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 advices on how to write the financial section of your startup Business Plan.
To do so, we are going to explain you what an investor is looking for in a financial section.
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, 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 analyse these 2 points in the cash flow statement :
- Main expenses forecasted in the short term to reach 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 the forecasted strategy.
- Monthly treasury forecast 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 on 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 an crucial point, because a lot of startup 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 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 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 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 a 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 theorical time to reach the break-even point and profitability.
To go further in building and writing the financial part of your Business Plan …
Check also these articles for more details on how to build a great financial plan for your startup :
- 2 complementary ways to create a financial plan
- Startup cash & treasury management with financial planning
- How to forecast startup revenue and growth ?
- Break-even point calculation to test startup profitability
Lastly, check our free & easy financial plan tool for startup, Business Model Forecast. It will help you to build financials for your Business Plan!
Business Model Forecast is a financial plan made to help entrepreneurs to build easily great financial projections. Within few minutes you will be able to build your financials for your Business Plan. You just have to fill in few information on your business model and then you get a complete and concise dashboard with everything you need to write your financial section of a Business Plan : a monthly treasury forecast for the 2 first years, a P&L for the 5 first years, a break-even calculation and some information on funding plan balance.
Of course, we can highly recommend you to build a serious financial forecast with an iterative process inspired by the “lean startup” approach to test and improve your key assumptions.
You can try it now! Free download here : http://www.businessmodelforecast.com/