Building Financial Assumptions
The financial section is the backbone of any good business plan. All other sections ultimately lead there, and more often than not, that is the first thing an investor will look at. It is crucial that the assumptions are realistic. Plans that detail financial projections that can’t be substantiated, are inconsistent, or are unrealistic hurt the credibility of the business plan. In comparison, fact-based financial assumptions and projections communicate business acumen and credibility.
As an example, if the company projects 90% operating margins, investors will immediately become suspicious. Most investors have read many plans, know the industries and have access to information that can be compared to your plan. If your expectations are way out of line with what everyone else in the industry is achieving, you have a problem.
Financial assumptions should be based on actual financial results from your Company or other firms in the industry. It is not difficult to find a publicly traded company’s operating margins and use these margins to approximate your own. Likewise, the business plan should base revenue growth on other firms.
Many entrepreneurs feel they have a break-through product or service in their market, one that can’t be compared. In this case, revenue growth should be compared to companies in other industries who have had breakthrough products or services. With this, you can justify more aggressive assumptions in your business plan as long as you explain them in the text.
The financials can either increase or significantly harm your Company’s chances of obtaining capital. By doing sufficient research to develop realistic assumptions, the financials can improve your firm’s chances of being funded. And from an operational standpoint, having realistic financial projections can help guide a company through early stage growth.