10 Steps for Simplifying Business Plan Financial Statements

For most business owners and entrepreneurs, preparing, and communicating the financial statement section of a business plan is like trying to give driving directions to someone who doesn't speak the same language.

"Numbers" is the language most investors speak. But, it is also the language that many business owners and entrepreneurs don't speak or understand.

So how do you bridge this gap?

1) Understand there is a difference between "crunching" or preparing the financial statements and presenting them.

Preparing business plan financial statements often requires expert knowledge of double-entry accounting, taxes, merger and acquisition accounting, and finance. Skills most business owners or entrepreneurs don't have, except for perhaps the most seasoned or those with accounting backgrounds. Presenting the numbers, however, only requires that you understand how what you plan to do translates into cash; and, what the potential financial risks for the business are, and how you'll minimize them. If you cannot demonstrate that you understand these, then why would an investor ever give you money?

2) Get help early on.

Okay so you don't have any money to hire a CPA or an accountant, and they just won't do it for nothing. Reach out to your local college. Find the head of the accounting department or an accounting professor. Then, see how your project might be used to help the class learn about accounting, starting a business, or building financial models. The point is; you need someone who understands how to build projected financial statements based on your specific plans for the business. It is also important to find someone who can help you understand your financial statements.

3) Know the kind of investor you are seeking.

This is the same as a writer taking the time to know the audience before writing a book. For example, a banker puts more weight on the business' liquidity, collateral, and ability to convert assets into cash quickly if the business runs into trouble and a loan is called. The emphasis on these financial measures is different for a venture capitalist whose interest is more on how quickly your business can grow, the potential future cash flow it can generate, and the potential for cashing out at an amount much higher than the initial investment.

4) Present only the numbers and measures most important to your type or types of investors in the body of your business plan.

Save the more detailed financial statements for the appendix and due diligence stage. Of course you need detailed financial statements and projections to support your business plan, but don't think you need to share them with potential investors upfront. Investors are more interested in seeing if a few key numbers and financial measures make sense and that they support your strategies before they waste time digging through your supporting data. If they are interested in moving forward with you, believe me, they will dig into your financial statements.

5) Use graphs and tables wisely to present financial information.

Graphs are great for presenting trends and comparisons. Keep them simple and uncluttered. Be sure headings, labels, axis tabs, and so on are clear and legible. Nothing is better than a great graph or table to convey a message clearly and quickly. But remember, a bad graph or table can create much damage and confusion too.

6) Check you numbers.

Like typos, a wrong number can shatter your credibility instantly. It can cause your potential investors to lose confidence in your ability, or to question your understanding of the business. Be sure the numbers in your plan agree to the correct model or version of your financial plan. Verify the numbers in your business plan agree to all supporting documents.

7) Always include a statement of the sources and uses of cash.

If you have teenagers, I'm sure you always ask them where they're going to spend the money you're about to give them, before you hand the money over to them. The Statement of Sources and Uses does the same for investors. It tells potential investors how you plan to use their money. The statement accounts for all the money coming into the deal, whether it is bank debt, seller notes, personal cash, cash proceeds from the sale of stock, and so on. It then explains how you intend to use this money, whether it is to buy an existing business, buy certain assets, payoff existing debt, or payoff certain start-up liabilities, fees, and expenses.

8) Include all three fundamental financial statements: income statement, balance sheet and cash flow.

Don't just provide potential investors with an income statement, it doesn't give them the complete story. Also, be sure that all financial statements conform to Generally Accepted Accounting Principals or GAAP. Include at least three years of actual historical financial information, if available, and five years of projected financial statements. Although no one expects you to be able to predict the future with absolute certainty, projections do provide insight into your thought process, assumptions, and understanding of the business and its markets.

9) Maintain a good financial model capable of running sensitivity analyses to show how your projected results will change as your assumptions change.

This allows you and your investors to identify which assumptions are most critical to your future performance. Each critical assumption needs evidence to support it. Also, include in your model benchmark comparisons to other companies in your industry. Compare things like revenues per employee, gross margin per employee, gross margin as a percentage of revenues, and various expense and balance sheet ratios.

10) Use footnotes and descriptions to explain how key numbers were derived or the specific assumptions behind them.

As much as possible, keep these short and to the point. Don't get carried away footnoting every number. Footnote only key numbers or unusual items.

