So, you’ve got a revolutionary business idea, a flawless marketing strategy, a motivated team and you’re ready to pitch your idea to investors for funding. Not so fast. Before you spruik your idea, you have to ensure your financial forecasts are in order.
To win over an investor, you must demonstrate that you can make money for them. The most effective way to do this is with an accurate financial forecast.
What is financial forecasting?
As the name implies, forecasting is a way to predict exactly how well your business is likely to perform. That is, it predicts future profits, sales, growth and more. The most common financial model entrepreneurs use is the Three Statement Model. This inclusive model includes the:
Balance sheet – This document analyses your company’s assets and liabilities. This projects your net worth at the end of the financial year.
Cash-flow statement – This section details all the money flowing in and out of your business. To show this, inflow and outflow is broken down into three categories:
• Operating activities (income generated from sales)
• Investing activities (purchase and/or sale of equipment)
• Financing activities (paying dividends to stakeholders)
Income statement – Often called a profit and loss statement, this is a straightforward assumption on your company’s ability to generate profit. To create this statement, you must have sales projections, cost of sales, expenses (i.e. the financial outlay to run your business), interest and taxes.
Why is forecasting important?
For a startup venture, financial forecasting has two key purposes, to:
Raise capital – Are you seeking funds from a venture capitalist or angel investor? If so, they will want to know whether your venture is likely to experience fast growth, enabling them to gain a quick profit.
Or, if you approach a bank or other lender for startup capital, they need you to demonstrate that you can repay the loan. You can demonstrate this easily with an accurate financial forecast.
Guide future business decisions – As a business owner, forecasting is important for you also. It paints an accurate picture of your company’s viability and the likelihood of turning a good profit. Keeping these records also acts as a helpful guide while running your business.
For guidance navigating your financial forecasts, call or email the experts at Propeller Advisory today.