Entrepreneurship requires spending months or even years to grow your business. Then comes another epic moment where you present your idea to show the worthiness of the investment. One of the most crucial aspects of a good company presentation is a financial projection.
Your financial projections will be the most analyzed part of your business plan. Maybe, it isn’t a precise prediction, but it delivers quite an important message of the risks involved, capital required, and the rewards.
Business projections are mostly divided into two types: short-term and long-term projections. Short-term ones mostly cover a year. However longer ones cover at least the upcoming five years.
It’s a part of a business plan that matters the most;
You’re aiming to attract investors;
You’re applying for a loan line or a credit;
You want to get a better handle on your business.
Now let’s learn about the steps of creating a financial projection. Before following them, you must consider the key financial statements of your forecast which are the income statement, balance sheet, and cash flow statement:
Income statement is a financial document that provides an overview of the organization’s revenues, expenses, and net income.
Balance sheet is a snapshot of the business’s assets and liabilities at a certain point of time.
A cash flow statement monitors a business’s inflows and outflows of both cash and non–cash.
It’s normal to make rough guesses since sales are usually hard to predict. Here are the six steps to creating your business projection for your startup:
Project your spending and sales. List the key expenditures you will need to get your company off the ground and your costs to operate. Don’t forget to include recurring expenses such as salaries, marketing, raw materials, utilities, insurance, etc. Research about the industry spending of your idea to get clues for costs.
Create financial projections. Here you should mostly focus on your cash flow statement as mentioned above. Make it monthly and cover the whole year. Excel tools can help you for a better presentation.
Determine your financial needs. It will help investors to see if your business plans are realistic, whether the business will have any shortfalls, and what financing you may need for your business.
Use the projections for planning. Screenshots from the industry (mainly competitors) will guide you in collecting real data.
Plan for contingencies. Investors will want to see if you have any “Plan B”s if an unexpected event occurs.
Monitor. As you start your business, compare your results with your projections in order to understand whether you’re on your target and if you need any changes.
This is just a general overview to guide you in the right direction. If you require additional assistance, don't hesitate to get in touch with us and we will make sure to direct you to the best resources available to us.