Financial Projections: Why They Matter to Investors

Financial Projections: Why They Matter to Investors

Many entrepreneurs have a brilliant business idea, but fail to back it up with solid financial projections. Why can this ruin their chances of investment?

By Paul Clarke

It’s long been known that many entrepreneurs and business owners don’t place sufficient emphasis on presenting a valid business case to potential investors when applying for funding, yet wonder why they are rejected every time they attempt to raise investment. This is a source of frustration for VCs, funders and angel investors alike. For them, trawling through vast amounts of poorly produced business plans can be a huge waste of time, and brings with it the risk of multiple missed opportunities.

The fact remains that numerous funding applications fall at the first hurdle because the supporting information and documentation, as well as the quality and relative experience of the management team, are not of a sufficient standard. This phenomenon is widely known as ‘The Quality Gap’.

Conversely, many entrepreneurs and business owners speak of the ‘The Equity Gap’, which is based on an assumption that there is little appetite from investors or funders to engage with startups or even existing businesses. This is in fact a false phenomenon. Investors and funders are constantly looking for opportunities to evaluate and fund but a large proportion of these opportunities unfortunately fail to see the light of day for the reasons above.

For those lending or investing, it’s much less about the product and service and more about the market, the competition, routes to market, management team and profitability.
So, if you are considering applying for funding, give yourself a major head-start by producing a suitable financial forecast and business plan to support your application. Investors and funders rarely back ‘ideas’, despite what some academics might say. Essentially, they want to know that they’ll get their money back in a given time period, make money to meet their own commercial terms, or, in the case of investors, achieve significant returns from a successful exit, typically over a five-year maximum period.

This, for some entrepreneurs and businesses owners, is a tough message. For those lending or investing, it’s much less about the product and service and more about the market, the competition, routes to market, management team and profitability. These facets, of course, are part of the bedrock of any business.

Ultimately, it’s essential to ensure that you can demonstrate your business model to an investor or funder. This is best built on a solid financial forecast – not just on 20 sides of A4 – describing how great your product or service is, and how “it’s therefore definitely going to achieve ‘x’ sales multiples”. So do your financial forecast first, then explain this forecast in the business plan. Not the other way around. Show me the money
Show me the money:

A strong set of financial projections will go down well with investors

Financial forecasting made easy

The scope of a business plan has changed over the years, in particular over the last 18 months. Many platforms or funders now stipulate which sections of a business they wish to see at application stage. Often, this means a lot less ‘narrative’ than was previously the case. They are much more interested in the numbers.

There are very few useful cloud tools on the market to help you produce suitable financial plans. While there are lots of basic templates available from the internet, most of these fall way short of what is actually required and simply won’t cut the mustard in terms of providing great insights or supporting you in preparing and producing what you need. The best tools are those that enable entrepreneurs, existing businesses and startups to produce high-quality business plans and financial projections via the simplest and most intuitive interface, and without any assumption of previous experience.

It’s worth choosing tools that are as much an educational tool as they are a practical business tool, and that guide an end-user through each stage of the forecasting process. Not only does this help a business owner test their assumptions as the plan develops, but it also aims to improve the quality of thinking that goes into the business model. In this respect, such tools can be used to further educate a user in sound basic business principles, including routes to market, financial planning, innovation, critical success factors and management techniques. This in turn means that business owners will only need to utilize advisors or mentors when they really need them, instead of being hand-held through a long-winded and often painfully boring exercise.

Many platforms or funders now stipulate which sections of a business they wish to see at application stage. Often, this means a lot less ‘narrative’ than was previously the case. They are much more interested in the numbers.

As well as the new cloud tools from UK-based Fund My Business, other similar products such as Liveplan (as used by Smarta) tend to originate from the USA, although they have recently been adapted for UK use. Opinion amongst funders, business mentors and accountancy practices certainly suggests that there is a desire for more choice in this space, with many people becoming critical of the longer-standing tools available to entrepreneurs, in particular the similar-styled manual template-based offerings. There’s a growing consensus that these often fall short of providing entrepreneurs and growing businesses with the best support for their funding applications. And, perhaps most importantly, many of them do not directly address the pertinent questions that investors and funders tend to ask entrepreneurs when they are pitching for investment.

Therefore, if you’re considering applying for funding, your chances of success are likely to be higher if you support your application with a robust and realistic financial forecast and business plan. Do some research, choose the tools you feel will help you achieve this and don’t be afraid to seek specific help from somebody who has ‘been there, done that and bought the t-shirt’.

About the author

Paul Clarke is director of Venture Hothouse, which develops cloud-based software for preparing business plans and financial reports. Formerly a recording artist, producer and songwriter, Clarke went on to run companies in the UK and Australia across marketing, cloud software, business planning, compliance and manufacturing. He has worked with the British government and a number of household brands including Adidas, Coca-Cola, Unilever and BMW.