The financial model in your business plan could be the most important document you create for your business.
That’s because it’s the first section any investor wants to see, says Michael Sheridan, COO of Docstoc. When creating a financial model that has the information an investor is looking for, he recommends that life science entrepreneurs spend time setting assumptions, projecting revenue and analyzing expenses.
It’s important to create a baseline of assumptions that the business plan is driven off of so people understand where you’re coming from in your financial model, Sheridan says. These assumptions can be about market growth rate, your ability to hire key salespeople and derive revenue or the multiple ways your business can create revenue.
There are two ways to create a financial model to project revenue: the bottom-up approach and the top-down approach. The bottom-up approach derives top line and sales revenue from the expenses that you have. For the top-down approach, Sheridan says, “It’s really starting with the end in mind. ‘Here’s the type of sales and projections that we need our business to have and what is it going to take from an expense line item to get those sales projections.’” Sheridan says either plan will work; Do whichever is easier for you.
The last piece of a financial model is all of your company’s expense line items: employee salaries, insurance, phone lines, travel, rent and everything else. “All of the nitty gritty details are so important in understanding how much it’s going to cost to run your business and get to the revenue projections that you want to, to be a successful business and to be appealing to potential investors,” Sheridan says.