Prospective investors must be able to understand and have confidence in your pro forma numbers or your company has no chance of getting funded. Without good numbers, you cannot forecast revenue or profit and loss, and you cannot make a defensible case regarding sources and uses of cash.
The company of a prospective client of mine is loaded with aggressive sales and marketing people and has a technology product that could become very profitable very quickly. But its principals have no financial modeling or accounting skills, and they didn't engage anyone who had these skills to help them.
Instead, without the slightest idea of what was needed and how to do it, they prepared their own financial projections. The result was laughable.
There was no balance sheet or statement of cash position. Their attempt at an income statement misstated nearly everything, except for rent and senior executive salaries. Loans were stated as revenue, capital expenditures were expensed and a sales/lease back effort was booked in a most creative way.
Among the notables, this entrepreneur said, "I left out one revenue stream because I didn't know where I should put it, but investors will be happy when more money comes in anyway."
These entrepreneurs worked very hard on their business plan and pro forma. But they got it wrong. Worse, they are frustrated because I told them how they messed it up. It's difficult to do that diplomatically when pointing out that the numbers look as though -- and have as much veracity as if -- they were done by monkeys playing with Excel.
An entrepreneur is expected to have great expertise in his or her product, service or technology and the markets it will serve. Investors look for the unique competencies of the firm.
But they also expect the entrepreneur to present a sound business plan with bulletproof numbers. Investors are not investing in just a technology, product or service, but in a company that has the capabilities and plans to make very significant profits.
Make certain that your numbers are solid and can stand up to vigorous due diligence.
Erwin Bruder (email@example.com) is chief economist & managing director of emerging enterprises at Prim Capital Corp. Reach him at (216) 830-1111, ext.2220.