Obviously, much of what most investors are going to be interested when investigating a renewable energy company will be the same as if they are looking at any type of business – financial statements. An investor is going to be most interested in their potential ROI (return on investment). If this is a new company, the business plan should include financial projections that clearly define what the balance sheet and income statement expectation may be along with outlines of the goals and exit strategy (if one exists).
In the renewable energy industry, it is likely the sales projections will depend largely on available incentive programs. It is imperative that a new company understand what those incentives, the details on the life-cycle and the estimated value and how those incentives will affect sales. If sales can be expected to be cut in half if the incentives are withdrawn, then that information must also be relayed to the potential investors. Also, it is critical to provide the potential investor with a thorough risk assessment and analysis. Although the fossil fuel industry understands and has been working with such assessments for a long period of time, it is something that the renewable energy industry needs to address. Properly conveying the risk and mitigation solutions could take an investor off the fence and make him or her want to invest in your project (Altran GmbH & Co, 2011).
With risk management addressed, it is imperative to show potential investors how the business makes money and, most importantly, has a significant rate of return. The best accounting method to do this, after the actual and future estimated balance sheets and income statements are prepared, is to run a return on equity (“ROE”) which takes the net income realized divided by the shareholder’s equity. This effectively shows how much profit has been and will be generated per dollar of investment. With some historical information, this number can also so the company’s efficiency levels. A rise in ROE each year would indicate a strong and efficient company. There is, however, the potential to artificially affect the ROE by having a large amount of debt or buying back shares (Financial Statement Analysis, 2014).
References
Altran GmbH & Co. (2011). Risk Quantification and Risk Managment in Renewable Energy Projects. Hamburg, Germany: Author. Retrieved October 15, 2014, from http://iea-retd.org/wp-content/uploads/2011/11/RISK-IEA-RETD-2011-6.pdf
Financial Statement Analysis (2014). Investing Answers. InvestingAnswers, Inc. Retrieved October 15, 2014 from http://www.investinganswers.com/financial-dictionary/financial-statement-analysis/return-equity-roe-916
Hi Jennifer. Christy here. I really liked your post because it addressed the topic of incentives and how the analysis (financial or otherwise) had to consider not just the incentives available at start-up, but how they could impact the project over its life cycle if conditions change. I also liked your reference to the need to conduct a thorough risk assessment. All too often, we tend to make decisions based on financial or environmental considerations alone. Great post! I approached mine from the perspective of what analysis my board of directors would expect to see prior to making a decision. The post is at http://engr312.dutton.psu.edu/2014/10/14/stallard-the-cost-of-capital-not-just-money/.
Hi Jennifer, great job on this post! You hit a lot of points on how the business plan should incorporate the financial plan which I couldn’t agree more. The financial plan plays two major roles on the cost of capital topic, the first one being that as an entrepreneur you should be able to understand the different financial terms and ratios, what that means for a new company and what you need to make in order to stay open. This also makes the point that as the owner you should be able to explain why your company is a good option (if all the given ratios make the same point) to invest in. This makes the second major point that being able to explain this to investors and show them that the company has a plan I believe you are more likely to have investors wanting to fund your venture. Thanks for sharing!
Thanks so much for your comments! You are absolutely right that for an investor, it is extremely important to believe that the person(s) pitching a new business venture understand their numbers and can not only explain them but back them up. I worked in the private equity industry for a time and it always amazed me how many new ventures would not be able to fully explain their own analysis!