Starting a business should be an exciting time. As long as you are properly prepared, you can increase your chances of success significantly and reduce the many stresses of entrepreneurship. Once you have that revolutionary idea, it is critical to look ahead to your short-term and long-term financial future. Before you do anything else, make sure you complete financial projections.
What are financial projections?
Financial projections are a series of charts and graphs that outline your expected profits, losses, operational expenses, sales and more. You should complete financial projections before you even think about launching a business. If you have already launched your business and have not yet completed financial projections, stop and do so immediately.
Financial projections are a forecast that helps determine the financial stability, or lack thereof, of any business in three to five years. These forecasts evaluate past trends, future expectations and current market conditions. They will also take into account regional sales potential and growth strategies and examine external and internal costs, such as the cost of customer acquisition and the amount of money you can afford to pay team members and yourself. Financial projections are essential to provide you with a realistic view as to whether or not your business is financially viable for success.
Why are financial projections important?
Financial projections are one of the most important steps in starting a business. These figures help show you whether or not your business will be profitable in the long term. If your business does not reflect a profit based on your projections, you may have to make some adjustments. While you cannot create a non-existent market for sales growth, you can cut costs in other areas, such as to find more affordable real estate or to lower starting salaries. Financial projections can also help determine realistic price points and sales goals. They can also show you whether or not a market even exists for the product or service you wish to provide.
How to create financial projections
It is important to understand that financial projections are simply the best estimates you can determine based on information available. These figures will not be exact. However, you should do as much research as necessary to make them as realistic as possible for them to be useful. To begin, focus on your revenue potential and likely expenses.
Project revenue and expenses
Your expenses will be rather straight forward. Begin by adding all of your expected costs to a spreadsheet, such as office space, computers, cell phone plans, utilities, packaging, materials, transportation, event participation, marketing, etc. Be sure to include any possible expense you can think of, even if it is as little as a box of pens. You can research all of these costs based on your type of business and the town or city in which you reside. And do not forget about taxes.
To project revenue, you have to be a bit more creative. Revenue projections are more complicated because these are estimates of sales you believe you can generate. Again, be sure to complete the necessary research to make these as realistic as possible. It is also important to be more conservative than optimistic in your estimates. You can always complete projections with both a conservative and an optimistic forecast. A good place to begin with sales is to look at your existing industry and determine the percentage of the market that represents your type of business. From there, establish the size of your potential market. Be sure to take into consideration any seasonal sales you may incur. It is quite common for certain types of businesses to have peaks and valleys in their sales forecasting due to seasonal demand.
Create an outline of the sources and uses of funds
Most businesses require at least a small portion of startup capital. It is critical to determine the sources from which you will acquire this capital and the ways you will spend it. Finding an investor as an early-stage startup is typically not easy. Most people fund their businesses themselves and with the help of friends and family at the beginning. Regardless of where you get the money, always have an outline demonstrating the source of the funds and the ways it will be used.
Prepare proforma financial statements
It will also be important to create various charts to demonstrate your financial projections clearly and objectively, including:
These charts may also be required to provide investors and bank loan officers if you seek capital. They also provide you with an easy-to-read guide as you move forward. Do not forget to make adjustments to your projections and charts as you make changes to the business. Keep everything up-to-date as much as possible as you never know when you will need these documents and figures.
Before you get too far into the development of your business, be sure to complete financial projections. You might have to make some significant changes to your business model and operational strategies as a result. And keep in mind that most investors will require financial projections if you require startup capital. If you are not great with numbers, you can find plenty of financial projection resources for free and startup assistance online for all budgets. Make your business a long-term success by analyzing your finances before you even begin.