Many entrepreneurs fail to build a financial forecast claiming they cannot predict the future.
The purpose of the financial forecast is not for future predictions, but rather for communicating the business plan to the investors.
From the forecast, the investor learns what growth rate the entrepreneur is considering.
The forecast shows where break-even may come in.
The investor can also gauge how much the entrepreneur knows about the costs and revenues of the business.
Big round numbers in the forecast indicate little knowledge of the costs and revenues.
Most financial forecasts can be driven by specific product quantities.
Finally, the forecast shows the interdependence between revenues and costs.
Increased revenues will drive variable costs higher leaving the fixed costs unchanged.
A financial model is helpful for managing the business.
If revenues double, the model shows what will happen to the costs.
If revenues get cut in half, the model shows what costs will drop and what will not.
It’s important to create a 3-5 year financial forecast to share with investors to inform them of the plan and demonstrate the startup’s credibility.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.