The reason many investors like to look at financial forecasts of early stage companies is not only to scrutinise the numbers but to get a steer on the main drivers of the business and to incite conversations with the founders on what the near and medium term looks like for the business and how they will get there.
A seasoned investor can glean a great deal from forecasts to help them evaluate their investment decision. At Numberslides, we ensure that the forecasts are well structured, standard and clear to pull out the necessary conclusions.
Entrepreneurs can walk you through their thought processes and use their models to demonstrate how adding a dozen new reps, or a product extension will alter their future.
What do financial forecasts tell funders about you?
Ambition - A financial forecast puts a scale to your business plan. It gives the investor and idea of your ambition. It is best to show a base case (Your expectations) and then scenarios that move away from that. This shows the investor that you have prepared for a number of outcomes.
Financial Literacy - We don’t expect most founders to be quants, but a lack of sophisticated financial knowledge on the founding team is worrying (though not disqualifying). We’re not looking for expertise on spreadsheet macros, but a sense for the math behind the biz.
Organisation - A well structured model with validated assumptions tells an investor you have your house in order. The model is only as good as the data/assumptions that underlie it. You should have a data room that documents historical financials and other quantitative data.
Detail orientated - The detail in a forecast can tell investors a lot - mainly that you understand the core drivers of the business rather (It does not need to be down to the stationary and coffee budget!).
Accuracy - A clear and realistic forecast show an investor that you have clarity over your numbers and you are operating in the real world. It is important to research you assumptions and have a clear rationale so as to not undermine your entire pitch.
Problem solving - in every model that are unknowns. How you go about sizing and creating your assumptions and take your investor through the workings will show that you are a structured thinker and a problem solver - after all there will be many more problems to solve over the life of the business
What do financial forecasts tell funders about your business?
Capital Needs - How much capital is needed to deliver the plan - having a sense of the funding requirement is very important to a funder and whether this is an investment for them.
Timing of cash - Forecasts need to show the actual inflows and outflows of cash. Often financial forecasts miss out the time it takes to get paid and/or pay a supplier, in other words the working capital - this can dramatically impact the business.
Milestones - An investor can use the model to see the timings of some of your milestones e.g. first paying customers, geographic expansion, future fundraises, bringing an outsourced service in-house - all of which, if aligned with your narrative will support your overall plan.
Speed of growth - All investors will want to see growth which can be clearly identifiable from forecasts. Forecasts will also show speed of growth and whether this is sustainable and/or realistic.
Your sales funnel - Having someone to pay for your offering is critical to revenue. In most businesses, client acquisition will have a cost associated with it such as sales agents or online paid adverts - Clear identification and understanding of your sales funnel will show the investor a core understanding of your revenue drivers.
Operational efficiency - Financial models give investors an idea of operational efficiency in other words how well you are using resources to turn revenue into profit. Some metrics include gross and operating profit margins but also working capital ratios and revenue per employee - all give a lens to the business and deeper understanding.
Your cost breakdown - Forecasts show an investor the make up of your cost base which in turn gives an idea of what is fixed and what is variable and your burn rate and your runway. After all, a healthy business needs to eventually cover its costs.
Opportunity risk - A financial forecast will give some other indications to an investor around risk e.g. is there a key person dependency or are vital parts of the business workflow outsourced. Does all revenue stem from introducers with no inhouse sales teams. These are risks that you should be alert to as the model owner and have a prepared rationale/mitigation.
Valuation - The model will provide an investor with the methodology for your valuation and future valuation expectations which is generally based on the discounted value of the future cashflows or a multiple of EBITDA. Financial forecasts will stand you a better chance to defend your valuation. Note: there are other non-financial considerations e.g. experience of the founders, competitive advantages and size of market to name a few.
This list is just a few things that show the power of the financial model in your fundraise and how it showcases more than just "numbers". A financial model is a tool that should be used to manage the business and should not be a rushed / last minute thought when you are approaching a fund raise to appease your investors. Get ahead of the game and build and manage your forecasts with Numberslides.