10: Financial Projections
TIME FOR COMPLETION: APPROXIMATELY 35 HOURS
Projecting your financial statements is a very important part of your business plan. It gives an idea of how your business will perform financially according to both current market assumptions and the business model you choose. If you do not know all of the numbers involved, ask somebody already in the business, or call service providers and ask them for estimates regarding operating expenses and any other cost estimates they would be willing to provide for you. This is a great way to start building your financial model.
What’s in It?
The Financial Projections section should include a spreadsheet that can help you in preparing your projections. It usually includes key metrics such as the startup expenses, marketing goals, unit sales and costs, personnel expenses, profit and loss statement, cash flows, and the balance sheets. The first year’s projections are prepared month by month, then annually for the following two to four years.
Why’s it Important?
Your financial projections give you an idea of how your business should be doing at any moment in time. It also shows your potential investors how you will be profitable over time. You have to be as realistic as possible in estimating your initial costs as they will determine how you will start your business as well as your expected profits. A business can easily fail if the management honestly believes that they will sell more products and services than their market research suggests is possible. Therefore, financial statements in a business plan should always be conservative so that the numbers are realistic and believable. It is a good idea to find actual sales data and/or estimates from companies that are already operating in your industry and/or someone with experience relevant to your industry to base your assumptions on. You may have to get creative to find good data for your financial projections, but anything solid that you do find will benefit you immensely when it is time to make realistic projections about the future. This is crucial information you need to start building your team and determine how much cash you need to reach profitability.