How to set realistic financial projections for startups
23 March 2020
One of the first things to do before starting a new business is to write a business plan. Financial projections are an essential part of any business plan, whether it be an online or offline venture.
Solid startup financial projections are the glue that keeps your business plan intact which is why they are such a fundamental ingredient of preparing a new company.
How do you make solid financial projections, and keep them realistic?
Learn below more about this topic in this article created by our team at TMS.
What’s a comprehensive, well-funded business plan? And how do realistic startup projections fit in?
A business plan projects how your company will make money and has 2 basic elements.
1) The first part includes practical questions that require answers.
- Who will be your customers?
- What will be the name of your company?
- What’s the best location for your startup?
- How will you promote and advertise your enterprise (marketing)?
- What business connections do you already have and how can you use them?
- How to set up the legal structure of your new business, and what licenses you need to get?
- How to insure your startup?
- Will you need staff?
2) The second part involves startup financials and these complete your business plan.
Financial projections for a startup business plan are:
- What money are you putting in and expect to get back? Return on investment (ROI).
- Related to ROI are P&L projections, meaning assumptions of Profit and Loss forecast.
- When do you think you will break even?
- Will you need a loan?
- What are your basic investments?
If you are new to business planning or just find the process boring, you can take advantage of an app called IdeaBuddy, that simplifies it and helps entrepreneurs structure their ideas and thoughts in a well-formed and comprehensive business plan. For a higher chance of success, it is vital that you understand what will your revenue streams be, what are the immediate costs, etc.
Most businesses have the following basic start-up costs.
- Accounting and business software or an accountant.
- Client management and scheduling software
- A website
You probably will need investors or a loan to finance all of the above. These costs add up and likely months will go by before the revenue comes in so you will need financing.
A profit and loss projection predicts how much profit you will make after deducting the production costs. This is what investors and banks are mostly interested in. If you can convince them of a profitable outcome, they have no reason to dismiss your proposal.
A P & L projection is essential for your startup business plan financials.
Marketing is about identifying the needs of your (potential) customers and matching your solution to their requirements. You attract customers or clients with a promising product or service and investors are customers too so the same principle applies.
Once you write acceptable startup projections, you can approach:
- A local bank or credit union for a small business loan
- Online alternatives, which are easier to get and will give you faster funding
- Potential business partners
The ABC of setting-up realistic financial projections for your startup
The starting point should be how to set realistic financial projections for startups.
- All the above-mentioned elements should be in place and connected
- Insert them into a realistic-positive timeframe
- Create a financial projection statement
A) If you are too optimistic about the expected revenue without proof
investors will not take you seriously. It’s good to be optimistic and positive, but make sure you have solid projections. On the other hand, don’t overcompensate by presenting figures that are below what your business can generate.
Keep it balanced and based on provable facts. Compare your numbers and expectations with equivalent businesses that you can use as a precedent. Financial projections need to be documented so you can be realistically optimistic.
B) The set timeframe in which you can expect lucrative results.
A balance is needed between a conservative prediction and an aggressive prediction which will inspire both investors and your team.
Maintain that balanced mindset when you unfold both short and mid-term financial projections over 3 years, in order to cover the early hard days, the break-even days, and begin to make profits. Attach a date, but support it with realistic numbers.
A startup requires small business financial projections, but that doesn’t mean you have to think small.
C) Your Financial projection statement is convincing, transparent, balanced, and promising.
The financial projection statement combines 3 types of statements:
- The Income Statement also called the Profit & Loss statement
- The Cash Flow Projection/Statement
- The Balance Sheet
1) Your Income Statement represents your expected net income after you calculate in your
- Expenses which include ALL costs: direct, general and administrative costs. You can control what you spend.
- Revenue which is harder to predict, but be carefully optimistic.
- Gains and losses
- Income Taxes
Your business will be profitable if you can ensure a decent net income.
2) In your Cash Flow Projection, you must convince your investors that you are You prove this eligibility with a combination of:
- Cash Revenues that estimate cash sales for a specified period
- The payments needed to buy items used to manufacture products you will sell paid from your cash resources. This is the cash you will pay to run your business and is called Cash Disbursements or simply cash payments.
- When you subtract the outgoing from the incoming, and the result is positive, your cash revenue is healthy.
The Cash Flow Statement covers what comes in (revenue) and what goes out (expenses) during a certain period which will inform you if your business made a profit or not. Your projection should try to predict this.
3) Your Balance Sheet is a summary of what’s presented in your Income Statement and Cash Flow Projection. This has to be correct.
- Assets (available cash, incoming payments, and everything substantial that adds value)
- Liabilities (mostly debts)
- Equity (liabilities minus assets)
The balance sheet projects your financial balance, what your business’s net worth will be. It needs to be positive. In the case of a startup, this final estimation should give realistic expectations and prove that your startup is a good investment.
Once your startup is up and running and properly financed, it will give you a regular insight into the success of your business.
How to set realistic financial projections for startups: final settlement
Realistic financial projections for startups are necessary to forecast your chance of success. However, if you lack confidence in how to go about it, look for an online startup financial projections sample. Simply type ‘financial projections example’ or ‘startup financial projections template’ into your browser.
However, if your financial projections are doubtful, no business plan will convince any investors or credit institutions nor reassure you of a good outcome. Financial projections are the backbone of your business plan.
Be clear about your business’s cash flow and make sure your balance sheet is consistent and shows that your startup is promising. If it’s transparent and realistic it will speak for itself.
Thorough research of industry trends will help to make financial projections for startups even more realistic. Once completed, again compare your projections with other businesses in your industry.
If you enjoyed reading this article on financial projections for startups, you should check out this one about startup failure.
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