Business Solutions

Creating financial projections for your business is both an art and a science, and although investors prefer to see cold, hard numbers, it is difficult to predict with great accuracy what you expect your financial performance to be three years down the road, especially if you are still raising capital, but regardless, a short- and medium-term financial projection is a critical part of your business plan if you want the serious investors’ attention, and even if your business plan will only serve as a blueprint for managing and monitoring your business, it is imperative that you make financial projections, since the financial projections can be an effective guide to future business decisions.

Financial projections can be intimidating, but however, they are less a matter of mathematical aptitude and more a matter of your knowledge of your business, the industry, and the market, and financial projections are most often viewed as the most critical part of the business plan by investors, lenders, shareholders and other stakeholders with a financial interest in the potential future of the business and its projected growth and return on investment (ROI).

The financial projections section of the business plan should be thought of as simply quantifying the effects of what was presented in the plan narrative, although the projections are concerned with the future don’t think of the projections as merely a prediction, instead of the projection should be thought of as goal-setting with respect to revenues and expenses, and it always must be remembered that we cannot predict the future and yet this is precisely why planning is necessary, because we can make plans, that set expectations and goals.

Projections should at least include a list of required funds and their uses, a sales forecast of at least monthly for the first year, and quarterly for additional years, a variable cost of sales analysis, a fixed-expense operating budget, a projected profit and loss statement, and possibly a projected cash flow statement, balance sheet, and breakeven analysis.

You should list out exactly how much money you need to make your plan a reality, and your listing should break these costs down into Fixed Assets and Working Capital. Fixed Assets are property that usually has some sort of long-term value, and Working Capital is money that will be used to finance the short-term operations of the business.

For your sales forecast don’t let the fear of prediction stop you from arriving at projected revenue figures, as every business sells units of something, whether it be hours, projects, products, services, etc. Simply set goals for the numbers of units you believe you can sell taking into account any seasonality factors, and finally, multiply these units by your average established a prices and the result is your sales forecast in dollars. Each fundamental assumption that you make needs to be documented in this section since the assumptions themselves can be more important than the final numbers.

Variable costs are those cost incurred every time a sale is made and they of course vary with sales, while they are the direct cost associated with the producing or selling your products and services, which include the cost of goods themselves, any direct labor associated with creating the product, or any materials that go into the product itself.

Fixed expenses do not vary with sales and are usually tied to some contractual arrangement or indirect cost of doing business such as rent, salaries, loan obligations, insurance, and advertising, and you should develop a monthly fixed expense budget for the year detailing these amounts and when they occur.

A profit and loss statement commonly called the “P&L” combine’s the revenue, variable cost, and fixed cost amounts in order to see if the business is operating at a profit or at a loss, and this statement tries to line up all revenues and expenses to determine the profit potential of the business.

Finally, as mentioned before, financial forecasting is as much art as it is science: You’ll have to assume certain things, such as your revenue growth, how your raw material and administrative costs will grow, and how effective you’ll be at collecting on accounts receivable, and it’s always best to be realistic in your projections as you try to recruit investors for equity-based capital, and any uncertainty in the future industry trends should be reflected in the information and associated assumptions from revenue, to costs, to payroll, to operating expense, and to the bottom line/profit, and remember to always maintain a conservative approach to the projections and you will eliminate most surprises that might occur once actual operations commence.