When preparing financial projections for a business plan, you may need to consider raising finance from venture capitalists, business angels and/or banks.
Here are some tips. They assume you are using a fully-integrated financial planning tool, like our Exl-Plan range, to prepare projected income statements, cashflows and balance sheets covering a time horizon of 3-5 years or so.
- Use "most likely" (highly probable) assumptions to generate initial projections but exclude, for time being, any assumptions about external funding. When the financial model runs without this funding, it should automatically build up a substantial overdraft (cash shortfall) based on projected net cash outflows.
- Review the trend in the overdraft and identify its peak month/quarter and value.
- Review the desired mix of external funding - overdraft, grants, loans and equity - and inject funding amounting to the peak overdraft into the model.
- Rerun the model and check that key ratios - especially debt/equity and quick ratio - look sensible for all months/years. If needs be, adjust the mix of funding to improve these ratios. For example, if the debt/equity ratio is 100%, consider reducing the debt level and increasing the equity content.
- Take note of the timing and amounts of proposed external funding.
- Undertake sensitivity analyses by running the model with revised projections for sales volumes/prices, costs and/or overheads in order to identify a realistic "worst" case.
- Repeat points 2-5 to determine "worst" case funding.
- If desired, raise the projections with altered sales volumes/prices, costs and/or overheads to see the "best" case funding and help sell the business's potential to investors.
Base funding needs on the "most likely" projections but take account of higher requirements suggested by the "worst" case. - it may be prudent to seek too much money rather than too little!
For more guidance:
- White papers on Raising Finance and Preparing Financial Projections,
- Financial and Funding section in the Business Plan Guide.
- Financial Projections Software for developing fully-integrated, multi-year projections.
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# eview the trend in the overdraft and identify its peak month/quarter and value.
# Review the desired mix of external funding - overdraft, grants, loans and equity - and inject funding amounting to the peak overdraft into the model.
# Rerun the model and check that key ratios - especially debt/equity and quick ratio - look sensible for all months/years. If needs be, adjust the mix of funding to improve these ratios. For example, if the debt/equity ratio is 100%, consider reducing the debt level and increasing the equity content.
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I personally don't think that venture capital will make a good source of funding while the economic crisis exists.
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