VC4A Guide Financial Plan

The financial plan is one of the most challenging parts of the business plan. Most
entrepreneurs can convince investors of their product and the need in the market of their
product, but when it comes to the financial plan they should convince investors too, in their
own field of expertise, finance.

To support the VC4Africa entrepreneurs we created an easy to use format for the financial
plan. It gives the investor a good insight into the costs structure of your business, the
expected revenues and the need for capital.

The investor is looking for a Return on Investment (RoI)

The investor is reviewing the financial figures because they are already attracted to the
product and/or idea. But now the investor is looking at the quality of the figures and the
estimations.
Are they correct?
Are they reasonable?
Are they interesting?
Are they supported by good research?

Let’s take a closer look at the process of analyzing the figures; as outlined in 5 sections:
1. Costs Structure
2. Revenues
3. Summary for in the Business Plan
4. Calculations of the NPV (Net Present Value)
5. Creating a deal

There is a difference between a Budget and a Cash Flow prognosis. The main differences
are 1) Investments (cash out) are divided in the budget as costs over the time the investment
is used (depreciation) and 2) payments (cash) follow on average 3-6 weeks after the deal is
closed (budget).

So the Cash Flow statement gives a better overview of when the investment is needed, but
the budget gives a better view about profitability and ROI (Return on Investment). In this
document we want to keep things easy to use and focus on the investment needed, so it will
be based on cash in-and outflow.

Step 1 Cost Structure

The costs are not that difficult to forecast. If you do a little research about prices you can
accurately detail the costs you will make as an organization over the course of the first year.
The years that follow (Year 2 and Year 3) will depend more on the success of the company’s
sales and the expected growth of the organization. We can divide costs in a few key groups
(granted you might have one or two specific to your particular business):

VC4A Guide Financial Plan 1



- Personnel Costs When will people be employed? What position?

What is the right salary and which costs (taxes) are involved?
Don’t forget to include training costs and other employee
benefits
- Office costs Cost of renting can be determined beforehand
Do a little research about costs of water and electricity
Internet / telephone / postage
Interior / furniture / etc.
- Marketing costs Advertisement & promotion, make this coherent with the
marketing
section in the business plan and show the relationship these
costs have to forecasted revenues
- Other costs Bank charges, registrations, legal costs, Accounting costs,
these can all be determined with good research.
Expected travel expenditures
Interest
- Investments As explained before, we look at the cash needed, so predict
when the cash for an investment is needed and don’t
depreciate. (if you are familiar with finance of course you can
make a different choice here!)

Questions an investor will ask:

• What is the burn rate (expenditure) per month and is this realistic, enough, and/or
necessary?
• What salary do the entrepreneurs pay themselves?
• Are there costs that are not taken into account?
• Are all calculations right and consistent?

Step 2 Revenues

This section is more difficult to predict. Still, we need to find ways to get to a good,
reasonable and attractive forecast on what the future of the company looks like in terms of its
ability to generate revenue.

As a starting point, produce a well-supported research that outlines the size of market. When
you know what type of client will be interested in your product(s) and you know how many
potential clients there are, then you have to estimate what percentage of the market might be
realistic for you to reach by year 5. Once this is determined you can calculate backwards to
year 1.

The second step is to break down the first year into 12 months. In this month-to-month
breakdown you want to show how the number of clients is expected to increase. Here,
investors are looking to see how fast you are planning to grow the business. They will be
asking themselves if this analysis is realistic, too aggressive, or too slow.

VC4A Guide Financial Plan 2



When you sell a product (not a service), there will be costs involved directly related to the
product sold, these costs are normally presented in the revenue section as “costs of goods
sold” and not in the cost structure. For example, if you have a shop, you buy products for
0,50 and sell them for 1,00 the net revenue per product will be 0,50 (and not 1,00).

Questions an investor will ask:

• When are sales expected? is that realistic?

• Are the sales compatible with the market volume and with the marketing campaign as
described in the business plan and cost overview?
• Will the money truly be paid in that period?
• Is the organization ready to handle this amount of clients? Is production ready? Is the
help desk ready? Are costs increasing accordingly?
• Are these sales still realistic when a strong competitor enters the market?

