All potential investors want to know where your business is headed and how their investment is going to 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 business. Then back up 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.

As a starting point to build your projections, use your historical data as a baseline. Typically, investors would like 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 important because they convey what you have accomplished thus far and set a foundation for the scale and efficiencies you will reach in the future. Additionally, if you have a multi-year track record, historical financials can inform how you manage your business and prior investments internally as well as the external market appetite.

With historical financials in hand, you can begin telling your growth story through revenue on the P&L. By building up from your most basic elements—units sold and pricing by channel—you can derive gross revenues. A deep understanding 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. Is your gross margin increasing over time? Are your incremental expenses decreasing with scale? Is your net margin increasing to align with mature comparable companies in your industry? If your revenue is projected to triple year-over-year while your fixed costs double, you can begin demonstrating a path to profitability. Top line growth is always attractive, but without gaining efficiencies down the P&L, a business cannot be sustainable over the long run.

 

Financing for key investments

Now you’ve set the stage by creating an attractive growth story on your P&L, but you still have work to do! The next step is to connect the dots through your balance sheet to determine both what investment you need to make 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 the investments that need to be made to fuel your growth.

Assessing the required investment capital will also guide you towards the optimal type of capital to raise. Will you need to secure additional equity? Can you obtain 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 a responsible cash burn and controlled spending.

Finally, remember that all investors are going to discount your projections. Of course, being too aggressive with your numbers could potentially jeopardize your credibility with investors so a combination of aggressive and realistic is the way to go. Show that your business has significant potential to scale and generate attractive profits, and do so in a manner grounded on realistic fundamentals. Start with a realistic base case and include an upside case as well showing the potential if all the stars align.

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