Financial Modeling: Making the Numbers Work
- Learn techniques in this article to build a strong financial model
- Read here about common pitfalls to avoid
Looking to create a startup? Have dreams of being an entrepreneur? Good for you! But read this first; it could save you from headaches, heartaches and lost opportunities… I speak from experience.
One of the single most important parameters any start-up must get right is the financial model or operating plan. The financial plan has an immediate and very real impact on all facets of the business. If the financial plan doesn’t work, the wheels will fall off all other parts of the business.
Getting this right will be tremendously helpful to your fundraising efforts. Getting it wrong will create serious doubts in investor minds as to your ability and competency to successfully develop the company and product into a successful entity.
Simple equation: NO CAPITAL = NO COMPANY.
Each company tends to have its own unique set of circumstances that must be factored into the individual operating plan. It is this element that is the main reason you really need to build your plan from the ground up. Trying to use a pre-existing template will likely miss important aspects unique to your company and may also send the message that you’re trying to take the easy way out. Building the plan from the ground up will show investors that you have taken all pertinent issues into consideration, that you thoroughly know all aspects of your business and that you have accounted for all possible scenarios.
While there are a number of prepackaged programs on the market, they all tend to suffer from a few common pitfalls that will reflect poorly on you and your company.
One of the most common is that in an attempt to turn the operating plan into a presentation, some of these prepackaged plans use colored charts and other graphics to illustrate the numbers. This can be a HUGE mistake as this is no time to try to WOW the potential investors.
The investor slide deck is the appropriate time to show off the company and the opportunity. But when you are at the nuts-and-bolts stage of explaining how you will drive the company to success, it is content and real-world numbers that will sway investors one way or the other. Graphical presentations at this stage can often be seen as fluff and an attempt to cover up deficiencies in the plan.
Best to stick to the numbers.
If you’ve made it this far with a potential investor, chances are they have already been impressed with your overall story and the market opportunity. What they are most looking for now is to understand the mechanics of how you will be successful in your go-to market strategy.
A simple rule to follow: GIVE THEM WHAT THEY ARE LOOKING FOR.
Experience has taught that a simple spreadsheet format that covers all of the basic parameters in an easy and straightforward manner works best. If there was ever a time for you to do your homework to ensure you can demonstrate your full knowledge of the market, your plan and contingencies, this is that time.
By having played a very active role in building the plan, you should be familiar with all aspects of it. An easy way to test this prior to presenting to an investor is have your friends and colleagues review the plan and ask any and all questions that may come to mind. You want to prepare yourself in such a way that you can answer any questions that are asked of you.
This shows in a very convincing fashion that you know the business, you know the market and you know exactly how and why you and your team will be successful.
By taking the approach that your personal expertise, knowledge and commitment are selling the plan, (and not relying on superficial graphics of the plan to sell anyone), you will be far more likely to come to terms and secure the all-important investor dollars. Providing straightforward numbers in a clear and concise way that you can personally defend is the shortest path to success.
Now is the time to show how good you really are!
Here at Lead Read Today, we endeavor to take an objective (rational, scientific) approach to analyzing leaders and leadership. All opinion pieces will be reviewed for appropriateness, and the opinions shared are solely of the author and not representative of The Ohio State University or any of its affiliates.
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