Potential investors want to know where your business is going and in what way their investment is can help you get there. That’s why it’s important to present a set of attractive and realistic financial projections when raising capital.
When creating financial projections, approach it like you are telling a growth story about your company. Then validate the story by showing numbers and analysis through your financial statements. The individual income, expense, and investment components come together through financial statements and metrics to illustrate where you’re going and what it will take to get there.
Base financial projections on historical data
As a starting point to build your projections, use your historical data as a baseline. In most cases, investors want to see two to three years of historical financials to set the stage; but, if you have a shorter operating history, use everything you’ve got.
Historical financials are critical in part because they express what you have accomplished up to this point, and also because it sets a foundation for the scale and efficiencies you will reach in the future. Furthermore, historical financials can inform how you manage your business and prior investments internally as well as the external market appetite.
With historical financials at the ready, you can tell your growth story through revenue on the P&L. By starting with your most basic elements—units sold and pricing by channel—you can derive gross revenues. A clear idea of unit economics is key to be able to plan for the future.
The next layer down on the P&L will show all the associated expenses to achieve your revenue growth.
How will your startup continue its growth?
After you’ve set the stage by telling the history of your growth on your P&L, you're ready to set up an attractive story for how you plan to keep your momentum going!
Next, connect the dots through your balance sheet to determine where you need to invest capital to achieve your growth targets, as well as how you will obtain those investments.
Will you need to expand your sales team, grow your back office staff or hire additional key executives?
Will you need to invest in infrastructure, fixed assets, or significant amounts of inventory?
These questions will help you determine how much capital you need to fuel your growth.
Assessing the investments you need will also guide you towards the optimal type of capital to raise.
Will you need to raise an equity round?
Can you meet your growth targets with non-dilutive debt financing?
Or will you need a bit of both to maintain a strong balance sheet?
No matter what your answer is, plugging in these proposed investments is a key part of your projections so an investor can understand the commitment needed to catalyze growth.
It goes without saying that you also need show a judicial cash management approach—as they say, “treat every dollar as if it were your last.” This can be illustrated in your projections by showing responsible cash burn and controlled spending.
Finally, remember that all investors are going to discount your projections. However, if you’re too aggressive with your numbers it could potentially jeopardize your credibility with investors, and therefore a combination of aggressive and realistic is the way to go.
Highlight that your startup has incredible potential to scale and generate profits, and do so in a manner grounded on realistic fundamentals.
Begin with a realistic base case and include an upside case as well showing the potential if all your ducks are in a row.
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