should keep these aspects of priorities.
First, remember one thing: investors don’t even look at a financial section if they don’t believe in the potential of your business model you detailed in previous sections of your Business Plan…
A detailed cash flow statement for short term (at least the 12th first months)
It’s probably the most important part of financials for investors if they are convinced in the business model potential of a startup. Indeed, the cash flow statement is somehow the detailed explanation of a strategy. This means that it describes precisely how the startup is going to reach expected goals. Thus, this is how investor’s funds are going to be spent …
Investors will especially analyze these 2 points in the cash flow statement :
- Main expenses forecasted in the short term to reach the next expected goals, to have a clear understanding of how funds are going to be used. They will carefully make sure that these expenses are relevant in order to succeed in the forecasted strategy.
- Monthly treasury and demand forecasting to check that the treasury remains always positive despite cash variation over time. Running out of cash, even for a short time, can kill a startup.
A well-balanced funding plan
Investors take also a careful look at how the funding plan is built. They will want to make sure that the amount of money to raise is well balanced to reach startup goals. This amount should neither be oversized and nor too small…
- A funding plan can be oversized, either if expenses forecasted are way too important for expected goals, or if goals are not well sized to the startup maturity (a startup has to be built step by step, reaching successive goals that will lower risk and increase valuation). As an entrepreneur, it’s important to find the right next goal to reach (prototype, product launch, first customers, growth, profitability, …).
- On the contrary, a funding plan can also be too small, if the entrepreneur has not forecasted an extra safety margin of cash. Indeed, it’s a crucial point, because a lot of startups run out of cash due to overestimated revenue forecast. A funding plan has to take into account that the startup may have lower revenues than expected (most startups face this problem…). A funding plan can also be too small due to the lateness in reaching goals (usually because of unexpected events) or even in raising the next round of fundings.
Investors will also like a well-balanced funding plan between capital, debts, and subsidies. Indeed, any $ in the capital may help to raise $ in debts or subsidies. So, it’s important for an entrepreneur to diversify a funding plan with a mix of these different fundings. If possible … Make sure that you have identified the main subsidies you may obtain to balance your funding plan.
A Profit & Loss forecast for long term (usually 3 to 5 years)
Of course, investors will also expect a formal P&L (Profit & Loss) in a financial section of any Business Plan! The P&L gives an overview of the financial potential of a business model.
For startups, investors will mostly look at the long term P&L (as you notice, in the short term what is really important is to manage cash and uncertainty to reach goals!). Moreover, in the short term, a startup P&L is usually not very sexy (small and uncertain revenues, increasing expenses, huge losses, …).
The long term P&L is surely a rough forecast because it’s hard to predict well a long-run future for any startup, but it’s financial modeling of the forecasted business model. Thus, the P&L is the best friend of investors to evaluate the financial potential of a business model.
Finally, the P&L also gives an indicator to investors on the theoretical time to reach the break-even point and profitability.
