What Investors Are Looking For in a Financial Forecast
It’s common knowledge that when potential investors review a business proposal, they want to know if the business will be profitable. They look for indicators that determine whether the plan is sound and if so, how much it will make and how long it will take to break even and reach probability.
Understanding the variety of indicators investors are looking for in a start-up will improve your chances of receiving funding. Otherwise, you risk getting rejected every time you try to raise investment.
What is it they’re looking for that will convince them to invest? The answer lies in a financial forecast describing how great your business plan is.
The Factors Investors Are Looking For in a Financial Forecast
Investors will be looking at the following metrics, so it’s better to hire a world-class company offering financial modelling Australia services to improve them.
Start-up costs include licenses, lease, furniture, supplies, equipment, and other expenses necessary to get your business up and running until you start generating revenue. Even if you can convince an investor that you have a profitable idea, they will want to know what their initial contribution will be and whether it will be worth it.
Part of the start-up investment funds will go toward operating expenses in the first few months of business. However, to prove that your business is profitable, investors will have to see that you can continue operations and manage the costs using primarily revenues. Create an extensive operating budget that details what it will cost to operate the business and how you plan to fund it.
Cash flow is the rate at which money comes in and out of the business. Create a cash-flow statement that proves you will have enough cash to pay your bills and continue operations throughout the year, based on your profit. It’s better if you can prove that you will have free cash flow or the amount of cash left after your expenses every period to guarantee sustainability.
Sales & Revenue
Investors don’t expect an immediate return on their investment. But, they want to know whether they will have a decent return in at least 3-5 years. You will need to have an objective analysis that will justify your sales projections and prove your long-term stability. If you can’t show a realistic path to solid revenue within that period, the investment will not likely happen.
While investors accept short-term losses, they are expecting a profit and a return on their investment sooner than later. There are at least two break-even points that they want to happen in your business: the one when your revenues start covering your expenses and the other is when your profits match their investment. In your financial forecast, there should be a point where your sales target will also get you to profitability.
When all the costs are accounted for, will you be able to make a profit? How long will it take to make your business profitable? How will that compare to the industry standards? Because investors are usually paid out of a percentage of profits, will that profit be enough? When you forecast your profits, it should continue to increase every year as you become more aggressive in making sales.
Your business may mature and remain profitable every year, but what investors want is for that profit to grow.
The scope of a business plan has changed over time and many investors today stipulate what metrics they wish to see in a proposal. There are very few tools on the market that can help you produce a comprehensive financial plan. But, the best ones are those produced by financial modelling companies that enable businesses to create high-quality financial projections in the most intuitive manner.
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