7. Unrealistic Financial Goals: There are no companies that ever achieve $100 million or more in sales and fewer still who can do it, or have done it, in only five years after funding. However, if you show only $20 million in sales after five years then it is not very appealing to angel investors or venture capitalists. Know your market and competitors and how that will affect the financial goals of your company.
8. Bottom-up financials: Construct your financials from the bottom-up, and then validate them from the top-down. A bottom-up model starts with details such as when you expect to make certain sales or hire specific employees. Top-down validation means that you examine your overall market potential and compare that to the bottom-up revenue projections.
9. Offer a valuation: Many business plans err by stating that their company is worth a certain amount. How do you know? The value of a company is determined by the market—by what others are willing to pay—and unless you are in the business of buying, selling, or investing in companies, you probably don’t have an acute sense of what the market will bear. It is too early in the process to worry about that.
10. Cash Projections: You take cash to the bank. Revenue is not cash. A gross margin is not cash. Profits are not cash. Only cash is cash. When you build your financial model, make sure that your assumptions are realistic so that you raise sufficient capital. You do not want to go back to your investors six months after getting funded because you did not project enough cash.
11. Conservative assumptions: Nobody ever believes that assumptions are conservative, even if they truly are. Develop realistic assumptions you can support. Refrain from using the words “conservative” or “aggressive” in your plan and leave it at that. It is just an assumption.
12. Incomplete financial projections: Basic financial projections consist of three elements: Income Statements, Balance Sheets, and Cash Flow Statements. All of these must conform to Generally Accepted Accounting Principles. Investors expect to see five years of projections. Everyone knows they are no doubt unrealistic, but they want to see the thought process you employ to create long-term projections.
13. Not Making Assumptions: A good financial model will show how your projected results will change if your assumptions turn out to be incorrect. This allows both you and the investor to identify the assumptions that can affect your future performance so that you can focus your energies on validating them.
14. Not Using Benchmarks: You should be benchmarking your business against other companies in your industry regarding things like revenues, gross margin, gross margin as a percentage of revenues, and various expense ratios (general and administrative, sales and marketing, research and development, and operations as a percentage of total operating expenses).
15. Not getting an unbiased second opinion: You need to have at least a few people review your plan before you send it out. They should be people who understand your market, sales and distribution strategies, the VC market, etc. You need a good accountant to review the financials in-depth.
16. Not getting it professionally proofread: Your plan may look perfect to you and your team, but that’s probably because you’ve been staring at it for months. Hire a professional to edit the plan and do whatever it takes to purge embarrassing errors. If you make stupid mistakes in your business plan, what does that say about how you run your business? Would you want to invest in it if you were on the outside looking in?
It’s always tough securing outside funding but in this economic climate it is even more difficult. However, good ideas backed by good teams and good business plans, are still getting funded. Keep in mind that an investor has dozens, if not hundreds, of plans waiting to be read. In order to get to the top of the pile, you must make sure that the cover is attractive, the binding is professional, the pages are well laid out, and the fonts are large enough to be easily read. Good luck, and we welcome you to visit our website, www.martcoassociates.com, for much more information on business plans and funding.