I will be speaking later this month to a group of start-up entrepreneurs in northern Kentucky on the topic of “Financial Information for Investors.” It seems only fitting to also share this material with those who read this blog.
Investors want to understand your vision for the company and they want to see financial information that is consistent with the fulfillment of that vision. Your historical data must be well-formatted in a manner that the investor is accustomed to seeing. It should contain an income statement, balance sheet and cash flow statement. And you should include projections that are realistic and well-documented.
Investors are concerned about how you will spend the funds they provide. Your projection should include the same financial reports as the historical data which will demonstrate where the cash will be invested in your business. I like to include a build-up of the revenue stream by product line, or if appropriate, by SKU. Indicate how quickly you anticipate payment from your customers and how much financing you can obtain from your suppliers. This may mean breaking your product cost into major components to show purchases from significant suppliers. Also include anticipated inventory levels. What will you need to stock to meet the revenue projection? Think through what lead times will be with these suppliers so that you have sufficient inventory to meet demand while waiting for your next delivery.
If you expect to borrow additional funds or have existing debt, show what the cash needs will be to service that borrowing. If you are using financing secured by inventory or receivables, demonstrate that you have sufficient inventory and receivables to collateralize that borrowing.
Think through your capital equipment needs. What equipment will you need to meet the revenue projections? How will that equipment to financed, with the investors money, leasing, or borrowing?
Consider your customer base, are they broad enough to meet your plans? If not, what is your marketing plan to expand your customer base? Ask the same questions about your supplier chain partners, can they support your projections? And what employees will be needed to support the revenue levels. This is critical in service companies.
Finally, document your assumptions. Your assumptions must be clear, consistent and attainable. Investors are accustomed to reviewing plans. Make sure your proposal is exciting, logical, believable, and attainable.