Writing a Business Plan – Financial Projections

Writing financial projections for your startup is both an art and a science. While investors want to see hard and clear numbers, it can be difficult to predict your financial performance over the next three years, especially if you are still raising initial capital. However, short- and medium-term financial projections are a necessary part of your business plan if you want to attract serious interest from investors.

Sales Projections

As a startup, you have no historical results to review, which makes it difficult to estimate sales. However, this can be accomplished if you have a good understanding of the market you are entering and industry trends in general. In fact, sales projections based on a strong understanding of the industry and market trends will show potential investors that you have done your homework and that your projections are not just guesswork.

Practically speaking, you should break down your projections into monthly sales with entries that clarify the units being sold, their price points, and the number of units you expect to sell. As you enter the second year of your business plan and beyond, the projections can be narrowed to quarterly sales. In fact, this is the case for most items in your business plan.

Expense Budget

You need to have a sense of the costs you will incur for the units you are selling, in addition to operating costs in this budget. It’s a good idea to break expenses down into fixed and variable costs. For example, some expenses will be the same or close to the same each month, including rent, insurance, and others. Some costs may fluctuate from month to month, such as advertising or seasonal sales assistance.

Cash Flow Statement

Just like with your sales projections, a startup’s cash flow statement requires some research since you don’t have historical data to reference. This statement, in summary, analyzes the amount of cash coming into your business monthly versus the amount of cash going out. By using your sales projections and expense budget, you can smartly estimate your cash flow.

You must keep in mind that revenue often lags behind sales, depending on the type of business you’re in. For example, if you have contracts with clients, they might not pay for the items they purchase until the month after delivery. Some clients may carry balances for 60 or 90 days after delivery. You should factor in this delay when calculating when you expect to see your revenues come in.

Profit and Loss Statement

The profit and loss statement should take information from your sales projections, expense budget, and cash flow statement to forecast the amount of profit or loss you expect over the three years covered in your business plan. You should have a figure for each individual year as well as a total figure for the entire three-year period.

Balance Sheet

You should provide a breakdown of all your assets and liabilities on the balance sheet. Many of these assets and liabilities are items that go beyond the monthly sales and expenses. For example, any property, equipment, or unsold inventory you have is an asset that has value assigned to it. The same applies to invoices owed to you that have not been paid. Even though you may not have cash in hand, you can consider those unpaid invoices as assets. The amount you owe on a business loan or what you owe others on unpaid invoices is counted as liabilities. The balance is the difference between the value of everything you own and the value of everything you owe.

Projections

Reaching the Break-Even Point

If you have done a good job of forecasting sales and expenses and inputting the numbers into a spreadsheet, you should be able to determine the date when your business reaches the break-even point – in other words, the date when you become profitable, with income exceeding expenses. As a startup, this is not expected to happen immediately, but potential investors want to see that you have a date in mind and that you can support that expectation with the figures you provided in the financial section of your business plan.

Additional Tips

When setting your financial forecasts, you should keep some general advice in mind:

• Learn to use spreadsheet software if you are not already proficient. It is the starting point for all financial forecasting and provides flexibility, allowing you to quickly change assumptions or weigh alternative scenarios. Microsoft Excel is the most common, and you probably already have this program on your computer. You can also purchase specialized software packages to assist with financial forecasting.
• Prepare forecasts for five years. Do not include this in the business plan, as the further into the future you go, the harder it is to predict. However, you should have the forecasts available in case investors request them.
• Provide only two scenarios. Investors would like to see best-case and worst-case scenarios, but do not inundate your business plan with a bunch of mediocre scenarios. Such numerous scenarios may just cause confusion.
• Be reasonable and clear. As mentioned earlier, financial forecasting is an art and a science. You will have to make certain assumptions, such as how your revenue grows, how raw material and administrative costs increase, and how effectively you collect accounts receivable. It’s best to be realistic in your forecasts while trying to attract investors. If your industry is going through a contraction and you are forecasting a 20% growth in revenue month-over-month, expect investors to see red flags.

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Source: https://www.thebalancemoney.com/writing-a-business-plan-financial-projections-1200842