The necessary evil I am referring to is forecasted financial statements included in business plans. The importance of my comments on this topic comes from a discussion during a recent NEF program committee meeting.
The discussion focused mostly on forecasts being incomplete and unreasonable. While what is included in a presentation is summarized, the business should have complete forecasts including balance sheet, income statement and statement of cash flow. Well prepared forecasts will quantify and summarize all the other discussed in the business plan. Forecasts are also a means of communicating the entrepreneur’s fiscal responsibilities and recognition of the important of communicating good financial information. We realize that preparing forecasts can be difficult, involve skills that most entrepreneurs are weak in and in the end forecasts will not match actual results. Unfortunately our understanding and sympathy will not get entrepreneurs funding.
For me unreasonable forecasts are especially frustrating. I have been involved with businesses financials for over 30 years and have never seen achieved results with 50% and better EBITA to sales like we have seen in to many forecasts. Other than straight licensing business, these kinds of results just don’t happen. When I see forecasts like this, I become suspicious of what is missing in the business plan. Unreasonable forecasts typically reflect business plan with problems. Most common issue is the marketing and sales. Entrepreneurs fail to recognize the cost to acquire customers. Close to this, is investor backed business will typically take any profits earned and put back into sales to accelerate growth.
Whether you agree or not with the importance of forecasts, investors do believe they are important. Financial information whether forecasts or historical are one of several means of communication used in the business community. As with any form of communication people need to use methods that will be understood and believed by others.