Creating financial projections for your startup is both an art and a science. Even if investors want to see cold hard numbers, it can be difficult to predict your financial performance three years on, especially if you’re still raising money for planting. In any case, short and medium-term financial projections are a necessary part of your business plan if you want serious investor attention.
The financial section of your business plan should include:
- A sales forecast.
- An expense budget.
- A cash flow statement.
- A balance sheet.
- An income statement.
Be sure to follow Generally Accepted Accounting Principles (GAAP) established by Financial Accounting Standards Board, a private-sector organization responsible for setting financial accounting and reporting standards in the U.S. If financial reporting is new territory for you, have your projections reviewed by an accountant.
You have no past results to review as a startup company, making forecasting sales difficult. Still, it can be done if you understand the market you are entering and the industry trends. Indeed, sales forecasts based on a solid understanding of the industry and market trends will show potential investors that you have done your homework and that your projections are more than guesswork.
In practical terms, your forecast should be dissected by monthly sales with items showing which units have been sold, their prices, and how many you expect to sell. Reducing the quarterly sales forecast is acceptable when entering the second year of your business plan and beyond. This is the case with most of the items in your business plan.
Budget of expenses
What you sell must cost something; this budget is where you need to show your expenses. These include the cost to your business of units sold, plus overheads. It’s a good idea to break down your expenses into fixed and variable costs. For example, certain expenses, such as rent, insurance, and others, will be the same or nearly every month. On the other hand, some prices will likely vary monthly, such as advertising or help with seasonal sales.
As with your sales forecast, cash flow statements for a startup require you to do some homework as you don’t have historical data to use as a reference. This statement, in short, analyzes how much money goes into your business—every month versus what comes out. Then, using your sales forecast and spending budget, you can intelligently estimate your cash flow.
Keep in mind that revenue often follows sales, depending on the type of business you are running. For example, if you have contracts with customers, they may not pay for the items they purchase until the month after delivery. Some customers may have balances 60 or 90 days after delivery. You need to consider this delay when calculating exactly when you expect to see your income.
Profit and loss statement
Your P&L prospectus should take the information from your sales projections, expense budget, and cash flow statement to project how much you expect in profit or loss over the three years included in your business plan—year as well as a figure for the entire three-year period.
The balance sheet provides a breakdown of all assets and liabilities. Many of these assets and liabilities are items that go beyond monthly sales and expenses. For example, any unsold property, equipment, or inventory you own is an asset with a value that can be assigned. The same goes for pending bills that have not been paid. You can count those bills as assets even if you don’t have cash. Liability is the sum payable on a business loan or the sum owed to third parties on unpaid invoices. The balance is the difference between the value of everything you own and the value of everything you owe.
If you’ve done a good job of projecting sales and expenses and have entered the numbers into a spreadsheet, you should be able to identify a date when your business breaks even – in other words, the date you become. Profitable, with more money in than out. Being a startup, this is not expected to happen overnight. Still, potential investors want to see that you have a date in mind and that you can back up this projection with numbers that you have provided in the financial section of your business plan.
When putting together your financial projections, keep some general tips in mind:
- Get familiar with spreadsheet software if you aren’t already. It is the starting point for all financial projections and offers flexibility, allowing you to change assumptions or weigh alternative scenarios quickly. Microsoft Excel is the most common, and you will likely already have it on your computer. You can also buy special software packages to help with financial projections.
- Prepare a five-year screening. Please don’t include this in your business plan, as the further you project the future, the harder it is to predict; however, have the projection available in case an investor asks for it.
- Offer only two scenarios. Investors will want to see a best-case scenario and a worst-case scenario, but don’t flood your business plan with a myriad of average methods – they will likely confuse.
- Be reasonable and clear. As mentioned earlier, financial forecasting is as art as science. You will have to assume certain things, such as how your income grows, how your raw materials and administrative costs will grow, and how effective you will be in collecting credits. Therefore, it is best to be realistic in your—projections when trying to recruit investors. For example, if your industry is experiencing a downturn and you are projecting revenue growth of 20% per month, expect investors to see red flags. Continue reading more informative business, technology, internet investment, and app development tutorials. For additional information, go to generalposting.com. In one location, you will find a wealth of information.