How to Build a Financial Roadmap for Your Business Plan

Creating a strong business plan starts with a clear financial roadmap—one that showcases your startup’s milestones as well as highlights where you will get capital and how you will use it. It also should include longer-term projections on how you plan to scale the company, how you will achieve profitability, and how long it will take you to get there.

Whether you're seeking funding from angel investors, applying for a venture philanthropy program, soliciting state funding, or simply plotting out your company’s growth, a solid financial section will demonstrate your startup’s viability as well as break down your costs, project your revenue, and outline your financial strategies, explained Laurie Silver, CEO of BrainScope, a neurotechnology company. Silver also has served as the company’s Chief Financial Officer and Chief Administrative Officer.

“A strong financial plan also requires good storytelling and solid data that educates investors about why your product is unique,” said Silver. “It also should be based in reality and show that you are being thoughtful about how you’re going to spend their money.”

In this section of the business plan series, our experts walk you through the essential components of building a solid financial roadmap for your business plan. From gathering data to building a financial strategy and everything in between, you'll learn how to create financial projections that demonstrate foresight and communicate value.

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What Are Financial Projections and Why Are They Important?

One of the most important parts of your business plan are the financial projections or your financial plan. Not only does it let investors know what types of funding you already have, but your projections also illustrate how you plan to scale operations and how long it will take you to achieve profitability.

The key is to develop a financial plan in such a way that it serves as a roadmap for potential angel investors, VCs, and other stakeholders. After reviewing it, they should see that you not only have a great therapeutic or medical device, but that you also know how to leverage that to build a sustainable business.

Having a solid financial plan can also build your credibility with investors and other stakeholders, especially if it’s clear you have done the necessary research and that you can plan realistically for the future, said Silver. Here are some additional benefits of putting together a solid financial plan:

• Demonstrate viability and value: In other words, your financial plan should show that your startup is sustainable and can be profitable.

• Engage investors: Realistic financial projections show that you understand the market, are aware of the risks, and have accounted for potential delays or setbacks.

• Inform your decisions: A solid financial plan will guide your research and development, hiring choices, and scaling plans.

• Manage risk: By putting together a thorough financial plan you are able to clearly recognize your funding needs and prepare for cash flow gaps. 

• Serve as a benchmark: A solid financial plan will help you measure progress over time and adjust strategies as needed to stay aligned with business goals. 

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Key Components of an Effective Business Plan

Whether you’re applying for a grant, meeting with investors, or seeking a business loan, these professionals likely want to gather a clear understanding of your company’s current performance and where you expect to be in the next few years. 

Even if you have no revenue or funding at this point, it’s important to include comprehensive financial projections for three to five years out, says Thomas Duening, PhD, an investor, entrepreneur, and founder of International Collegiate Angels Network. Duening also is a founding faculty member in what is now the Wolff Center for Entrepreneurship.

As for how detailed your financial plan needs to be, Duening and Silver suggested looking at angel investor sites or grant sites for specific requirements to determine what details they want to see. For instance, many will want pro forma documents like an income statement (profit and loss), balance sheet, and cash flow statement. You also should include where you expect your funding to come from (or your funding requirements) as well as your start-up costs, especially if you are a very early-stage company.

“It’s also helpful to have an org chart that shows the organization today and how much it costs and then who you need to hire down the road and how much that’s going to cost,” said Silver. “Look up the average compensation for various roles so you can get an idea of your monthly burn because that’s going to drive what funding you need to hit certain milestones.”

How to Build a Financial Plan That Gets an Investor’s Attention

If you’re unclear on where to start, it can help to speak with a mentor as well as others within your network for advice and suggestions, especially if you have never done any type of financial projections before. There also is the option of hiring a professional or offering them stock for their help, but Silver said you may want to limit this approach.

“Try to layer in as much non-dilutive funding as you can, especially in the beginning,” said Silver. “There are still grants out there, so find your way to them or find a good clinical partner that can help you get non-dilutive funding opportunities. It was a successful strategy for us and we were able to get $30 million from non-dilutive funding across 10 different research contracts such as the NFL, Department of Defense, and GE.”

Here are other crucial insights for building a realistic financial plan.

