Financial Plan: What’s your business opportunity in dollars and cents?

At last week’s lecture on financial planning, I spoke about the basics of building a solid financial plan for your business opportunity. I weaved in lessons I’ve learned as a venture capital investor having reviewed many new business plans.  More importantly, I’ve learned a lot from being an entrepreneur and creating plans that help me effectively launch and scale my business and attract the funding necessary to succeed on the global stage.

For homework, anyone interested in developing a financial plan for their business idea can work through Financing Workbook 1: Developing a Financing Strategy for your Company, which you can download here.

Below I outline some key advice I provided during the lecture.

Before the finance plan

Before building your financial plan, think through your business model, the plan to develop your technology, product or service, the market opportunity for your product or service and specifically how your organization will take your product or service to market. Your financial plan is the quantification of these business plan elements.

The three-scenario plan

A financial plan includes a cash flow forecast, an income statement and balance sheet and entrepreneurs should develop three scenarios:

  1. A probable or most-likely scenario
  2. A pessimistic scenario to determine how much cash will be needed if everything doesn’t go according to plan
  3. An optimistic scenario which can help investors appreciate the potential upside for your business

You’re probably wrong

Many technology entrepreneurs develop and spend to a plan which only addresses product development, assuming if they build the best product, the customers will come and investors will be impressed by that product and want to fund the opportunity. Neither of these assumptions are true and this is the main reason that many tech ventures fail.

Milestones = success

In The Art of the Start, Guy Kawasaki talks about the milestones critical to the success of a new venture. His simple list can apply to most tech businesses although the timeline may vary greatly from business-to-business. Guy’s milestones are:

  1. Prove your concept (both technical and business model)
  2. Complete design specifications
  3. Finish a prototype
  4. Ship a testable version to customers
  5. Ship the final version to customers
  6. Achieve break-even and profitability for your business


In the lecture, I underlined the importance of pursuing customer and distribution partner feedback throughout the above milestones and ensuring you build a product or service that customers will pay for and distribution partners will help you sell in order to scale your business. In today’s tough economic times, it is more critical than ever to develop plans that generate early sales and cash flow for your business. This provides two benefits:

  1. You’ll reduce your need for additional outside funding
  2. You’ll be much more attractive to investors since you can demonstrate customer traction for your product or service

Big piece of a small pie: Forecasting

Revenue forecasts are derived from market opportunity and should be targeted to a segment, rather than applying a small market share target of, say, 1% against a large market opportunity. In my example, the entrepreneur indicated that he would achieve 1% of a $3-billion market or $30 million in sales in year five of his financial plan. I coached him to look at the market segments and determine which slice of the total market would be most likely to use his product. His market share increased significantly by year five of his plan to 15% of a $200-million market segment. Investors prefer plans demonstrating strong market share in a targeted market segment over financial plans that target a wide audience (which usually costs more for sales and marketing) and achieving a poor overall market penetration level.

Budget for sales

While R&D expenses are the comfort zone for most technology entrepreneurs building a financial plan, selling expenses generate revenue growth for most technology companies. Newbridge Networks, a Canadian global success story founded by Terry Matthews, spent 50% of its expense budget on selling through the company’s early years and only 33% on research and development to achieve a spectacular track record of sales growth to over $300 million over six years. Newbridge is in good company with Cisco, Adobe and F5 Systems — all currently spending between 53-60% of their total expense dollars on sales and marketing.

Social costs

Social ventures entrepreneurs should try to identify and quantify any additional costs of delivering the social or environmental impact benefit, beyond the traditional business model for their product or service, to compare with non-financial benefits being generated from social mission. For example, a café owner who employs staff with disabilities may require additional or specialized training or support staff to make their employees effective.

Work in progress

For early-stage companies, a financial plan can be a work in progress. Not all elements need to be completely finalized before seeking outside funding. Entrepreneurs should be honest about where they are confident in their plan (for example, near-term product development costs) and where more work is required to finalize the plan (for example, a distribution agreement may not be negotiated yet, so entrepreneurs may use experience from another company or industry he/she is familiar with). Investors see a lot of business and financial plans and can be a useful resource if you’ve done enough work to convince them to spend the time with you.

During the Q&A period, a few questions came up regarding hiring help for your business and financial plans and compensating staff with sweat equity or splitting initial founders shares. I mentioned some articles in the MaRS Entrepreneur’s Toolkit that you might find helpful. These include:

Want to learn more about financial planning? Check out the slides and video below.

Downloads and resources

Weren’t able to attend the class? Need some notes or want to look something up? Click below for all of the goodies from the lecture. Watch the video and the slide presentation below.

CIBC presents Entrepreneurship 101 2009/10 – Week 18 – Financial Planning from MaRS Discovery District on Vimeo.