Applying for funding when you're a cash strapped entrepreneur can be stressful. Developing the financials for your business can bring on additional stress, but it doesn't have to. As long as you have a well thought out business plan, doing the financials to go with it is just a matter of putting the dollars to the business tasks. Here are my seven rules of effective startup financials.
1. The numbers tie in all documents. Make certain that whatever financial numbers are put into the application are the same as in your written on-line application and in your presentation. Too often, numbers we see in the written application don't match what's in the income statements, balance sheets, or cash flow statements. Double check sales, net income, and investment in the company (on Balance Sheet beginning Owner equity + Loans). Also, use the same numbers in the presentation that you submitted.
2. Sales revenue timing and amounts are reasonable. Revenue generation is an important part of your financials, but counting on it as a source of income too early can be detrimental to your overall financial plan. I've seen many entrepreneurs put in sales revenues earlier than when the business plan has the prototype finished. Hockey sticks don't happen often. A general rule is to count on revenues taking twice as long and being half as much as you expect.
3. Costs are in line with the business plan. What do you need to do to develop your product? How are you taking it to market? What people do you need? Are your employees all management with no one to bill customers or answer the phone? Where are you going to get an electrical engineer for $20,000 a year? Will your sales people have a phone to call customers? And so on . . . Think about your business plan and put the dollars with the words. And many times how the entrepreneur says he or she will spend the award dollars is not even included in the financials.
4. All uses of cash are included. Unless your business is one where customers pay before or when they receive the product or service and you don't need to have any product in inventory you will need money for working capital—accounts receivable and inventory less accounts payable. Sometimes this can be a significant use of cash, especially if you have product sales and/or you sell in an industry with long payment terms. Don't forget fixed capital too—if you have employees they will need a computer and a place to sit.
5. It's clear how much money the business will need. Many applicants say they need to raise a certain amount of money upfront for their business, but their financials say something else. If you honestly believe you need to raise $250,000 to get your business going, make sure the financials say that. If you believe that what you put in the financials represents your business plan and expectations, then that is the number you should put in your written application.
6. The numbers have been double and triple checked. It's easy to spot an application that has not been looked over for final financial confirmation. A good proofing will ensure that the numbers tell the story you intended them to and that you are knowledgeable about the details of the finances. You will probably be asked a question or two about the numbers at the presentation, so be prepared.
7. The financials are made easier by following directions. This should probably have been the first tip. Too often it's clear that the applicant has not read the guide we provide, which outlines a clear overview of what is required for the financials, including formats to follow, questions to ask before turning in the final numbers, and things to include. This guide is provided for a reason. Take an extra five minutes before you start and another five after you finish review the tips given in the financial guide. They will help you develop good financials to give you an advantage over the applicants who don't.
Following these seven rules should result in above average financials for your business as well as to relieve some of the stress of doing financials. While good, effective financials alone will not ensure your business will get funded—you still have to have many other things as well as the ability to pitch the business—poor financials could hurt you chances of getting funded.
Nancy Ernstes helps entrepreneurs working with Innovation Fund Northeast Ohio develop pro-forma financial statements that reflect the monetary success of their business. She developed a financial model that's easy to use and understand by the business owners and assists them in doing their financials so that they reflect their business model, and helps them to understand what the financials mean for their business.