Lord Kelvin, arguably the greatest scientist of the 19th century and the developer of the scale for absolute temperature measurement, said:
"When you can measure what you are speaking about, and express it in numbers, you know something about it, but when you can not measure it, when you can not express it in numbers your knowledge is of a meager and unsatisfactory kind." (punctuation by Lord Kelvin)
quote summarizes one of the most fundamental principles of writing a
good business plan or developing an understandable financial model,
whether it be a startup or a billion dollar company. Numbers, because
of their simplicity and elegance, provide a very simple, logical means
to increase the understanding of the reader about your business. In
fact, some times the financial model does a better job than the
business plan of explaining the business drivers, the revenue
assumptions and the levels of profitability.
Now, if we were to ask what are the two or three most important questions that a business plan or financial model should answer, somewhere in the top three would probably be "how much money do you need and for what". Now this question, by its nature, appears to me to be an obvious candidate for a numerical answer or an exhibit. Yet, half the business plans and models I see do not answer either question and a surprising number do not even make clear how much money they want to raise.
There is a very simple way to answer both questions in one exhibit that can be used in both a business plan and a financial model--a Sources and Uses Statement. Sources show how much you need and where it will come from and the uses show where the money is being used. All entries represent cash and cash only! The example below is a representative format and shows clearly that this company needs $3 million in new mezzanine debt and $9 million in new equity in order to purchase a company, buy some new equipment and provide for working capital after the acquisition.
Click on image to see full exhibit.
I think people leave out the "sources" because frequently they are trying to hide their lack of equity investment in the company. They leave out the "uses" probably because they have not thought through in detail what the money is for. Hiding an issue is rarely a good approach with sophisticated financiers. Use a Sources and Uses Statement in your business plan and financial model, show that you have detailed knowledge of your business and make it easier for the funding sources to understand the transaction. Lord Kelvin will be smiling down on you.