Step 3 Overview for in the Business Plan

The figures in step 1 and 2 can be researched and worked out in detail and in depth, but
what do we present to the investors in our Business Plan? This need to be short, clear, and
contain all relevant information. Again a combination of Budget and Cash Flow forecast, we
call it ‘Operating Budget’, that is our choice because it covers the most relevant points in 1
overview, but feel free to choose another format. Whatever model you choose, start the
financial section with a little introduction about the way the figures are presented.

Example 1:

Operating Budget Q1 Q2 Q3 Q4 Y1 Y2 Y3 Y4 Y5

REVENUES
Product A 200 3.000 8.600 19.500 31.300 66.000 145.200 332.750 585.640
Product B 0 0 0 0 0 20.000 44.000 96.800 159.720
Product C 0 0 0 0 0 0 15.000 31.000 66.000
Gross Revenues 200 3.000 8.600 19.500 31.300 86.000 204.200 460.550 811.360
Costs of goods sold 80 1.200 3.440 7.800 12.520 33.075 76.569 165.425 280.539
Net Revenues 120 1.800 5.160 11.700 18.780 52.925 127.631 295.125 530.821

EXPENDITURES
Personnel costs 0 4.500 9.000 17.700 31.200 34.320 37.752 41.527 45.680
Marketing costs 0 150 1.200 300 1.650 2.475 3.713 5.569 8.353
Office costs 0 400 600 600 1.600 2.400 3.600 5.400 8.100
Other costs 800 1.250 750 1.250 4.050 6.075 9.113 13.669 20.503
Investments 28.900 3.900 0 0 32.800 40.000 40.000 60.000 60.000
Total costs & investments 29.700 10.200 11.550 19.850 71.300 85.270 94.177 126.165 142.636
(excl. tax and depreciation)

RESULT -29.580 -8.400 -6.390 -8.150 -52.520 -32.345 33.454 168.961 388.185
(Excl. tax & depreciation, incl. investments)

VC4A Guide Financial Plan 3



In this example we have 3 products. The table shows that we expect the first sales of product
A in Q1, for product B in Year 2 and the third product to start selling in Year 3.

We only presented Year 1 (in four Quarters). The reason is that year 1 gives us clear
deadlines for the coming period, relevant information for investors, and establishes the
foundation that explains the companies projected growth curve from year to year. So if year 1
makes sense, it is easier for an investor to see how the plan will translate into year 2 and
year 3.

It is good to support the table in the Business Plan with comments that explain the key line
items. Try to answer some of the standard questions you think an investor will have when
reading your plan. If there have been sales before presenting this Business Plan, that is a
strong sign for any investor. If this is the case, don’t forget to mention it and to make this part
of your financial forecast. This can be done in words above or under the table or even better,
insert a column before Q1 (Year -1).

Questions an investor will ask:

• What is the expected profit & loss?
• When will the company become profitable?
• Are the Costs and Revenues coherent with each other?
• How sensitive are the projections and what are the 2-3 key assumptions/scenarios
that would radically change the outcome?*

* If there are key factors that could drastically change the company’s ability to achieve its
projections, this should be mentioned in a section describing company risks. Here you can
also explain what you plan to do to prevent these factors from impacting your business.

Step 4 Request for Finance

In this section we take a closer look at the investments made so far, secured investments
and the request for investment. For this we made a standard format as well.

Example 2:
Cash statement (EUR) Q1 Q2 Q3 Q4 Y1 Y2 Y3 Y4 Y5
Invested before Q1 10.000
Cash balance begin 0 20.420 12.020 30.630 0 22.480 20.135 53.589 222.550
Own Investment 10.000 10.000
Secured Investment 15.000 15.000
NEED FOR INVESTMENT 25.000 25.000 50.000 30.000
Profit/Loss/investment -29.580 -8.400 -6.390 -8.150 -52.520 -32.345 33.454 168.961 388.185
Cash Balance end 20.420 12.020 30.630 22.480 22.480 20.135 53.589 222.550 610.735

Here again, it is important to support the figures with an introduction and short, clear, and to
the point explanation.

