If you are trying to raise angel or venture capital investment you have probably been asked for a detailed set of financial projections from your potential investors. There are 3 areas that you really need to focus on as you build your forecast.
1. Market Potential Narrative – Investors want to know that you are entering a large enough market that the investor has the potential to earn a large return. If your market potential is only $10 million in annual sales, then you can’t expect to raise 5 million in investment. The market is simply too small. Here is an example of how I developed the market potential for ProjectionHub.
2. Cash Flow Projections and Analysis – If you ask for $1ook in investment, but when reviewing your cash flow projections the investor realizes your cash balance never drops below $80k. You are asking for too much. You don’t need to keep such a high cash balance. You might be able to ask for $25,000 instead, and retain significantly more equity in your business. What if sales double, how does that impact your cash? What if sales are cut in half, how is your cash flow changed? Investors will want to see that you have looked at various scenarios like this.
3. Do your Projections Seem Realistic – No one can predict the future with perfect accuracy. Investors don’t expect your projections to be correct, but they do want them to be within the realm of possibility. Your projections should be based on data, and should be built from the bottom up.
Once you have built a set of realistic, data driven assumptions, creating your pro forma financial statements is easy. There are a number of tools that will help you create the actual statements, including ProjectionHub. You can get started here.