Investors and lenders require significant demonstration of your ability to repay money that will be extended to your business. Lenders will want to know when your business can be expected to make a profit, so they can be shown in yet another way that you will have the ability to repay the loan. Investors will want to know when they can expect some ROI.
Both groups will also want to know the rationale for your financial calculations and for what purposes loan and investment capital will be utilized. The following three statements will answer those questions.
THE BREAK EVEN ANALYSIS
The point in time when sales revenues generated equal business operating expenses is called the break even point. This is an important calculation for a new business, perhaps more so for those who seek funding. The Break Even analysis is also useful for established businesses that will launch a new product or service.
The B-E analysis demonstrates how much product must be sold at a given price for the business to stop losing money. The business owner can then think about the road to profitability. Investors will be able to think about getting paid back and eventually receiving their ROI.
Refer to your P & L 2 or 3 year projections and get the data for fixed and variable expenses and gross revenues. Use an Excel spreadsheet to set up your B-E analysis. You will be able to experiment with different product/service prices to learn how much product must be sold at each price point to bring your business to B-E. So now you have yet another way to help determine pricing. Excel will also create graphs for the analyses.
When you have completed each of the five financial statements, it is customary to explain your rationale for calculating things the way you did. In a new business so much is an educated guess and in an existing business past performance points the way to the future.
Events beyond your control may occur, an extreme example being the tanking of Lehman Brothers in September ’08 that set off our global financial crisis. That ruined a whole lot of financial assumptions, that’s for sure!
Give an overview of the financial picture and then discuss the P & L, Cash Flow, Balance Sheet and B-E Analysis. Let’em know you did your homework. Explain and defend your decisions.
SUMMARY OF FINANCIAL NEEDS
If you seek funding for your business, then you must document for investors or the bank how you will use their money and when you will need the infusions of cash.
Will you use the loan to finance an expansion of the business? Must you buy new equipment, hire employees, increase advertising expenditures or obtain larger office space? Provide detailed info on the costs associated with making it all happen.
Creating a timetable for the roll-out will make you look very prepared, as will including references to the sections of your plan that discuss these actions. Be convincing as you discuss how these actions will increase revenue and profits and bring in the money needed to repay the loan on time.
There are categories of financial needs: Working Capital–money you’ll need to keep the cash flow healthy so you can do business as you should; Growth Capital–money used to expand the business and increase profits; and Equity Capital–money to be used for permanent needs, it is offered to investors who will take a risk and receive a piece of the business or dividends.
Next week we’ll take a look at options for the legal structure of your business.