Cashlandia is a more beautiful place thanks to Loot Landscapers. It’s a local business that specializes in growing and planting coin saplings for new homeowners looking to monetize their lawns. But the owner, Benjamin, almost had to let go of his dream of business ownership when he couldn’t secure the funding he needed to bring his idea to market. (Read more about his story in last month’s article: Using Financial Projections to Find The ‘Business Funding’ Money Tree.)
Benjamin did everything he was supposed to do, including putting together a financial forecast to win funders over. As it turns out, he was making five big mistakes when preparing his financial forecast that resulted in rejection after frustrating rejection. Once he secured help from a Fractional CFO with the financial expertise to strengthen his financial proposal, he got his first “yes” from a venture capitalist and Loot’s was in business!
Financial forecasting is complex and requires an advanced level of expertise that comes with years of training and experience. Benjamin learned the hard way that it’s not something you can DIY and expect a positive outcome.
If you are a business owner looking to secure funding, I’d love to serve as your Funding Arborist, identifying exactly what type of business funding you need and building a strong financial proposal to successfully secure it. Schedule a call with me today to chat about your current financial landscape.
What are common financial forecasting mistakes?
Benjamin didn’t have the financial training and expertise to put together a strong financial forecast on his own. This was obvious to potential funders because he was making several rookie mistakes. Identifying these mistakes is the first step towards strengthening your own financial forecast and securing funding.
Mistake #1: You don’t know your audience.
Are you building your financial forecast for internal or external stakeholders? A board of directors? A bank? Venture capitalists (VC) or angel investors? This is the first question you need to ask before preparing anything for your forecast. You need to strike the right balance of giving enough information without bogging them down with too much that their eyes glaze over.
For example, if there is a lawyer on the Board of Directors you are trying to convince to fund your business, their skill at reading financial forecasts will be lower than a VC with a business finance degree under her belt. So prepare your proposal accordingly!
Pro tip: Some funders may require a balance sheet forecast with your income statement. This is a common area where mistakes happen and then compound, affecting your entire forecast in negative ways. Don’t do this alone – it’s complicated. Hire a Fractional CFO like me to build accurate projections.
In general, VC’s are more interested in long term net income and find short term losses acceptable if there’s a big payoff at the end (think of all the pre-IPO companies that eventually went public, like Meta and Google). On the other hand, banks are more interested in ongoing cash flow (which usually comes from positive net income, but not always) to ensure you can pay off the loan.
Mistake #2: You mix up net income and cash flow.
Cash flow and net income are different, albeit strongly related.
Net cash flow = cash inflow – cash outflow
Net income = revenue – expenses
Around 80% of business activities will affect both net income and cash flow; 20% will affect one or the other, but not both. Even if you think you are recording things on a cash basis.
Here’s a quick list of those exceptions:
This loops back to mistake #1: know your audience. Banks, in particular, don’t solely focus on cash flow. If your forecast reflects that net income and cash flow are the same, you’ve most likely thrown oak trees and pine trees into the same section of the nursery and labeled them all oaks. You may not know the difference, but your potential funders do.
Pro tip: When presenting projections to highlight loan repayment ability, know that banks are interested in net income, but only as it shows your ability to pay them back. Demonstrate all of the ways you are getting paid and how you can pay on the loan to increase your chance of getting funded.
Mistake #3: You don’t know your burn rate.
Your burn rate, calculated monthly or annually, is how fast you spend money on expenses. Loot’s Landscapers expected to have about $100,000 in monthly expenses, so their monthly burn rate is $100,000 and the annual burn rate is $1.2 million ($100,000 x 12 months).
If you are building a financial forecast for a VC, this rate is critical because it reveals how much money you need to cover your expenses until you get your product to market (or need another round of funding). A VC will want you to control your expenses to lower your burn rate and stretch their money longer.
Pro tip: When calculating your expenses, you need to include research and development costs, employee costs, fixed asset purchases – anything you will spend money on. Don’t leave anything out or else your burn rate will not be accurate.
Mistake #4: You don’t stress test your financial forecast.
Life at Loot’s Landscapers isn’t always going to be flowering coin saplings and blue skies – storms will come. The same is true of your business and funders know it. It’s critical to balance an optimistic forecast with a worst-case-scenario forecast that can still pass a stress test.
Stress testing your financial forecast means you must build a model that is flexible enough on the inputs to allow you to try out different scenarios (best-case; worst-case). Start with a baseline scenario and then push the limits to see what the numbers reveal.
For Loot’s, the goal was to sell an average of 6 coin saplings to each new homeowner for $250 each. Knowing there are 30,000 new home builds in his area, that’s $1,500 per home x 30,000 new homes: a market potential of $45 million. He’s thinking he can capture 5% of the market each year, which equals $2.25 million potential revenue for Loot’s Landscaping in the first year.
To stress test this scenario, change the numbers to find out:
- What happens if he only secures 2%?
- What happens if he needs to hire more employees than first anticipated?
- What happens if he needs to buy more equipment than expected, or if the cost of equipment skyrockets because of newly enacted tariffs?
If your financial forecast does well under stress tests, then your business plan has built-in wiggle room and you’ve been conservative in your planning. Great job! If you failed the test – meaning you went from profitable to being in the red, or have extended the time it takes to become profitable – then you need to look at adjusting your business plan to fix those problems.
Pro tip: A good financial forecast file allows for flexibility. If you change a few numbers, everything should flow through the file in Excel without errors or holes. (I call those an Accountant’s work of art, because it is beautiful when it happens!)
Mistake #5: You don’t hire a professional to prepare your financial forecast.
Benjamin’s dream of becoming a professional landscaper who owned his own business almost didn’t come true because he tried to DIY his financial forecasts. Leave the complicated details to a trusted financial expert who can be in the forecast weeds while you stand back and admire the view of the beautiful landscape with a pocket full of newly acquired business funding.
I’d love to partner with you and build a strong, flexible financial forecast and business plan that can withstand stress tests and secures your business the funding needed for success. Schedule a call with me today to chat about your current financial landscape.
