20/10/2016
Tips for Developing Credible Financials
NONPROFIT/ FOR PROFIT TIPS
Face it: Sooner or later, you'll have to prepare a set of financials whether as a legislative requirement or because you need to raise finance, also it may be for internal use by decision makers.
In each of these cases, the reader may be looking for something different. Lenders will look for a strong likelihood of repayment; investors will calculate the value of your company; and management wants to see revenue growth while controlling expenses.
Despite these differences, all of them will expect to find the same information on which to base their evaluations. So, while creating a financial statement is not easy, it’s not rocket science, either. Here are few tips to keep in mind when developing yours.
1. Wherever practical, make Financial Statements Conventional: Financial statements should be done according to what are known as "generally accepted accounting principles." Bankers and investors, who examine dozens of financial statements every day, are accustomed to seeing expenses, margins, taxes and other items identified in certain ways and in a certain order. This allows them to review a company’s financial state quickly and easily. So, the financial section of your business plan should consist of three types of standard statements: cash flow, income (sometimes referred to as the profit/loss statement) and balance sheet.
2. Cover Both the Past and Future: Business plans should provide detailed financials for the previous three years, if the company has been in operation that long. Based on those results, future financial statements can be projected. Since accurate forecasting is difficult, don't provide more than three years' going forward unless specifically requested.
3. Provide Monthly (Short Term) and Annual (Long Term) Data: Use monthly data for the current year. For the future, use annual figures. Since your financial results will probably end up being different from your projections, there's no point in spending time on monthly forecasts for the years ahead.
4. Project Realistic Numbers: All bankers and investors want to do business with ambitious entrepreneurs, but not ones who wear rose-colored glasses. For example, it is not realistic to expect that your business can double in size every year. It is also not likely that you will achieve economies of scale while growing rapidly because you’re likely to be increasing your fixed costs as well as revenues. If you do, be prepared to explain how.
Bankers and investors ordinarily assume that a start-up company's projections are wildly optimistic; just saying that your numbers are "conservative" won’t cut it as an explanation. Ideally, you've done some test marketing and/or have hard experience with a comparable business to provide some basis for your projections.
5. Consider Several Scenarios: One way to ease the concerns of outsiders worried about overly optimistic projections is to provide different outcomes. However, don't provide more than two: Loan officers and investors are overwhelmed by paperwork, so less is more.
Prepare a base case and break-even case. The former should show what you realistically expect the business to do; the latter should show how low sales could go before the business begins to lose money
6. Include What’s Important and Summarize the Rest: Don't include every individual line item. Let's hold it here for today....
