Developing a business financing roadmap and financial plan

Before you can start planning your financing and making a financial plan, you need to figure out your business model and what success would look like. This means making a list of goals and figuring out what you need to do to reach them. Additionally, it is important to make some educated guesses about the venture so that you can plan accordingly.

Key business assumptions

To ensure the success of your business plan, make sure to carefully consider and document all key assumptions you are making. Don’t miss any detail and compile a complete list including:

• product or service performance metrics
• your customer’s business case (that is, 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

Monitor and assess your assumptions regularly, adapting quickly when they are disproved. You can make life simpler by linking the business's major assumptions to its key milestones; that way you can test all related expectations as soon as a milestone is achieved.

Create your financial plan

By utilizing your fundamental assumptions, business model and execution plan, create a financial strategy for the business that consists of:

• For the next two years, a cash flow projection is required that's created from bottom-up assumptions and must include annual projections for at least three to five additional years.
• For the next three to five years, you will need a comprehensive income statement. This statement should have market expectations and predictions of gross margins and profitability. This will help you assess your business's financial health.
• A balance sheet may not be needed depending on how far along the business is and what type of investor is involved; however, any cash that would be needed for a balance sheet, like money for capital expenses or to pay back debt, must be included when making a cash flow forecast. Additionally, money set aside for inventory and accounts receivable should also be considered when figuring out where the financing for the project will come from.
• To make sure your financial plan is accurate, it is a good idea to make two different plans. One plan should be for if things go well (optimistic), and the other should be for if things do not go well (pessimistic). But usually, the regular plan you make (with regular assumptions) will be the most likely outcome.

Determine size and timing of investment rounds

If a company wants to get money from investors, they must show that they have done what they said they would do and that people are buying their product. There is a list of things that are more important than others when trying to show sales traction:

• sales
• field testing and pilot sites
• agreement to field test, pilot or use prior to shipment
• establishment of a contract to pursue a field test
• references from customer proxies (used by angel and seed investors mainly)

If you have a high-ranking job, it will be easier for you to raise money. But if you don't have an agreement to do a field test, it will be harder to get resources from normal investment firms. You should give references of people who might want to buy your product or their representatives to get angel and seed investment.

To develop your financing roadmap

1. It is important to calculate the total amount of money your business will need. This is so your business can have enough money to pay for everything it needs. Most entrepreneurs plan for a range of possible outcomes, including an extra 10-25% just in case something unexpected happens.
2. When investing in something, it is usually a good idea to split the money into two to four rounds. This way, you have enough money to fund your business plan until its next big goal. (For example: commercial product shipment or Phase II clinical trials). To make sure you are successful, let investors know how much money they are allowed to invest.

If your investment goal is not met, there are typically a few reasons why. These include:

• How much investment is available to your business?
• Are you familiar with the details of your investment? If not, it's important to understand them thoroughly. The valuation and terms may be less than desirable if they're too strict or fall below expectations. In that case, it could be wise to raise a smaller amount in order to reach an interim goal faster where the valuation is more favorable due to shifting market conditions or increased investor confidence from growing sales figures.
• How much capital do your investors believe is needed to reach the milestones and desired level of sales? They will prioritize how they can guarantee that prospective rounds demonstrate an increased market value, with terms attractive enough for current shareholders.

Don't forget to make sure that your financial roadmap is constantly being modified, adjusted and updated as you reach milestones or gain sales traction. Additionally, it should be adapted when the assumptions in your fiscal plan shift.

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.