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  Category: Articles » Business » Article
 

Developing Realistic Financial Assumptions in Your Business Plan




By Dave Lavinsky

Many investors skip straight to the financial section of the business plan. It is critical that the assumptions and projections in this section be realistic. Plans that show penetration, operating margin and revenues per employee figures that are poorly reasoned, internally inconsistent or simply unrealistic greatly damage the credibility of the entire business plan. In contrast, sober, well-reasoned financial assumptions and projections communicate operational maturity and credibility.

For instance, if the company is categorized as a networking infrastructure firm, and the business plan projects 80% operating margins, investors will raise a red flag. This is because investors can readily access the operating margins of publicly-traded networking infrastructure firms and find that none have operating margins this high.

As much as possible, the financial assumptions should be based on actual results from your or other firms. As the example above indicates, it is fairly easy to look at a public company's operating margins and use these margins to approximate your own. Likewise, the business plan should base revenue growth on other firms. Many firms find this impossible, since they believe they have a break-through product in their market, and no other company compares. In such a case, base revenue growth on companies in other industries that have had break-through products. If you expect to grow even faster than they did (maybe because of new technologies that those firms weren't able to employ), you can include more aggressive assumptions in your business plan as long as you explain them in the text.

The financials can either enhance or significantly harm your business plan's chances of assisting you in the capital-raising process. By doing the research to develop realistic assumptions, based on actual results of your or other companies, the financials can bolster your firm's chances of winning investors. As importantly, the more realistic financials will also provide a better roadmap for your company's success.
 
 
About the Author
GT Business Plans has developed over 200 business plans for clients that have collectively raised over $750 million in financing, launched numerous new product and service lines and gained competitive advantage and market share. GT Business Plans is the sister site of GT Venture Capital.

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  Some other articles by Dave Lavinsky
Should Entrepreneurs Hire Entrepreneurs?
In his book, Gerber discusses that an entrepreneur encompasses three roles, which are: the technician, the manager, and the visionary. As a technician, the entrepreneur is able to ...

Pre-Money vs. Post-Money Valuation
When a company decides that it must raise capital, a key question that must be answered is how much the company is worth. For example, if the business needs $500,000 ...

Answering "Why You, Why Now" - A Critical Component of a Winning Business Plan
Business plans continue to be an essential element of the capital-raising process. They must convince investors to take notice - investors that ...

Finding a Venture Capital Firm
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Describing Intellectual Property in Your Business Plan
Most companies that are worthy of raising venture capital have proprietary Intellectual Property (IP). In fact, the quality of the IP and the management team are often the two most important aspects of ...

The Marketing Plan and the Four P's
The Marketing Plan section of the business plan demonstrates how a company will penetrate the market with its products and services. The Marketing Plan should ...

  
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