Build Cash Flow Statement From Balance Sheet And Income Statement How Do Investors Read Business Plans

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How Do Investors Read Business Plans

There are hundreds of thousands of business plans floating around trying to find a source of funding. I myself receive hundreds of business plans a year and I can safely say that 99% of those documents are laughable as presenting an exciting investment opportunity. I’m not referring to the value of the product described, but to a presentation that purports to describe an exciting investment situation.

One of the reasons so many plans are so poorly written, and there are many, many additional reasons, is that the writers don’t understand how plans read. Investment banks, venture capital firms, family offices, angel firms, banks and hedge funds receive piles of plans for consideration every day. Typically a junior reader, often a recent MBA, is assigned to read and review the plans by editing out any obvious losers. The remaining business plans are then marked after reading the sections in the following order: Executive Summary, Finances, Governance and Exit Strategy.

Why is it important to recognize the order of reading a business plan? Because these are areas that must be addressed strongly and convincingly in order to put the business plan in front of the decision makers. The writing and construction of these sections dictate the level of interest the original review reader will express in the synopsis they will attach to the business plan copy at the beginning of their route through the project analysis process.

The Executive Summary is read first. This should be a vivid two-page snapshot of the business and touch on every aspect of the opportunity. An executive summary should paint an exciting word picture that leaves the reader wanting to know more. Unfortunately, most plans don’t read beyond the first paragraph or two.

Why? I have discussed this with investors on several occasions. I asked the question, “Aren’t you worried that you might miss out on a great product opportunity just because the document has a poorly written executive summary”? The universal answer, “if there’s no more passion or ability to excite us than we see in a bad executive summary, we never had to look back on a missed opportunity. If you can’t make a great first impression on us, you won’t on anyone else”?

You only have one chance to make a great first impression. A business plan is the first impression of your project. It is the superstructure of your opportunity, the skeleton and foundation. If the house has a weak foundation, it will not stand for long. Why entrepreneurs submit documents that do not properly reflect the excitement they believe is inherent in their invention is a sad mystery. A poorly executed Executive Summary negates all the time, energy, investment and innovation built into the new offering.

Assuming that the newly submitted Business Plan has an adequate Executive Summary and has passed the initial screening, the Finances are read next.

Why Finance? Well, the Executive Summary is the skeleton of the project, while the Finances are the muscle.

Finances are based on a series of assumptions that are key to presenting a realistic, justified cash flow, balance sheet and profit and loss account. Investors have certain return on investment parameters that they must strive to achieve before they can consider any investment commitment. The assumptions underlying the Finances must be based on thorough research, current market conditions and historical indicators.

The main reason Finance leads to project death is because assumptions are based on dreams, hope and pie in the sky. The rule of thumb for successfully jumping the hurdles of the Finance section is this: Investors must realistically see that they will receive a median 30 percent return on investment beginning between the 24th and 36th month (3rd year) after the investment. This rate and speed of return must stand up to harsh scrutiny. Believe me, investors think manically about analyzing, poking, prodding and breaking down the assumptions on which Finance is built.

Good news! Your business plan has successfully passed through the Summary and Financials. Management follows!

The Management section represents the brain of a new business being considered for investment. An experienced (industry specific) management team must be on hand or ready for a successful setup.

The downfall in this area for so many would-be entrepreneurs is a complete lack of direct management experience. I recently reviewed a great security product that I really liked. Exciting product, high margins, consumer needs and obvious benefits, however, the group seeking funding had no executive management experience in any of the areas the project required. They are candidates for sale or license, but no funding round ever happens without strong management. Remember: investing in people, people who are capable of launching an exciting opportunity for success.

Do not dream of running your own company, with other people’s money, if you are a warehouse worker by profession, but you need experience in production and marketing to succeed in your new business. It’s just not going to happen, unless the investment comes from Aunt Hazel.

However, if you have strong and direct management experience and the Management section indicates a well-rounded team, the plan will move through gate three and to the final initial hurdle to overcome. What is your harvest goal (exit strategy)?

An exit strategy is essential for investors and effective management of their cash funds. Exit strategy is the brain, intellect and emotional component of work. Venture capital is a high risk/high reward game. Investors know that a successful investment must pay off big and relatively quickly in order to cover the losers who vastly outnumber the home runs they hit.

Some entrepreneurs have an unrealistic view of the gains from their business. This scares away investments and risk money. An agreed plan to exit, take profits, sell, or use a myriad of other harvesting mechanisms at maximized points in the business cycle will be required before an investment is considered. It is best for the entrepreneur to be very flexible when negotiating the harvest. An exit strategy can best be summed up as an area where the entrepreneur is open, flexible, wants to maximize profits and make a deal that is fair to all parties.

Inflexibility is a deadly sin for investment seekers. I can’t overstate how many deals never happen, products stall and die, opportunities are lost because the owner is unrealistic in framing their demands for their enrichment when potential success is achieved. Leave something on the plate for all parties to the deal.

The other parts of the customized business plan are important now, but only after the eminent areas of the Executive Summary, Finance, Governance and Exit Strategy are passed. If your business plan has all four in good shape, you’ll be in rare company. Too many entrepreneurs dream of securing investment. This is anything but a dream workout. It’s a tough, competitive, demanding, tough job. If you put the necessary effort into your project, you will greatly increase your chances of success!

Don’t take shortcuts! Don’t guess the details and assumptions! Don’t fill in the blanks on a store-bought template! Don’t offer your review opportunity until you have a professional, exciting presentation! Your business plan represents you, your family and the future of your partner!

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