Tips: Ten Tips for Developing Credible Financials

1.	*Make Financial Statements Conventional:* Financial statements should be done according to what are known as "generally accepted accounting principles." Bankers and investors, who examine dozens of financial statements every day, are accustomed to seeing expenses, margins, taxes and other items identified in certain ways and in a certain order. This allows them to review a company’s financial state quickly and easily. So, the financial section of your business plan should consist of three types of standard statements: cash flow, income (sometimes referred to as the profit/loss statement) and balance sheet.
2.	*Cover Both the Past and Future:* Business plans should provide detailed financials for the previous three years, if the company has been in operation that long. Based on those results, future financial statements can be projected. Since accurate forecasting is difficult, don't provide more than three years' going forward unless specifically requested.
3.	*Provide Monthly (Short Term) and Annual (Long Term) Data:* Use monthly data for the current year. For the future, use annual figures. Since your financial results will probably end up being different from your projections, there's no point in spending time on monthly forecasts for the years ahead.
4.	*Project Realistic Numbers:* All bankers and investors want to do business with ambitious entrepreneurs, but not ones who wear rose-colored glasses. For example, it is not realistic to expect that your business can double in size every year. It is also not likely that you will achieve economies of scale while growing rapidly because you’re likely to be increasing your fixed costs as well as revenues. If you do, be prepared to explain how. Bankers and investors ordinarily assume that a start-up company's projections are wildly optimistic; just saying that your numbers are "conservative" won’t cut it as an explanation. Ideally, you've done some test marketing and/or have hard experience with a comparable business to provide some basis for your projections.
5.	*Consider Several Scenarios:* One way to ease the concerns of outsiders worried about overly optimistic projections is to provide different outcomes. However, don't provide more than two: Loan officers and investors are overwhelmed by paperwork, so less is more. Prepare a base case and break-even case. The former should show what you realistically expect the business to do; the latter should show how low sales could go before the business begins to lose money
6.	*Include What’s Important and Summarize the Rest:* Don't include every individual line item. Instead, show details about sales from major product or service lines, as well as the direct cost of sales associated with them. Keep to the basics in other categories, while accounting for reasonable interest expense on the income statement if you have debt on your balance sheet. Also, be sure to include any assets that you consider material, such as patents or licenses.
7.	*Explain Your Assumptions:* Investors will want to know how you arrived at your projections, so your assumptions should be clearly spelled out. If you have an existing business, you have a good sense of how much things will cost, how much staff you'll need and the sales you're likely to make. But when you're just starting out, these projections are difficult to make. Instead, develop your financials from the bottom up: Examine the opportunities and costs of different distribution channels Source manufacturers and suppliers. Project staffing needs with salaries and start dates. Provide a one-page summary that explains your assumptions about revenue growth; cost of goods sold; operating expenses; interest expenses; turnover of accounts receivable, inventory, and accounts payable; capital expenditures; dividend policy; and income-tax rates. Also include any ancillary information that has an impact on the financial success of your business. Examples of this might include your projected employee head count and office or warehouse space requirements.
8.	*Consult a Professional:* Ask your accountant to review your financial statements. Or better yet, get him or her involved in the process from the start. Since doing financials can be complicated, technical issues may arise with which you may not be familiar. Moreover, an accountant can help you assess how a banker or investor might view your financial statements and help you show your company in the best light.
9.	*Ensure That Numbers Reconcile:* When assets don’t equal liabilities plus equity, you may be tempted to plug a figure into the equity slot to make things add up. Don’t. If your banker is doing his or her homework, he or she will check the math. If the equity numbers don't add up, you'll be asked to explain. Even though everyone makes mistakes, that's a particularly naļve and careless one.
10.	*Know Your Numbers:* Be ready to explain how each item in your projections has been calculated, because any serious investor is likely to grill you in detail. If you’re a start-up company, you’ll also be expected to know your break-even point and burn rate. Be prepared to discuss when you are going to run out of money and what the investor’s exit strategy will be (buyout, IPO, merger/acquisition).