Are Business Plan Financial Forecasts the Final Proof?

Business plans can be analogous to nonfiction stories.  I make this crude comparison from the standpoint that one has a story to tell that must be compelling and conveyed with passion.  One also has to “develop” the characters with sufficient credibility that investors will be drawn in to engage with them.  Just as the accomplishments might be the end result of nonfictional character stories, financial forecasts are the predicted result of a successful business plan.

How hard can it be to assemble a nonfictional business plan?   I sometimes come across business plans that more closely resemble works of fiction, or imagined, rather than nonfiction.  Where is the line between fiction and nonfiction in business plans?  Educated people should be able to figure out how to put together a story of imminent success that is built upon winning technology, faltering competition, a large market size, a brilliant strategy, and concludes with financial forecasts demonstrating ever-increasing income and asset balances.  After all, there are a number of templates available from books and guides as well as software packages that make it easy to simply populate the particulars of your new-fangled contraption business.

But alas, investors somehow don’t seem impressed or worse yet, they say that they’ll get back, but you never hear from them.  Was it perceived as fiction?

One of the most common issues with an investment proposal, which your business plan is if you’re asking the reader for money, is the failure to connect critical elements of the plan with marketplace reality.  Broad, unsubstantiated claims become interpreted as fiction.  Evidence-based claims translate as nonfiction and bolster credibility.  The stronger the evidence, the lower the fictional aspect.  Specifically, from a market perspective, one must address what is the validation of customer demand?  How firm is the commitment from your alleged fans that they are now or will be adopting your solution in droves?

But it’s a startup, you say.  Everyone’s simply waiting for us to be able to produce so that they can issue their purchase orders.  Build it, and they will come.

What are your financial forecasts based upon?  The weakest, most fictional plans provide their market proof in the form of only demographic information coupled with an imaginative adoption rate claim.  Others cite purely secondary research as proof without ever having contacted anyone in the industry.  Read: pure fiction.  Also toward  the bottom of the list are letters of support or letters that purport to state a potential customer’s interest if and when a product might come to market.  At the opposite side of the spectrum, existing sales provide tangible proof of demand.

More commonly, however, pre-revenue companies must establish solid evidence that sufficient progress is being made with potential customers, distributors and other key partners.  Make sure to cultivate and articulate any signed contracts or joint development agreements (JDAs) with established industry players.  Are you in final negotiations with anyone or at least started the process? The key to distinguishing your investment proposal as nonfiction with respect to the market is early engagement with industry.  Engagement and gaining industry commitments are the foundation of nonfictional business plans.  Unsubstantiated financial forecasts are merely an exercise is spreadsheet creation.

 

 

Andrew Salazar