EB5 Investors Magazine Volume 2 Issue 1 | Page 18

The Fuel for Your EB-5 Engine

Assumptions in Your Financial Analysis by Soyini Coke

Soyini Coke
The financial analysis in your EB-5 application is like the engine in your car . If your engine is faulty , you are not going anywhere . Your financial analysis or projections will most likely come from a model — a series of spreadsheets that analyze the likely performance of a company into which the EB-5 dollars will be invested . This model will then become the basis for all the financials in your business plan , a requirement for either a regional center ( I-924 ) or visa ( I-526 ) application . In particular , your financial analysis proves your business will create the number of jobs required by the EB-5 program .
A well-built model can result in a cogent , credible plan , which leads to an approved application , and eventually becomes a useful tool for strategic and operational decisions . Conversely , a poorly designed financial model may lead to inaccurate projections , potentially resulting in a denial of the investors ’ I-829 application after two years because a business did not create the number of jobs promised in its business plan .
This article discusses assumptions in your business plan via your financial model — what assumptions are , why they are important , and how to develop them accurately . Whether you are a project developer or an investor ( direct or regional center ), being clear about your financial assumptions is critical — their accuracy determines your business ’ s success . New ventures are inherently risky ; however , this approach will allow you to understand and bracket that risk , thereby increasing the likelihood of hitting or exceeding your financial targets .
What are assumptions ? Why are they important ?
Assumptions are the variables that you put into a model — your price , costs , sales cycle , conversion rates , etc . You must assume them because they are not calculated or implied by any other analysis , and they are variable and imperfect . So , even though assumptions are a choice , they should be driven by empirical evidence and logic rather than by conjecture . Assumptions are the key inputs that fuel the model ; if they are wrong , so the entire model will be .
Financial models are used in order to obtain EB-5 approval , to project future profitability , and to market your business to investors . On a broader scale , models are also used to hire employees , purchase inventory and equipment , and take on loans and lease agreements . If your model provides inaccurate results due to poorly chosen assumptions , your company will face enormous pressure , future setbacks , and a general uncertainty that limits your success , costs valuable time and money , or even causes your business to fail .
While the consequences of erroneous financial projections are painful for any investor who loses money , they are even more so for an investor in the EB-5 visa program , who may face deportation if the quota of 10 jobs is not reached . The risk is very real . In a business with $ 1 million in annual revenues , a negative 10 percent error in revenue projections would be $ 100,000 off the top line — that is the equivalent to at least one job in most businesses , which jeopardizes an investor ’ s visa .
Recommended methodologies for developing assumptions Historical data - If you have an established business , the most fundamental baseline is what you historically have charged your customers . If this is not an option , you can analyze competitors ’ pricing levels in comparable market segments .
Industry experts - One way to double-check your assumptions is to consult industry experts . These could be managers in operating roles , management consultants , or even investment bankers and accountants that focus on your industry . Many of these people create their own financial models and will have valuable feedback on your assumptions . Furthermore , you may get advice for free and expand your network at the same time .
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