286 Planning and Forecasting
Offering (^1 ⁄ 2 –1 page)
Based upon the entrepreneur ’s vision and estimates of the capital required to
get there, the entrepreneur can develop a “sources and uses schedule” (see Ex-
hibit 9.13). The sources section details how much capital the entrepreneur
needs and the types of financing such as equity investment and debt infusions.
The uses section details how the money will be spent. Typically, the entrepre-
neur should secure enough financing to last 12 to 18 months. Taking more cap-
ital means that the entrepreneur gives up more equity. Taking less means that
the entrepreneur may run out of cash before reaching milestones that equate to
higher valuations.
Financial Plan (4 – 8 pages)
If the preceding plan is your verbal description of the opportunity and how you
will execute it, the financial plan is the mathematical equivalent. The growth
in revenues speaks to the upside of your opportunity. The expenses illustrate
what you need to execute on that opportunity. Cash f low statements serve as
an early warning system to potential problems (or critical risks), and the bal-
ance sheet enables monitoring and adjusting the venture’s progress. That being
said, generating realistic financials is one of the most intimidating hurdles en-
trepreneurs face. I will highlight a dual strategy to building your model: com-
parable analysis and the buildup technique. Entrepreneurs should do both
approaches; with work and skill the two approaches allow the entrepreneur to
triangulate into a credible facsimile.
Entrepreneurs are notoriously overoptimistic in their projections. One
phrase that entrepreneurs overuse in their business plan, especially the finan-
cial plan, is “conservative estimate.” History proves that 99% of all entrepre-
neurs are amazingly aggressive in their projections. Professional investors
recognize this problem and often discount financials up to 50% from the en-
trepreneur ’s projections. How do you prevent that from happening? Validate
your projections by comparing your firm’s pro forma financials to existing
firm’s actual performance. Obviously, no two firms are exactly alike, and if you
were to launch an online bookstore, it would be unlikely that your firm would
perfectly mirror Amazon.com. However, the comparable method doesn’t mean
that you substitute another firm’s financials for your own; it means that you use
EXHIBIT 9.13 Sources and uses schedule.
Sources Uses
5,000,000 VC 1,688,750 Systems development
1,652,000 Equipment
1,125,000 Sales/business development
534,250 Working capital
5,000,000 Total 5,000,000