Financial projections and metrics to include in your business plan
/Crafting a compelling business plan is a critical step for entrepreneurs seeking investment. While the entire document is essential, the financial section plays a pivotal role in influencing investors' decisions.
In this article, we’ll explore the key financial metrics that entrepreneurs should include in their business plans, how to present financial projections effectively, and common mistakes to avoid when presenting these projections to investors.
Let's start by diving into the key financial metrics that you should include in your business plan.
Key metrics to include in your business plan
Revenue: This is the total amount of money your business generates from selling products or services. Revenue is a fundamental metric that showcases your ability to rake in that cash.
Gross Margin: This is the difference between your revenue and the cost of goods sold, expressed as a percentage. It gives you a glimpse into the efficiency of your production process and the potential for profitability.
Profitability Ratios: These ratios are the keys to unlocking the treasure chest of investor interest.
Return on Sales: This ratio evaluates your ability to generate profit from your revenue. It's net income as a percentage of sales.
Return on Assets: This ratio assesses how efficiently you're using your assets to generate profits. It's net income as a percentage of total assets.
Return on Investment: This ratio measures the return on the capital invested in your business. It's net income as a percentage of the total investment.
Liquidity Ratios: Investors like to see how liquid - how much cash your company is sitting on. These ratios will impress them:
Debt-to-Equity Ratio: This measures the proportion of debt to equity used to finance your business.
Current Ratio: Show off your short-term liquidity and ability to cover obligations with this ratio. It's the proportion of current assets to current liabilities.
Working Capital: Providing insight into your operational liquidity, working capital is the difference between your current assets and current liabilities.
Now that we've tackled the metrics, let's discuss the art of presenting financial projections in a way that will leave investors wanting more.
Financial projections to include in your business plan
Align with the Presentation: Make sure your financial projections flow seamlessly with the rest of your presentation. You want those numbers to make sense in the broader context of your business plan.
Unit Economics and Industry Benchmarks: If you have profitability on a unit or product level, flaunt it! Benchmark your financial projections against industry standards and comparable companies for that extra oomph.
Connect Projections to Business Strategy: Use visual aids like graphs or charts to illustrate how you'll allocate funds. Show investors how your projections tie into your business strategy, giving them a clear picture of how those funds will be utilized.
Use Simple and Standard Formats: Keep it classy and professional by presenting your financial projections using common formats like income statements, balance sheets, and cash flow statements.
Visualize Financial Data: Use graphs, charts, or tables to bring your financial data to life. Highlight key trends, ratios, or indicators to enhance understanding and capture attention.
Avoiding pitfalls is just as important as showcasing your strengths. Below are some common mistakes founders make with their financial metrics.
Common mistakes with financial projections
Unsubstantiated Revenue Projections: Don't leave your revenue projections hanging without solid research and logic. Back them up and give investors confidence in your forecasts.
Unrealistic Cash Flow Projections or Ambiguous Profit Explanations: Be real. Unrealistic valuations and profit predictions or vague explanations of fund use won't impress anyone. Keep it grounded and crystal clear.
Inability to Explain Key Assumptions: Be able to articulate your key assumptions with finesse. Share your thought process and respond thoughtfully to any investor inquiries.
In conclusion, the financial section of your business plan holds incredible power to sway investors. By focusing on key financial metrics, presenting projections clearly, and avoiding common mistakes, you'll build that investor confidence make your business plan more compelling, and increase the likelihood of securing the funding needed for success.