At the end of the day, more business deals are not consummated because investors don't feel like they can trust the numbers for one reason or another. Spend the time, effort and money to communicate your financial statements clearly and convincingly. It can be the key to making your deal a reality.

Mike Elia is a chief financial officer and an advisor to venture capitalists and leverage buyout specialists. For more information about business plans and raising capital for your business or to review his business plan manual, visit Business Plan Secrets Revealed.

---

The Top Ten Reasons to Hire a Coach

1. You have a big goal and you want someone... Read More

10 Things To Do Before You Start Your Business

If you are thinking of starting a new business, or... Read More

10 Reasons to Use Online Banking

With today's technology and people's need for more information it... Read More

7 Reasons You Want Referral Business and How to Get Them

Studies have proven that there is one reason why people... Read More

How To Finally Unlock Your True Potential And Discover The Secret To Lasting Success

Did you know that there is one critical difference between... Read More

Top Seven Reasons to Publicize your Business with Articles

Do you want to be #1-10 on Google and other... Read More

I WANT IT NOW - 10 Tips for Freight & Drayage at Trade Shows

Gas prices continue to go through the roof and increased... Read More

Top Ten Tips for Improving Your Cash Flow

Cash is king-so they say. If you work for yourself... Read More

Top Ten Reasons to Write a Sales Letter for Each Product? - Part 2

Authors/publishers are great at getting their books written. Entrepreneurs know... Read More

Tips to Starting your Own Busniess

The 9-to-5 grind can make you feel like a just... Read More

After Hurricane Katrina - Seven Things You Can Do

If you are like me, you are living some distance... Read More

Top Ten Things to Do to Make your Signature File Sell

Always include a powerful signature on every email you send... Read More

Learn to Improve Sales - 10 Ways to Get More Business Starting Today

You need sales and you wanted them yesterday. Here are... Read More

Seven Steps to Achieving Your Dream

"Vision is the spectacular that inspires us to carry out... Read More

Top 7 Business Tips For Small Business Starters For Online Business

1.) Brainstorming for an idea - You must select what... Read More

Advice for New Coaches: 10 Ways to Attract Your First Paying Client and Receive Endless Referrals

Many new coaches struggle to attract their first client. Often,... Read More

1 Step Program to Achieve All of Your Goals

In Jack Canfield and Mark Victor Hansen's original "Chicken Soup... Read More

How To Make $20.00 For Every $1.00 Invested

It has been said you can lift the Rock... Read More

The Top 10 Reasons Your Staff Wants to Quit

From an employee's perspective, management often conducts itself in ways... Read More

Top Ten Reasons to Write a Sales Letter for Each Product? - Part 1

Authors/publishers are great at getting their books written. Entrepreneurs know... Read More

Top Ten Tips: Where to Get the Best Business Books Now!

There are many places you can get books, and I... Read More

The Top Ten Qualities that Allow Business Operations to Grow Easily

My husband and I were enjoying our dinner meal one... Read More

How To Eliminate Your Competition Without Bloodshed

So how do you eliminate your competition without bloodshed? You... Read More

Top 10 Ways to Start a Business For Less Than $500

We've heard numerous success stories of Internet entrepreneurs like Jeff... Read More

Increase Exposure, and Profits With Powerful Memorable Business Cards Using These Ten Strategies

Your business card is a valuable piece of real estate... Read More

The Warning signs of Online Fraud and How To Avoid It

The number may seem grim for Web-based commerce. In 2004... Read More

Business Attire: 10 Tips to Perfect Your Look

Being appropriately dressed is essential in making good impressions in... Read More

Top 10 Items For A 21st Century Toolbox!

Skilled workers of every age have prized their tools. I... Read More

7 Steps Toward a Better Website

Creating a website is one thing, making it better is... Read More

Home Furnishings in India : How to Find an Exporter,manufacturer or Supplier ? Beyond a Database.

Looking for a manufacturer or supplier of home furnishings in... Read More

The Top 10 Reasons Businesses Succeed

Only one of every 5 businesses makes it to its... Read More

How To Use The Power Of Focus To Build Massive Momentum In Your Business

Getting focused on what you want to achieve and creating... Read More

How To Use Bartering To Gain An Advantage Over Your Competition

If you have a business on the Internet you should... Read More