1. Start With Research

To build a financial plan as a startup, you need to start with research. Duening suggested looking at comparable firms, talking with others in the industry, and searching relevant databases for the market you are entering. You also can look at the financials of public companies and see how they are spending money on comparable things such as people, equipment, trials, and so on.

“The key to developing financial projections is to make sure that the numbers are tethered to reality as much as you can possibly make them,” he said. “And, that means you have to do your research.”

For instance, research pricing, the cost of acquiring customers, and the cost of building and testing your product. As an investor, Duening said he is going to ask questions like: What have you done to validate your belief that you’re going to be able to sell this many units of this health product or therapeutic? He said the best answer to that question is not that you have done market research, but that you have talked to actual patients or customers.

2. Include Insights From Potential Customers

Duening said customer acquisition cost is something very much underestimated by most entrepreneurs. “A lot of founders of startups are so enamored with their idea that they’re fearful to go into the marketplace and perhaps get rejected.” 

But it’s important to actually talk to real customers or patients and get honest feedback about whether they’d be willing to use or purchase what you’re bringing to the marketplace, he said.

“Sometimes you have to change the trajectory of the company in a different direction because of what you have learned from the customer or patient,” he said. “So all of the numbers that you’re putting into your sales forecast, the more you have customer interaction that validates those numbers, the more you’re going to be able to convince investors you have a worthy opportunity on your hands.”

3. Understand and Talk About the Capital Stack

You also need to understand what is called the capital stack, said Duening. “The capital stack is the different sources of money coming in to support the venture like Small Business Innovation Research funds, NSF grants, and other non-equity capital. If you have angel investors that is part of the capital stack, too.”

According to Duening, the capital stack gives the new investors you’re talking to an idea of how wisely you are organizing the company and how carefully you are deploying the capital that’s coming in.

4. Ensure Your Financial Plan Communicates Value

One way to communicate value and viability is to create a financial plan that is milestone based, said Silver. “Particularly with early stage healthcare and life sciences companies, investors are going to want to fund toward certain milestones.” 

These milestones might include proof of concept, research and development milestones, pivotal studies, and so on depending on the type of startup you have, she said. “And if you have hit some of these milestones already, this is a huge risk-reducer for investors.”

5. Create Realistic Projections

Focus on creating projections that are both realistic and strategically-aligned with your business model and industry standards. Begin by grounding your assumptions in credible data, information from key opinion leaders, customer or patient input, and industry norms, said Silver.

Overall, your financial plan should illustrate that you have a sustainable path to profitability. It also should reinforce the idea that your startup is clinically promising and strategically positioned for long-term success, she said. 

Silver said you also should be prepared to adapt your business plan as your company progresses. “The first business plan you have is rarely going to be the one that gets you all the funding you need.”

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How to Avoid Common Pitfalls

According to Duening, putting together financial projections is both a science and an art. The key, though, is to stay rooted in reality. “Be extremely realistic because it’s so easy to generate numbers that make it appear as though you’re going to be a multi-millionaire in a couple of years. Many entrepreneurs fall prey to that siren song of the Excel spreadsheet—just tweaking numbers a little bit here and there.”

Here's a quick checklist that will ensure you don't fall prey to common pitfalls:

• Find key opinion leaders who can talk about why your product is helpful

• Ensure you have believable numbers and data to support those numbers

• Make sure you can share a story about where the numbers came from

• Confirm that your numbers are consistent with industry norms

• Focus on the near term but also have a line of sight to the future

• Give investors a clear picture that makes them want to invest

• Assume things are going to take longer than expected (especially regulatory processes) 

• Start off conservative and manage your costs as tightly as possible

• Try not to shortchange your product or technology but resist overspending

Silver also suggested heeding the advice of investors who say no and paying attention to the questions they are asking. “Listen to their questions, because those are likely the questions that other investors want answers to. And, the more you can be prepared for those future meetings, the better results you will get.”

Also, keep in mind the financials are the very first thing investors look at when they get a business plan, said Duening. “We want to get a sense of whether or not this is an exciting deal. It also can reveal naïveté. So, if the numbers are really erratically out of step with industry standards or norms, that raises red flags all over the place.”