The financial forecasts you include in your business plan are crucial. The forecasts give lenders and investors an idea of how well your company will likely perform. Balance sheets and income statements are both included in financial projections.
Several factors make financial projections crucial. They first provide lenders and investors with a forecast of your company’s future performance. This can assist you in obtaining the funding required to launch your business. Financial forecasts also enable you to monitor your development over time. They can help you determine whether your company is on track to achieve its objectives. Financial projections can aid in early problem detection, allowing you to take appropriate action.
What Are Financial Projection Models in Business Plans?
Through financial forecasting, financial projections provide an estimate of your company’s future financial performance. They can be helpful for internal planning and decision-making but are typically used by businesses to obtain funding.
Making financial projections for your new business in 6 simple steps
A profit and loss statement, balance sheet, cash flow statement, cash flow forecast, and budget for expenses should all be included in the financial section of your business plan. Make sure to adhere to the generally accepted accounting principles (GAAP) established by the Financial Accounting Standards Board, a private organization in charge of establishing financial accounting and reporting standards in the United States. Have an accountant review your projections if financial reporting is new to you.
Since you are a new company, you do not have any historical data to compare to when making sales projections. But it is possible if you have a solid grasp of the market you are entering and the general state of the industry. Sales projections based on a thorough knowledge of market and industry trends will demonstrate to potential investors that you have researched and that your forecast is more than just conjecture.
Your forecast should, in actuality, be divided into monthly sales, with entries indicating which units are being sold, at what prices, and how many you anticipate selling. Reducing the forecast to quarterly sales is acceptable once your business plan has reached the second year and beyond. In actuality, that’s true of the majority of your business plan’s components.
You need to list your expenses in this budget because whatever you’re selling must have a price. In addition to overhead, these expenses also include the cost of the sold units to your company. Organizing your expenses into fixed and variable costs is a good idea. For instance, some costs, such as rent, insurance, and others, will be the same or very similar each month. Some expenses, like advertising or seasonal sales assistance, are likely to change from month to month.
Similar to your sales forecast, you must research your startup’s cash flow statements because there is no prior data to use as a guide. This statement details how much money comes into and leaves your company each month. You can accurately estimate your cash flow using your budgeted expenses and sales forecasts.
Depending on the type of business you are running, revenue frequently follows sales. For instance, if you have contracts with clients, it’s possible that they won’t pay for the goods they buy until the month after delivery. Some customers may keep their balances for 60 or 90 days after delivery. When determining precisely when you anticipate seeing your revenue, you must consider this lag.
Revenue and Loss Report
Your P&L statement should project your expected profits or losses over the three years covered by your business plan using the data from your sales projections, expenses budget, and cash flow statement. A figure for the entire three-year period and a figure for each year should be provided.
In the balances sheet, you detail every one of your assets and liabilities. These assets and liabilities frequently consist of things other than regular monthly sales and expenses. You can assign a value to any property, machinery, or unsold inventory you own as an example of an asset. The same holds for unpaid invoices that are still owed to you. These invoices are assets even though you don’t have the money. Liabilities include debts such as what you owe on a business loan or what you owe others for invoices you haven’t paid. The balance is the difference between what you own and what you owe regarding value.
Projections of Break-Even
You should be able to determine the date your business breaks even—when you start making more money than you are losing—if you did a good job projecting your sales and expenses and entering the numbers into a spreadsheet. Although this is not expected to happen right away for a startup company, potential investors want to see that you have a target date in mind and that you can back up that projection with the data you’ve provided in the business plan’s financial section.
Follow these general guidelines when creating your financial projections:
If you still need to become familiar with spreadsheet programs, learn them. All financial projections begin with it, and because of its adaptability, you can quickly change your assumptions or consider different scenarios. The most popular one is Microsoft Excel, which you already have on your computer. Additionally, you can purchase specialized software programs to aid in financial projections.
Make a five-year forecast. This one shouldn’t be in the business plan because it becomes more difficult to predict the further into future of your project. Nevertheless, keep the projection on hand in case an investor requests it.
Just present two scenarios. Refrain from overstuffing your business plan with numerous medium-case scenarios; investors only want to see the best- and worst-case scenarios. They’ll probably only make things confusing.
Be fair and concise. As previously mentioned, financial forecasting is both an art and a science. You’ll need to make assumptions about your revenue growth, your raw material and administrative costs, and the efficiency of your receivables collection efforts. To attract investors, it is best to make realistic projections. Expect investors to raise questions if you forecast revenue growth of 20% month over month during a period of contraction in your industry.