Writing a Business Plan - Financial Projections
Spelling out your financial forecast in dollars and sense
Creating financial projections for your startup is both an art and a science. Although investors want to see cold, hard numbers, it is tough to predict your financial performance three years down the road, especially if you are still raising seed money. Regardless, a short- and medium-term financial projection is a required part of your business plan if you want serious investors’ attention. Here are some tips for crafting solid financial projections.
Get Comfortable with Spreadsheets
Spreadsheet software is the starting point for all financial projections. Microsoft Excel is the most common, and chances are you already have it on your computer; there are also special software packages you can buy to help with financial projections. Spreadsheets offer flexibility, allowing you to quickly change assumptions or weigh alternate scenarios.
Go Beyond the Income Statement
The income statement is a standard measuring tool used to convey your projected revenues and expenses. A good financial projection also will include a projected balance sheet, which shows the breakdown of assets, liabilities and owner’s equity. In addition, it will include a cash flow projection, which reveals the actual movement of cash through your company in a given period.
Your financial projections should include estimates of how much money you plan to borrow and interest repayments on those loans.
Additionally, be sure to follow the Generally Accepted Accounting Principles, or GAAP, which are set forth by the Financial Accounting Standards Board, the private-sector organization responsible for setting financial accounting and reporting standards in the U.S. If financial reporting is new territory for you, have an accountant review your projections.
Provide Short-Term and Medium-Term Projections
You should be able to offer investors:
- A short-term projection of the first year, broken down by month
- A three-year projection, broken down by year
- A five-year projection. Don’t include this one in the business plan, since the further into the future you project, the harder it is to predict; however, have it available in case an investor asks for it.
When projecting growth, consider the state of the market in which you are operating, as well as trends in raw material and labor costs, and whether you foresee needing additional funding in the future.
Account for Startup Fees
Fees related to licenses, permits and equipment should be included in the short-term projections. Also, keep in mind the difference between fixed and variable costs; differentiate where appropriate. Variable costs usually will be included under the category of “cost of goods sold.”
Offer Two Scenarios ONLY
Investors will want to see a best-case and worst-case scenario, but don’t inundate your business plan with myriad “medium-case” scenarios. It will likely just cause confusion.
Make Your Assumptions Reasonable and Clear
As mentioned before, financial forecasting is as much art as it is science: You’ll have to assume certain things, such as your revenue growth, how your raw material and administrative costs will grow, and how effective you’ll be at collecting on accounts receivable.
It’s best to be realistic in your projections as you try to recruit investors. If your industry is going through a contraction period and you’re projecting revenue growth of 20 percent a month, red flags will begin to pop up.