Part 11/20 - Twenty Questions You Will Be Asked By Venture Capitalists (If You Get That Far)

By Laurence K. Hayward

This is part eleven of a twenty part series on this topic.

11. When will your company break even in terms of profitability and cash flow?

I remember when I first became financially independent of my parents. The thrill of freedom was quickly followed by the burden of responsibility. Still, my income exceeded expenses, and I no longer required financial support. In accounting terms, I was solvent. Likewise, my parents had one less thing to worry as much about, financially speaking anyway. The concept is not unlike that of a venture capital investment. Once your business is financially independent and solvent, you become less of a liability to a VC. Certainly there may be opportunities to continue investing, but that might be focused on expansion rather than “staying alive.” VCs would like to get their portfolio companies to this point as quickly as possible. Many only invest in companies that have already passed this mark. Profitable businesses are more attractive to potential buyers and the public markets.

In order to estimate when your company will break even, it is important to have the appropriate financial projections. Many entrepreneurs develop income projections, but fail to fully appreciate the application of the balance sheet and cash flow statement. For example, capital expenditures can drain significant cash upfront even though the effect on the income statement as depreciation expense can be minor in a given year (because the expense is spread over a number of years – the depreciable life of the asset). Likewise, accounts receivable cycles and inventory can have a significant impact on cash flow, which fundamentally is the most critical element to survival. If you do not have the appropriate financial experience, seek out a well-trained advisor who can assist you with your financial projections.

A well-developed business plan will include projected income statements, balance sheets and statements of cash flow five years forward. Many entrepreneurs also provide information regarding the assumptions used to generate the financials.

For example, they may provide pricing and volume data in order to demonstrate how and when revenues are recognized. Whether you present this information in the plan, or reserve it for more detailed discussions with investors is up to you.

However, it is critical that you can support the assumptions logically (with hard data), that your calculations (within the given set of assumptions) are accurate, and that the approach used to arrive at the final set of projections is methodical.

Laurence K. Hayward is the Founder and CEO of TheVentureLab. To learn more about him follow the link here