Entrepreneurs tend to spend too much time looking for money and not enough time making it. This problem stems from the lack of adequate pre-planning given to the initial use of funds. In order to determine what your short and long term capital needs are going to be, you must perform accurate financial projections.
Your projections must consider:
The cash flow model is the best tool for determining your capital needs. Don’t be overly optimistic or too conservative, either one will hurt you. Know what factors will affect your projections to the downside, (sales, costs, price breaks, etc.). Work closely with third parties, financial advisors, accountants, industry consultants, retired executives, etc., to keep from having tunnel vision and missing the big picture. Your cash flow model should be month to month for one year and the quarterly for the next two years, annually for the last two years.
It is extremely important that your financial projections fully support the amount of funds you are seeking. If you are seeking debt financing your request must be very specific. Lenders frown upon you having to come back to ask for more, because you underestimated. Investors may not be inclined to keep your management team in place if you can’t make the funding work.
Take the time to plan for the downside. It is far better to over estimate your capital requirements than to run short and be forced to go hat in hand back for more.
Both Lenders and Investors are going to want to know that you have reasonably estimated and supported your costs and projected revenues. Your financial pro forma should include detailed information and trade references on the costs of each expense you list.
In your income projections be sure to include Trade Industry support information or other market information that lends credibility to the conclusions you have drawn. Most associations publish reports of standard industry costs, margins and financial ratios.
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