Part of the purpose of this blog is to help describe what issues are necessary when trying to succeed as a venture capital backed startup, with a focus on Australia and clean technologies.
So, I've started to start a series of postings called Business Plan Tips. These tips will help your business plan be more readable by, and therefore more interesting to, investors.
Today's tip is something that, when I first saw it, I dismissed it as an anomaly. However, I have since seen it four other times, and so I decided it was worth discussing, so here it is. Please do not include a "Total" column in your Income Statement.
I'll explain. If you look to the figure at the left, you see a three year Income Statement for that hot new startup, Fantastic Co. You can see modest growth in revenue and EBITDA, until glancing at the last line you see $9m in sales, with almost $5m in EBITDA. But, wait! Looking up you will see something odd. The company doesn't have $9m in sales in year four. Instead, the company has had $9m in sales across the previous three years. What does this mean?
In short, it means almost nothing. Nobody cares what the cumulative sales/EBITDA/COGS or anything else performance is over some arbitrary period of time. Putting in a Total column is just misleading, because most investors will look to the last line to see how the company is performing in the final year. Companies are valued as multiples of EBITDA, or multiples or revenue, but no company is valued as some total of previous years. I suppose the only purpose of this column would be if the company were to be liquidated at the end, but even then, the Retained Earnings figure on the Balance Sheet would be more appropriate.
So, please don't put a Total column. It's misleading. It's pointless. It frustrates the reader (and worse, once they realize their mistake, the next emotion is disappointment, because the actual final year figure is much less - even if the final year figures are reasonable, why would you ever want your reader to feel the emotion of disappointment when reading your business plan?) The goal of your business plan should be to quickly and clearly communicate your good-news story of why your company will be a success. A Total column just gets in the way.