288 Planning and Forecasting
plan are the income statement, cash f low statement, and balance sheet. I typi-
cally call for five years of financials, recognizing that the farther out one goes,
the less accurate the forecasts are. The rationale behind five years is that the
first two years show the firm surviving and the last three years show the upside
growth potential. The majority of new ventures lose money for the first two
years. Therefore, the income statement and cash f low statement should be
month-to-month during the first two years to show how much cash is needed
until the firm can become self-sustaining. Month-to-month analysis shows cash
f low decreasing and provides an early warning system as to when the entrepre-
neur should seek the next round of financing. Years 3 through 5 need to be il-
lustrated only on an annual basis, because these projections communicate your
vision for growth but are likely to be less accurate because they are further out.
The balance sheet can be on an annual basis for all five years since it is report-
ing a snapshot on the last day of a particular period.
Once the financial spreadsheets are completed, a two-to-three-page ex-
planation of the financials should be written and it should precede the state-
ments. Although you understand all the assumptions and comparisons that
went into building the financial forecast, the reader needs the background
spelled out. The explanation should have four subheadings: overview, income
statement, cash f low, and balance sheet. The overview section should highlight
the major assumptions that drive your revenue and expenses. This section
should explain several of the critical risks you identified earlier. The income
statement description goes into more detail as to some of the revenue and cost
drivers that haven’t been discussed in the overview section. The cash f low de-
scription talks about the timing of cash infusions, accounts payable, accounts
receivable, and so forth. The balance sheet description illustrates how major
ratios change as the firm grows.
Appendices (as many pages as necessary)
The appendices can include anything that you think further validates your
concept but doesn’t fit or is too large to insert in the main parts of the plan.
EXHIBIT 9.14 Headcount chart.
Month Month Month Month Month Month Month
1 6 12 18 24 30 36Business development 1 2 3 3 3 3 3
Sales and administration 2 2 6 10 10 14 14
Software developers 3 3 3 18 18 23 26
Customer service 0 2 3 5 5 10 10
Total head count 6 9 15 36 36 50 53