Whether you’re in the early stages of your business or looking to expand, forecasting your finances is a crucial part of the process.
Having business plan financial projections for your startup or new company is the closest thing you’ll get to a crystal ball: By extracting data from the past, you get to predict potential earnings in the future, and most importantly map out how you’ll get there.
If you’re a new business owner and are completely overwhelmed on where to even start, or if you break out in hives when you read words like ‘finance’ and ‘forecast revenue’, fret not! Read on and we’ll set you off on the right foot.
Creating financial projections for startups & new businesses
Besides the accounting basics like making payroll and paying the bills, understanding how to create a solid financial projection is crucial for the strategic planning of your business.
Short-term projections cover 12 months while long-term projections cover three to five years. Most business owners will create both short and long-term projections.
When it comes to raising funds or getting a loan you should ideally give a three-year projection. Taking the time to craft realistic forecasts of expenses, revenue and growth patterns will help persuade investors and lenders of your business’ potential.
There are two key forecasts to put together in your business plan financial projections: an expense projection and a sales projection.
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1. An expense projection
Let’s start with the easier one – list down the expenses for running your normal business operations. Here are some examples to include:
- Utility Bills
- Phone Bills / Internet Bill
- Bookkeeping Costs
- Website Hosting
- Advertising & Marketing
- Direct labour costs
- Cost of goods sold (packaging, supplies, etc.)
If you are a new business with no existing data to go off on, create your projections based on market and competitor research.
When doing an expense projection, consider:
- Conservative advertising and marketing estimates. Especially when you’re just starting out, advertising and marketing costs are notorious for going over budget.
- Keeping track of labour expenses you’re currently doing yourself. Even if you’re playing jack-of-all-trades right now, ask yourself if you want to be managing that many tasks in the future. Include assumptions on payroll expenses for when business grows and you hire more.
- Adding 15%-20% to the initial number. Apply Murphy’s Law here – anything that can go wrong will go wrong. No one probably included an estimate for deadly-pandemic-puts-world-in-lockdown in their 2020 projection, but preparing for the ‘what-if’s can help you bounce back easier if something unexpected happens.
2. A sales projection
Sales projections can be harder to predict that your expense projection – besides just predicting how many customers you can expect and how much inventory will be sold, you need to consider outside factors like the future health of the economy or any industry downturns. When you project sales, you’ll also be able to forecast revenue.
While you want to be optimistic, be sure to have a great argument on why you think you can grow that fast.
You can create a sales projection by basing it on:
- Your existing traction. Look at your historic performance and include any improvements along the way (new features, more efficient labour, etc).
- If you don’t have traction yet, use industry benchmarks from similar businesses. Make your forecast realistic and don’t over promise if you don’t think you can deliver.
But first, refer to the holy trinity
There are three key financial statements you need to map out your sales and expense projections: a balance sheet, an income statement and a cash flow statement. You can streamline the accounting process by using softwares like LedgerBrains or QuickBooks to generate these reports.
1. Balance sheet
A balance sheet is a financial breakdown of your business. The formula for a balance sheet is:
ASSETS = LIABILITIES + OWNER’S EQUITY
Creating a three-year balance sheet projection should allow you to predict the break-even point i.e. when your business begins to turn a profit.
Use your current balance sheet totals to predict your business financial projections for the next one to three years. If you’re in the planning phase, create a balance sheet projection based on information from researching your industry.
2. Income statement
Or better known as the profit and loss statement. Income statements reflect how much money your business has made from its operations during any given month. It captures a company’s net income and profitability by taking into account revenues, expenses, gains and losses.
Your current income statement can serve as the basis for estimating net profits down the road. If you’re in the planning stages, it’s worth it to employ market research firms that can give you an overview of your industry, target market and industry growth levels.
3. Cash flow statement
This is where you estimate the money that flows in and out of your business.
Creating a cash flow projection is important so that you can make informed decisions and predict cash shortages. For example, if you forecast expenses to be higher in the coming months, you can cut down on unnecessary expenses this month.
Cash flow projections should be updated regularly as you add or lose customers, hire or let go of employees or when monthly expenses shift. Your estimate should also include seasonal expenses like holidays.
Tips to follow
While financial projections are not a one-size-fits-all approach to business, there are some basic best practices that can help you create detailed and investor-friendly forecasts.
- Create multiple financial projections, including best case scenario and worst case scenario. You may have a great business plan, but we know all too well how unpredictable the world can get. Making financial models for all of the possible ways things can turn out is one way to reveal opportunities while avoiding disastrous circumstances if something goes unexpectedly wrong.
- Research your industry to the point of exhaustion. It’s how you can plan for success on paper with realistic profit margins. There will be obstacles along the way (that’s business, baby!), so keep an optimistic mindset and make decisions based on hard numbers for long-term sustainability.
- Find the Obi-Wan to your Anakin. Admit to what you don’t know and look for mentors. It doesn’t matter if you’ve been in the business for 5 months or 5 years – there will always be others ahead of you. Make use of the support offered by government agencies and organizations. Their wisdom can save you from making all the same rookie mistakes they did.
Now start smashing those projections!
To recap, every startup and new business needs two key business plan financial projections:
- An expense projection
- A sales projection
To create both, you will need to have your balance sheet, income statement and cash flow statement at hand.
Building projections for your business will take time and many revisions as you build out your experiences. A company’s growth is not always linear, so creating financial projections can be a daunting task – but the earlier you start, the earlier you’ll learn the ways to get it done right.