write on the money:WITH NATSAI MUSARURWA
So finally we have reached the end. Don’t worry, I mean the end of the business plans that win investors series, not the column, I’m still around. Today we will be covering the last and most important part of the business plan, the financial analysis (which I will also refer to as a financial model interchangeably within this article). This is the section where money talks, so it’s easy to see why it’s what potential investors focus on most. You can nail every other part of your business plan, but if you don’t get this right you will not get funding, it’s that simple.
As the title implies, the financial analysis demonstrates the financial potential of your business. It shows a record of your past financial performance, if it exists, and the projected performance over a certain period. I’ll give my first tip here — unless you have a very compelling reason to do otherwise, do not make projections any further than five years into the future; the longer the time horizon, the more prone to error your model becomes. Now just like all other segments, the financial analysis has its key message that it needs to communicate. The required message can vary somewhat depending on the business and the investor you are trying to appeal to, but generally it needs to spell out clearly: (1) how much funding you need and how you’re going to use it; and (2) how much you will make and, in turn, how much the investor stands to make.
There are different ways of doing your financial analysis but regardless of how you choose to approach it your model must contain your assumptions, the financial statements, and the return on investment (ROI). Again, depending on the investor additional information may be pertinent but these three items are non-negotiable.
Now building a financial model isn’t as intimidating as it sounds. At its very core it’s really just a bunch of made up guesses. Unless you can somehow perfectly predict the future, your model will be flawed, and that’s okay. That doesn’t mean, however, that you can just throw any figures into your analysis, they still have to make sense. The assumptions you feed into your model have to be backed by logic and be realistic. Realistic means you can’t say you expect revenue to grow by 110% annually for five years when you operate in an industry with hundreds of direct competitors and GDP growth is expected to average 1% over the same period. I mean you could say that but best of luck trying to pass it by investors.
Previous sections of your business plan can come in handy with building your assumptions. After doing your market analysis you should be well informed about trends in your industry and your available market, so use that information to help you.
Now for the financial statements, those being the income statement, cash flow statement, and balance sheet. It can be argued which is more important but, if you recall from my first article, it depends on the investor and what matters most to them. I’ve seen models that exclude statements, the balance sheet is the most common victim of exclusion, but please, just make sure you have all three in your analysis. There isn’t much I have to say on this part of the model, it’s pretty straight forward, but make sure your balance sheet balances (and I mean actually balances, don’t twist the numbers because you will be found out), and to make life easier for your investor also include a table with the key figures from your statements like revenue, EBITDA, closing cash balance, etc. I would recommend including this financial highlights table in your executive summary.
And finally, the ROI. This is also a piece of information that people neglect to include in their model. It’s a very easy number to calculate so it’s not like investors don’t know how to do it, but they really shouldn’t have to do any work to prove whether your business is a worthwhile investment. Hand your investors everything on a silver platter, you’re the one who wants their money after all. Again, not much to dive into with this, it’s pretty straight forward.
Other information you may consider including in your analysis, which you will find in almost all financial models done by Amras Communications (yes we do financial models as well, we do it all), is a payback period analysis, IRR, breakeven analysis, and schedules for depreciation, loan amortisation, etc.
Whatever you choose to include just make sure your model is neat and easy to read and follow.
So as my parting words for the business plan series I would just like to remind you to keep a few things in mind when writing your plan. The first thing, always remember who your intended audience is and tailor your message and plan to them. Secondly, always be clear and get to the point, fifty page business plans shouldn’t be a thing anymore. And the last thing is be passionate about what you do, that passion does translate on paper whether you realise it or not.
l Our team at Amras Communications is still more than happy to address any questions you may have as you go on your business plan writing journey, so please do not hesitate to give us a call on +263787722016 or email us at email@example.com. We are committed to your success.