One of the most difficult aspects of preparing a business plan is the development of powerful financial statements.

If the statements are too grandiose, they lose creditability. For example, if they are what is commonly called “hockey sticks” the sophisticated financial analyst who is reviewing the statements will immediately discount the soundness of the business plan. A “hockey stick” projection is one where the revenues for the first one or two years are relatively modest, and then in the third, fourth and fifth year they shoot up spectacularly. On the other hand, if the projections are understated you may not be able to attract investment because the potential investors will not look favorably on the opportunity. The answer is to be very thorough in preparing your projections so they reflect the written content of your business plan.

An often overlooked aspect of financial statements is cash flow. How much money will you need each month to meet your anticipated obligations? Cash flow to a start up is the most important financial management task. Each month there must be sufficient cash to meet your obligations. Focus on the uses of cash each day. Avoid unnecessary expenditures. We have several cash flow projection sheets we can make available. These will forecast your cash needs for the following 6-8 weeks which allows you to plan the needs and uses of that scarcest of resources cash.

Finally, be accurate in forecasting your needs for getting to market. Venture capital firms and other investors react badly to unanticipated cash calls. If you forecast your total investment needs to be $500,000 and they turn out to be $1,000,000 two unpleasant things happen. First you will find that raising the additional amount will cost you dearly. The amount of equity the second $500,000 will demand will be high. Primarily because the investor will know you are desperate, and because your lack of foresight casts doubt on your management knowledge. Secondly, those investors who took a chance on you in the early rounds will find the value of their investment severely impacted. It may wipe out all or most all of it. You don’t want to be responsible for that. So be realistic.

Examine your needs, consult with those who have done it before to get their insights. Bob Savage, who manages our Rocket Venture Investment Fund, and other funds constantly reminds us, “it takes twice as long and costs twice as much as you think”. That is a good rule of thumb to follow.

Jon Klotz
Entrepreneur in Residence, Rocket Ventures
klotz@rgp.org