An important part of any startup business plan is a financial projection. This section will show potential investors hard predictions about how a startup will operate in its first few years. For the owner of a startup, writing this section accurately and convincingly is essential in locating capital to build. As a result, you might find this part of your entrepreneuring journey daunting. Writing a financial projection can be straightforward if you follow a few simple rules. Here are the steps used to write financial projections for startups.
The first section of a financial projection is the sales forecast. Here you estimate what your startup will make in sales over the next three years. This should be broken down by month for the first year and quarterly the next two. It should also include the expected price of the goods over time, how many expected sold units, and how much each product is expected to cost to make. This last item is important since it is needed to calculate the gross margin of your sales. Gross margin is handy to determine where your company will sit compared to competition. In making these estimates remember to be ambitious, but also realistic.
You will next write a projected budget for the same three years period. This budget doesn’t need to be in such detail as your sales forecast. It does need to take a realistic account of both your fixed costs such as rent and unit production, and variable costs like marketing. It should also consider foreseeable cost increases, such as rising rent and inflation. This proposed budget will be needed to work out profit projections.
Cash Flow Projection
The next step of your financial projection will take your sales and projected budget and combine them into a cash flow projection. This table will use your data to estimate your how much cash you will have at any one time during the three-year period of the projection. It is important with this section to get the timeline right. For example, sales in a certain month will not equal cash immediately to hand. You will have to explain how your cash flow management will get through these periods. The goal of this projection is to get as close as possible to a road map of the next few years for your company. It should show place where you would have the cash buffer to expand and reveal weaknesses in your cash flow.
Profit And Loss Statement
Your financial projections for startups should then include a profit and loss statement. This statement takes all the data used above and identifies how much profit, or how much debt, your company stands to make at various point along the three years of the projection. It should provide both an overall amount for the three years, and yearly estimates. This statement should also include the break-even projection based on your direct expenses. This will indicate the point on the three-year timeline when the startup takes in more money than it spends. Identifying this date is important for making financial decision during this three-year period.
Projected Balance Sheet
The four previous sets can now be merged into a single, simplified projected balance sheet. This graph will take all the data points you established previously and display them together in one, easy to follow, place. You may want to use an accountant for this step, since building this balance sheet can be complicated. The benefits of a projected balance sheet far outweigh the trouble making it though. In particular a projected balance sheet, once made, can be altered to take into account changing situations. This means your projection remains relevant even as your startup takes off. This is the part of the projection that investors will most want to see most. It will let them see your startup projections at a glance.
A startup financial projection can be easy to put together with a few straightforward steps. Write a sales forecast to estimate sales for the next three years. Then write a proposed budget for the same period. Use these two together to estimate your cash flow over the three years. Combine these three to estimate your profit at various times over the period. Then merge all these data points together into a projected balance sheet. With this material in hand, you’ll easily find investors ready to put their money in your startup.