Financial projections are something investors want to see before deciding if they will back your company or not. Therefore, it’s essential to make your projections realistic while also keeping investor appeal in mind. In this article, Hiruy Amanuel provides four simple tips to create financial forecasts that your startup can achieve while still encouraging potential investors to back your business.
Consider Industry Expectations
We all like to think of our startups as reflections of ourselves, and we want them to succeed immensely. Because of this, you may think your startup will break the mold in the industry and have profit margins and financial ratios that are out of this world.
However, to keep your financial projections realistic, you should include reasonable industry expectations as measurements, not what you hope your business will achieve. By doubling or even tripling your expectations about other industry standards, you’re only hurting your chances of getting reliable investors on board with you.
Accurately Predict Monthly Cash Flow
Investors understand it takes a lot of financial backing to get a startup up and running, which is why you’re coming to them for support. Be accurate and honest rather than trying to downplay how much cash flow you expect your company to need. Otherwise, investors will likely call your bluff as they know you’ve got to spend a lot more than what you’re showing on paper.
It’s best to present potential investors with your first year of cash flow but be prepared as they may ask to see as many as five years of predictions if they’re seriously interested in investing. Ensure each month is accurately based on sound financial projections.
Create an Appealing Return on Investment
As much as we’d like to think investors are helping out from the goodness of their hearts, they are ultimately looking at your business transactionally, more specifically in regards to their return on investment. Your average investor will expect at least a ten-fold return on investment, so it’s essential to show how your business will provide that to them.
Perhaps your ultimate goal is to have your startup acquired by a larger company, or maybe you’ve calculated projected share prices for your startup’s initial public offering. However your company plans on creating this ROI, you should explain it clearly and concisely to investors to realize you mean business.
Avoid Omitting Standard Expenses
It’s easy to get bogged down by all the details that have to go into financial projections and decide to omit what seem like minor expenses. Unfortunately, these seemingly insignificant expenses can add up very quickly, and leaving them out of your forecasts will show investors you may not be trustworthy or prepared enough.
Rather than randomly deciding what to keep in and leave out of your financial projections, take the time to go through everything closely. Then, if you can still objectively omit something, be prepared to explain why if an investor asks.
About Hiruy Amanuel
Hiruy Amanuel is an expert on technology and a devoted philanthropist. He has invested in numerous educational and technological initiatives in East Africa. Amanuel predicts the rapid growth of groundbreaking technologies throughout the Horn of Africa as access to quality education and technology increases.