Your business plan has to be wholesome. Your finance model should be well treated. Also, when you build your financial model, make sure that your assumptions are realistic so that you raise sufficient capital.
Avoid these mistakes when it comes to your business plan
1. Lack of Detail
Your financials should be constructed from the bottom-up, and then validated from the top-down.
A bottom-up model starts with details such as when you expect to make certain sales, or when you expect to hire specific employees.
Top-down validation means that you examine your overall market potential and compare that to the bottom-up revenue projections.
2. Unrealistic financials
Do you homework and make your projections much more realistic. Financial forecasts are a litmus test of your understanding of how venture capitalists think.
If you have a realistic basis for projecting, you are probably a good candidate for venture financing. Otherwise, you should probably look elsewhere.
3. Insufficient financial projections
Basic financial projections consist of three fundamental elements: Income Statements, Balance Sheets, and Cash Flow Statements. All of these must conform to Generally Accepted Accounting Principles, or GAAP.
Investors generally expect to see five years of projections. Of course, nobody can see five years into the future. Investors primarily want to see the thought process you employ to create long-term projections.
A good financial model will also include sensitivity analyses, showing how your projected results will change if your assumptions turn out to be incorrect. This allows both you and the investor to identify the assumptions that can have a material effect on your future performance so that you can focus your energies on validating those assumptions.
They should also include benchmark comparisons to other companies in your industry – things like revenues per employee, gross margin per employee, gross margin as a percentage of revenues, and various expense ratios (general and administrative, sales and marketing, research and development, and operations as a percentage of total operating expenses).
4. Conservative assumptions
Nobody ever believes that assumptions are conservative, even if they truly are.
Develop realistic assumptions that you can support, refrain from using the words “conservative” or “aggressive” in your plan, and leave it at that.
5. Offering a valuation
Many business plans err by stating that their company is worth a certain amount. How do you know? The value of a company is determined by the market – by what others are willing to pay – and unless you are in the business of buying, selling, or investing in companies, you probably don’t have an acute sense of what the market will bear.
If you name a price, one of two things can happen: (a) your price is too high, and investors will toss your plan; or (b) your price is too low, and investors will take advantage of you. Both are bad.
The purpose of the business plan is to tell your story in the most compelling manner possible so that investors will want to go to the next step. You can always negotiate the price later.