Are Your Financial Projections Believable?

Many people think a set of financial projections is a business plan. Wrong. Experienced business people know that no matter how honest and forthright your financial projection is, it cannot present the full picture. To achieve credibility for your financial projections, be prepared to demonstrate an understanding of your market, describe your product or service in detail, formulate your marketing strategy, outline your promotion and sales plans, and most importantly, introduce the management team responsible for using the capital and driving your business toward success, the financials demonstrate the viability of your business, but each element of your plan makes a difference to the success or failure of your business.

Investors understand that financials for new businesses in undefined markets are very hard to estimate, much less verify, but be realistic. Even if you believe that you can build a $500 million business in five years, understand that this kind of growth would make you one of the fastest-growing companies in American history.
~ Mike Frank, a general partner at Advanced Technology Ventures
Business assumptions: Garbage in, garbage out…

You’ve heard that before. Every good financial plan begins by introducing and explaining the major business assumptions you used to make your projections.
Your business assumptions are what you must sell investors; the rest is arithmetic. Every assumption needs to withstand the challenge, “How do you figure that?”

Differences between your assumptions and those of your investors can drastically alter the outcome of your financial picture and their perception of your business. You and your investors must agree upon your assumptions. Your ultimate assumption is that there is demand for your product or service by enough customers who you can reach easily and sell to economically, and, who will ultimately provide the cash to repay the loan or investment you are seeking. The deal is won or lost in the assumptions. Financial projections are just the arithmetic that play out what might happen next.

A business assumption is any condition that you believe to be true based on your research and analysis. For example, you may assume that you will reduce your cost of goods by obtaining a volume discount on supplies. Other assumptions may have to do with federal interest rates or the condition of the general economy. Still others may include the availability of a fully staffed and trained production facility, ready to do business by a certain date.

The validity of your assumption affects the attainment of financial goals. Some of your goals might be achieving self-supporting profitability, or reaching the break-even point, or selling the business outright, or conducting an offering of public stocks. It is usually assumed that your costs, including labor, will increase by the general inflation rate. Hopefully, costs will also be decreased by volume discounts and better negotiations with suppliers. If costs are shown to be level or decreasing, comment on that fact and explain the underlying reasons.

Remember, you are pitching your business to people who understand the basic realities of business. They want and need to see the numbers, they also need an explanation of how you arrived at these numbers. The explanation must be believable from start to finish.