A well known venture capitalist once told me that he looks for six things in every company he meets with - focus, focus, focus, cash flow, cash flow, cash flow.
Today, Enable begins a series of columns on the financial projections that must be included in every business plan. This includes expected cash flow, revenue, and profit and loss statements. All of the forecasts must realistic - they cannot exceed accepted norms. For example, if you are an Internet security start-up, your projections should not exceed those of Checkpoint, or other leading players in the industry. An excellent source on the Internet to find comparable companies is Hoovers.
The following will guide you through the process of preparing the projections in general, and your cash flow projections in particular.
The Process Itself Is the Key
The process of preparing the forecasts is just as important as the forecasts themselves. Investors want to know that you went through the process to make sure you have dealt with the real-life issues you will be facing as you try to grow your company. They want you to consider very carefully your best and worse case scenarios. Investors want to see your impressions on where your company will be in five years.
Bear in mind that your financial projections are the result of your strategic planning. You can only prepare proper financial projections after you have conducted market research, analyzed the market, determined the human resources you need, your production costs and other capital issues. Only after this exhaustive work is finished will you be able to prepare competent and realistic financial projections.
Each and every number will have to be supported with credible data. The data you use should be logical, well researched and carefully put together. It should also be based on multiple sources.
Impress Investors - Show You Know Cash Is King
If you take the time to prepare realistic cash flow projections (monthly or quarterly) you will be doing your company a great service and you will also impress investors and be in a better position to persuade them to invest in your company. Remember, it is their money you are going to be using - so show them you are prepared to guard it as if it were your own.
Your cash flow projections are the difference between the money you expect to take in, and the money you expect to spend. Never forget that cash flow involves money in the bank. It does not include orders or invoices. Cash expenditures are cash that is taken "out of the bank.". A bill is not an expenditure until your check has cleared your bank account.
Watch Our For Accepted Industry Practice
Too many start-ups fail to take into consideration the fact that in most industries, invoices are never paid upon presentation, but usually at least 1-3 months later. In addition, many start-ups fail to realize that it will take them several months to even get their first sale. Both of these standard industry practices have an obvious effect on cash flow forecasts.
Also, it is standard practice for start-ups to have negative cash flow - if you do not, something is wrong with your forecasts. The negative cash flow will give you and investors an idea of the financial support you actually need.
Projecting cash flow expenditures is easier than trying to predict cash receipts. Therefore, you must keep reviewing and updating your cash inflow. When raising money, you should ask for at least 25% more than your forecasts indiciate that you need. The point here is to insure you do not run out of money - it is not a negotiation tactic for you to use with investors. Experienced investors will know when you have "padded" the numbers.
Do Not Be Too Optimistic
Your cash flow projections provide investors with insights into your common sense and your understanding of the difficulties facing you as you grow your company. Excessively optimistic projections will ruin your credibility and will turn off potential investors. The key point is to try to find out just how much money your really need and for how long. Once you have got to this point, you can prepare various scenarios. Remember, if your basic assumptions are correct - the scenarios will be helpful and realistic. If not, you are just wasting time - yours and the investors.
Competition
I have been asked to be a judge in the MIT Israel Best Business Plan Competition. Anyone interested in entering the competition can find information at www.mit-forum.co.il
Published by Israel's Business Arena on 10 August, 1999.