Fortune Telling Putting together financial projections that attract investors

In every company's life, there comes a time when it mustlook into the future and try to imagine what its financialprospects are. Often this occurs right at the point when theproduct or service is fully developed but not yet launched.It's at this moment that most entrepreneurs--faced with theenormity and cost of evolving from a product development company toa sales and marketing giant--seek outside financing.

Naturally, the first question would-be investors ask is"What do your financial projections look like?" Thereason investors ask this question is simple: Companies are valuedin relationship to their earnings. Hence the future value of theinvestment depends on how the company performs down the road. As aresult, access to growth capital depends in large measure on theentrepreneur's ability to paint a credible and compellingpicture of his or her company's financial prospects through aprojected income statement.

But how to do so effectively? "It's naive to simplystart with baseline sales and apply a formula that increases themby 20 percent per year," says venture capitalist Fred Bestewith Mid-Atlantic Venture Funds in Bethlehem, Pennsylvania."It's probably even more naive to suggest that the marketis a certain size and the penetration will increase a certainnumber of percentage points each year. The fact is, there'snothing formulaic about projecting future sales. It requires goingthrough a spreadsheet cell by cell and thinking about each quarter.It's damn hard work."