VC4A Guide Financial Plan 4



Questions an investor will ask:

• What investment has been made in sweat and what are the real capital investments
made already?
• What investment is already secured for the next months? By whom/how?
• What investment (rounds?) are still needed? Will this be in my investment range?
• Will these investments be enough or is it likely to need additional investments?
• What would a possible deal look like? Equity/debt/percentages? (You can bring this
up later as well)

If the initial look at the figures is satisfying for the investor they will most probably want to
follow up and want to see more detail and possibly review some of the research that was
done in putting the projections together. Be prepared to explain the detailed calculations,
prices (how you determined the prices) and the calculations that drive number of sales. If it
takes too much time to understand how the projections are built, or it takes you too long to
respond to questions, the investor might lose interest.

Step 5 Creating a deal!

Say the investor is willing to invest 80k. They argue that you only put in 20k in sweat equity
so they want 80% of the shares….

Some investors start their negotiation like this so see it as a test. They want to see if you are
a strong negotiator! If you even think about giving an investor more than 50% know that you
have lost control of the company. They will never invest in you if you give your company
away that easy, and it means you don’t really believe in its potential yourself or don’t really
have a clue about the figures you have presented.

Make sure you know what deal you want to make and start the negotiation at a realistic level,
with some room for negotiation. Also know what you will not accept and don’t let yourself
cross this line. Decide this before you start fundraising and the negotiation process. Be sure
to remind yourself when you get emotionally attached to the deal J

Most investors are realistic as well and don’t want to sit on the entrepreneur’s chair. It is
important to keep 51% of the shares (or at least 51% of the voting rights, there can be shares
with lower votes), in this way you as entrepreneur(s) keep the control of your company in
your own hands. In most cases this is also what investors want. They want to support a
motivated and driven entrepreneur and join in their success (ROI).

Part of the investment process has to do with knowing what the value of the company is
today and what it might be in three or five years. But so what is the value of your company
right now? To get a reasonable indication of the value we have to look at the future expected
profits and losses. See example 3.

VC4A Guide Financial Plan 5



Example 3

Cash statement (EUR) 2013 2014 2015 2016 2017

Invested before Q1
Ca s h ba l a nce begi n 0 22.480 20.135 53.589 222.550
Own Inves tment 10.000
Secured Inves tment 15.000
NEED FOR INVESTMENT 50.000 30.000
Profit/Loss/investment -52.520 -32.345 33.454 168.961 388.185
Ca s h Ba l a nce end 22.480 20.135 53.589 222.550 610.735

Net present Value percentage 20% (NP) Value 228.597

In this example the results from the first 5 years were calculated back to this moments value
requesting a 20% return rate. This rate is flexible, the higher the risk, the more return
investors demand. The higher the demanded return, the lower the actual NPV (Net Present
Value) with the same estimated results.

Now this 80.000 investment represents 80000/228597 = 35% of the company. That sounds
more reasonable, but maybe still a bit higher than the entrepreneur would want. In most
cases the investor gets somewhere between 10-30% of the shares. If this is the first or
second round, make sure there is room for follow on investment (if needed)…. Leaving some
% on reserve up to 50%.

In our example, we can choose for a hybrid-financing model that combines both debt and
equity. In a construction like this (adding a debt component) you are able to raise the same
amount of capital but keep more equity (shares). This could be interesting for the
entrepreneurs because they get to keep more of the company. It could also be good for the
investor because they actually get some of their investment back when the company starts to
make some money.

Equity: 20% shares for 45.000

Debt: loan at 10% for 35.000
80.000

Most likely, the first revenues will be used to pay back the loan (before any dividends are
paid out to the shareholders). So in addition to a nice interest rate, the investor is able to
reduce some of the risk by getting some of the investment back when the first revenues are
made.

Things to remember when negotiating:

- The investor will become a partner, not an opponent! You need a good deal, but also
a good team! You need to be a good negotiator without upsetting them…
- The other way around works the same way. Only accept a deal when you feel you
have a good party on board. Don’t let the money be leading and don’t let it push you
past your own boundaries.

VC4A Guide Financial Plan 6



- Know where you would like to end and start at a reasonable level with little room for
negotiation. In this example, you might start with 15% shares for 50k and 30k loan at
6%....

After you agree on these conditions it is also very common to discuss the exit strategy. Many
investors want to be involved just for 3-5 years and almost all entrepreneurs would like to
have an opportunity to become 100% owner of their company at some time. A call option to
buy back shares within a certain period for a predefined price or calculation (x times profit),
or a price to be calculated at year 5 by an independent accountant, is common to negotiate
in a deal!

VC4A Guide Financial Plan 7