Do Business Well

• Explain your assumptions.At some point in the financial section of your business plan you need to explain the assumptions that underlie your projections. That is, how did you arrive at your estimate of general and administrative expenses? Have you worked out a commission structure with your sales reps or are you just estimating the sales costs? And how much of your sales increases come from expanding volume and how much from price increases?

Consider several scenarios. One way to ease the concerns of outsiders worried about your projections being overly optimistic is to provide several potential outcomes. The first would be your expected projections_; the second, a “worst-case” scenario—if there’s an industry recession, here’s how your financial situation would be affected. Third, you may want to include a “best-case” scenario—how things would work if everything went your way. The best-case numbers may look impressive, but they won’t carry much weight with experienced investors.

• Avoid “spreadsheetitis.” In this day and age of easy-to-use computer spreadsheet programs (e.g., Lotus, Excel), the task of putting together financial projections is much less time consuming than it was in the days of adding machines. As a result, it’s possible to assemble financial statements that go into excruciating detail—more than what bankers or investors want to see and more than what is truly necessary. Some professional investors refer to the page upon page of financial statements that weigh down some business plans as “spreadsheetitis.”

One venture capitalist told me of a technique he uses with entrepreneurs who present what he considers to be excessive tabulations. “How did you come up with line 18 on page 24?” he asks. “The computer came up with that,” is the typical response. To which the venture capitalist responds, “Is the computer going to be running the business?”

Just as the prose should be concise and to the point, soshould the financial statements.

• Consult an accountant. All smaller companies should have an accountant involved at least in tax preparation. Ask this accountant, or another accountant with whom you may have a relationship, to review your financial statements. Indeed, if you consult your accountant for business advice, you may want to get him or her involved in the financial planning process early.                                                                                                                                                                                      Parts of the financial statements, particularly the balance sheet, can involve technical issues such as how assets and liabilities should be classified. Moreover, an accountant can help you assess how a banker might view your financial statements.

Bankers tend to use ratios from the balance sheet—such as assets to liabilities and debt to equity—in assessing the creditworthiness of businesses. The ratios they consider satisfactory can vary from industry to industry. If your ratios are out of line with the bankers’ viewpoint, an accountant can suggest steps you can take to adjust these ratios.

The remainder of this chapter provides explanations of the three types of financial statements, with special emphasis on the cash flow statement because it is the basis of the other two.

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