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.

---

Top 10 Ways to Turn Clients Into Raving Fans

Do you find great joy in being a coach? If... Read More

Private Practice Success: 10 Essentials for Starting a Practice

As a counselor, therapist or healing professional (massage therapist, physiotherapist,... Read More

The Top Ten Ways to Stop Procrastinating Now

10. Procrastination Condemnation - Lose the Labels! All those things... Read More

Brainstorming! The Key To Wealth

Advertising executive Alex F. Osborne first coined the word "brainstorming"... Read More

Top 10 Ways to Use Quotations to Be Healthier, Happier and More Productive!

Most people have at least one favorite quotation from a... Read More

The Benefits Of Helping An Online Business Newbie

Do your remember when you first ventured out in the... Read More

Are You a Project Manager Or a Project Mangler?

Which one are you? An effective IT project manager, able... Read More

Top Ten Ways to Manage Interruptions

So many people I worked with said they got more... 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

Reminders For Running A Better Business

The following tips are from an article we contributed to... 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

7 Keys to Running a Successful Business

Although dentistry may appear to be different than other types... 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

Why Dont They Just Get It Done: 7 Performance Tactics for CEOs

Buckling under the weight of chronic corporate restructuring, and frustrated... Read More

Top Seven Questions for Starting Projects More Effectively

We all are project managers. Some of us manage projects... Read More

How to Counsel Your Non-Performing Team Members - 10 Tips

Counselling non-performing team members is a tough part of any... 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

10 Great E-Commerce Businesses You Can Start Now

If you've been thinking of starting a business on the... Read More

7 Ways To Get One-way Links To Your Site

One way links will help you gain better rankings in... Read More

Checklist for Hiring a Private Investigator

Looking for an old friend? Want to know if your... Read More

Yummy Yummy: Top 7 Business Lessons from the Wiggles

At Macquarie University in the early '90s, three Australian early... Read More

How To Eliminate Your Competition Without Bloodshed

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

7 Secrets to Writing Inventory Procedures

What would You do with $1,000,000With $1 Million would you:?... Read More

Top 7 Tips For Writing Your Marketing Plan

A lot of people are at a loss when it... 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

Plan Your Success In Seven Ways

Many businesses lose money yearly because they don't think creatively... Read More

Ten Tips For Starting A New Job

1. Get to know people. First meet those people in... Read More

The Seven Secrets of Top Performers

Let's put to rest the fallacy that success, in sales... Read More

5 Tips to Manage and Organize E-Mail

How do you focus on your urgent e-mail and organize... Read More

Shaking Your Money Tree: Seven Ways to Make Quick Cash

Does your business have a money tree you can shake... Read More

7 Tips for Home Business Start-up Success

1) Prepare a realistic business plan.Think of this as your... Read More

No More Lists To Remember

Are the endless lists of Top-7's and Top-10's taxing your... Read More

10 E-mail Organization Tips

Who doesn't have issues with organizing their inbox!? I receive... Read More