Q: I know my company will make money, but I don't know how to articulate how much in a manner that will convince potential investors. What do I actually write in my business plan?
A: You'll usually present your financial information as a set of pro forma income statements. An income statement lays out your income and expenses for a given time period; "pro forma" just means you're making it all up rather than reporting past results. A pro forma might end up looking like this:
Investors will be persuaded, in part, by the actual numbers (a $100,000-a-year business is a very different investment than a $55 million business), but most sophisticated investors will be even more concerned with the thinking behind the projections. Everyone in the funding game knows you can't predict the future. But they want to know you can think well with the info you have.
Your revenue projection should reflect your business assumptions and dynamics. That way, you can play with your assumptions--which correspond to your actual business structure--and see how they impact your revenue.
If you have a business with a sales force that generates revenue through direct sales, you might have this revenue model:
|No. of salespeople||Leads per month||Conversion rate||Average sale size||Average base salary||Commission|
**To justify your increase in sales size, insert an explanation, such as "Each year we will expand our product line and thus increase our prices."
Direct sales = no. of salespeople * leads per month * conversion rate
Salaries = average base salary * no. of salespeople Commission = top-line income * commission
Profit = revenue - expenses
Then you would grow your revenue projections by increasing the number of salespeople, the number of leads or the conversion rate. Note that the above model is simplistic in many regards, not the least of which is that it assumes revenue is realized during the same period when leads are processed.
Expenses are much easier to calculate; most of them can be found by calling vendors and getting actual numbers. My previous article on how to do financial projections, "Making Projections," discusses both revenue and expense modeling in more detail.
Ultimately, investors care about how much money they can take out of your company. So once you've created your pro formas, you must calculate the ROI (return on investment) you're offering them.
You usually pay investors back by getting acquired or going public. Your eventual value is a wild guess, but it's your guess to make. A full discussion of valuation is far beyond what I can easily answer here.
Normally, you would put very abbreviated income statements in your executive summary (just revenue, cost of goods, general administration and other expenses) along with a proposed ROI you're offering. In the appendix of the plan, you would lay out your full financials with the assumptions clearly stated.
I recommend not inflating your numbers to meet your investors' needs. Only ask for an investor's money if you truly believe you can give them a good return. Otherwise, you'll end up beholden to a group of people you're disappointing.
Stever Robbins is a consultant specializing in mastering overwhelm, power and influence. The author ofIt Takes a Lot More Than Attitude...to Lead a Stellar Organization, he has been a team member or co-founder of nine startups, an advisor and angel investor, and co-developer of Harvard's MBA program. You can find his other articles and information at SteverRobbins.com.
This article originally appeared on Entrepreneur.com in 2001.