Developing a financing roadmap

 

You have determined your business model and developed an execution plan of key milestones for your venture. These are necessary tools to build the financial projections for your business and financing roadmap. Additionally, you will need to put together a list of key assumptions.

Key assumptions

Create a comprehensive list of key assumptions you are making about the business, such as:

• product or service performance metrics
• your customer ’s business case (i.e., their return on investment, or“ROI”)
• market size, addressable market and target number of sales units
• gross margin —for direct and indirect sales
• sales calls per salesperson
• conversion rate of prospects to customers
• length of sales cycle
• technical support calls per unit shipped
• payment cycle for receivables and payables
• compensation requirements for sales and distribution
• headcount levels and compensation assumptions for research and development, quality assurance, marketing, customer service/operations, finance, and human resources teams

Track and test these assumptions on an ongoing basis and if they prove false, react to them quickly. Ideally, you can link most of the major assumptions to the key milestones you have set for the business, so that when you reach a milestone, you can test the related assumptions.

Financial plan

Using your key assumptions, business model and execution plan, develop a financial plan for the business which includes:

• a cash flow forecast by month for the next 24 months that is developed from bottom-up assumptions, and (at minimum) annual projections for three to five years thereafter
• a high-level income statement for the same three- to five-year period based on market forecasts, gross margin targets and earnings expectations for your business
• a balance sheet may or may not be required depending on stage of the business and type of investor; however, any cash requirements associated with the balance sheet such as capital expenditures or repayment of debt, working capital required for inventory and accounts receivable, and cash available from accounts payable should be considered in your cash flow forecast, along with any sources of financing
• two alternative scenarios for your financial plan , showing an optimistic and pessimistic outcome, with your regular set of assumptions being the most probable outcome

 Once you have completed this step, you can then determine the amount of the actual financing required and the size and timing of the investment rounds.

 

References

Kawasaki, G. (2004).The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything. Toronto: Penguin Canada.
Golden, K. (2007, March). Fail to Plan: Plan to Fail. Retrieved April 7, 2009. Presentation delivered at MaRS Discovery District, Toronto, Canada.

Tags: business-plans, raising-capital