Ten steps to producing a robust financial model for your company

Kevin Lonergan discusses how to present your company's financials in preparation for the scrutiny of investors.

Any start-up owner knows that sniffing out potential investors and then converting them into actual investors is a tough call. Knowing how to pitch your concept to the holders of the purse strings so it is presented in its best light as well as standing out from the crowd is crucial.

One of the first things an investor will look at if he or she is remotely interested in getting financially involved in your start-up is your financial plan, so it’s essential that it is robust.

1. Provide full information. Make sure you have a full five-year cash flow, profit and loss and balance sheet forecast to present to investors.

2. Present your information well. Take time to present this information in a simple and easy to navigate way. There’s no excuse for shoddy presentation these days; there are plenty of free to download document styles on the internet and once you’ve found one that fits with your branding or is neutral enough not to shock, it’s a case of getting to work on realistic figures. Also consider engaging with a corporate finance accountant if you are trying to secure significant angel investment.

3. Summarise your document. It’s important to include a summary page with headline figures to insert into the executive summary in your financial modelling document. In many instances, the actual investor will only read your summary and will pass the full document over to someone else for an in-depth review.

4. Include all your funding requirements. Make sure you show clearly your funding requirement over three to five years and don’t forget to include potential loans and grants in the model. Already secured grants and loans demonstrate that other funders have already had confidence in your idea and might help sway an investor who’s sitting on the fence.

5. Be thorough. Show clear and easy to understand information for all different revenue streams, gross margins and overheads. This is essential to give credibility to your projections.

6. Build in a contingency. Things change rapidly in the world of business. Prices, as well as supply and demand, can rise and fall faster than we imagine, and including a contingency in your financial plan is a good way of demonstrating your awareness of this. However, you need to go a step further than including them, you need to make sure that your contingency figures are deliverable. For example, if demand is 20 per cent higher than you expect, can your business processes deal with that increase timely and within budget? If not, then you need to explain how you’ll satisfy that increased demand.

7. Have a number of different models. Projections are just that; they are what you might reasonably expect to happen when you launch your product or service. They are not facts until they have happened. It is for this reason that it’s reasonable to have a number of different financial models for how your business might pan out under different circumstances.

8. Make your document flexible and easy to change. Your financial model needs to be fluid and easy to change as events in your business change. It could be that a relatively small event causes a significant knock-on effect to your model and it’s for this reason that you need to make sure your financial model is flexible and easy to change. That said, when you’re presenting it to potential investors, it’s a good idea to present it as a .pdf, because that will help prevent inadvertent (or deliberate) changes being made by other people.

9. Present realistic figures with solid assumptions. While it may be tempting to over-egg the custard, there really is no point when it comes to financial modelling. You need to make sure that your figures stack up and that they are based on solid and realistic assumptions.

10. Prepare your answers. Make sure you can supply clear reasoning if you are asked any questions about your assumptions. Being confident behind your plan is an essential part of the investment securing ‘sales process’. Ensure that you have answers for every assumption and that they are clear, credible and concise. Don’t put all your hard work at risk by stumbling your way through the ultimate grilling you’re likely to get from any serious investor.

Kevin Lonergan is a commercialisation adviser at Alba Innovation Centre.

Further reading on managing financials

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