Developing financial estimates for a startup is a combination of art and science. While investors want to see cold, hard numbers, it can be difficult to predict your financial performance three years from now, especially if you're still raising funds. In any case, short- and medium-term financial projections are a mandatory part of the business plan if you want to attract the attention of investors.
The financial section
of the business plan should include:
- A sales forecast.
- An expense budget
- A statement of cash flows.
- A balance sheet
- A profit and loss statement.
Make sure you follow
the generally accepted accounting principles (GAAP) set by Financial Accounting
Standards Board, a private sector organization responsible for setting
accounting and financial reporting standards in the U.S. If financial reporting
is new to you, have an accountant review your projections.
Quick Navigation
- Sales forecasts
- Budget expenses
- Statement of cash flows
- Profit and loss statement
- Balance sheet
- Break-even projection
- Additional tips
Sales forecasts
As a startup, you
don't have past results to look at, which can make forecasting sales difficult.
However, this is possible if you understand the market you're entering and overall
industry trends. Forecasting sales based on a solid understanding of industry
and market trends will show potential investors that you've done your homework
and that your forecasts are more than guesswork.
In practical terms,
your forecasts should be broken down by monthly sales, with entries showing
what units are sold, their prices, and how many units you expect to sell. As
you enter the second year of your business plan and beyond, reducing the
forecast to quarterly sales is acceptable. This is the case for most elements
of the business plan writers.
Budget expenses
What you sell has to
cost something; this budget is where you need to show your expenses. These
include the cost of units sold for your business and overhead. It's a good idea
to divide your expenses into fixed and variable costs. For example, some
expenses will be the same or nearly the same each month, including rent,
insurance, etc. However, some costs, such as advertising or seasonal sales
assistance, will likely vary monthly.
Statement of cash flows
As with sales
forecasts, cash flow statements for a startup require some preparation because
you don't have historical data to reference. In short, this statement breaks
down the amount of money coming into your business each month compared to the
amount going out. You can intelligently estimate your cash flow using your
sales forecast and expense budget.
Remember that revenue
will often come from sales, depending on the type of business you run. For
example, if you have contracts with customers, they may not pay for items they
buy until the month after delivery. Some customers may have balances 60 or 90
days after delivery. You need to consider this lag when calculating exactly
when you expect to see revenue.
Profit and loss statement
The P&L should
consider information from the sales projections, expense budget and cash flow
statement to project how much profit or loss you expect to make over the three
years included in the business plan. You should have a figure for each year
separately, as well as a figure for the entire three-year period.
For more information
you should visit business plan consultant.
Balance sheet
Provide a breakdown of
all your assets and liabilities on your balance sheet. Many of these assets and
liabilities are items that exceed monthly sales and expenses. For instance, any
unsettled equipment, equipment, or inventory that you own is a resource with a
valuation that can be ascribed. The same goes for unpaid overdue bills that are
owed to you. Even if you don't have the money in hand, you can consider these
bills as assets. The amount you owe on a business loan or that you owe others
for bills you haven't paid are considered liabilities. The balance is the
difference between the value of everything you own and the value of everything
you owe.
Break-even projection
Suppose you've done a
good job projecting sales and expenses and putting the numbers into a
spreadsheet. In that case, you should be able to identify a date when your
business will break even—in other words, the date at which you will become
profitable, with more money coming in than going out. Of course, as a startup,
this is not expected to happen overnight. Still, potential investors want to
see that you have a date in mind and that you can sustain this projection with
the numbers you provided in the financial section of the business plan.
Additional tips
When making your
financial projections, keep some general tips in mind:
- Get comfortable with spreadsheet software if
you aren't already. This is the starting point for all financial
projections and offers flexibility, allowing you to change assumptions
quickly or evaluate alternative scenarios. Microsoft Excel is the most
common and is very you probably already have it on your computer. You can
also purchase special software packages to help you make financial
projections.
- Prepare a five-year projection. Don't
include it in your business plan because the further into the future you
project, the harder it is to predict. However, you need to have the
projection available if an investor asks for it.
- Give only two scenarios. Investors will want to see an optimistic and a
pessimistic scenario, but don't flood your business plan with many average
scenarios. These will likely only create confusion.
- Be reasonable and clear. As mentioned before, financial forecasting is both an
art and a science. You will need to make assumptions about how your
revenue will grow, how your raw material and administrative costs will
increase, and how efficient you will be regarding debt collection. When
trying to recruit investors, it is best to be realistic about your
projections. If your industry is going through a period of contraction and
you expect a 20% increase in revenue per month, expect investors to see
red flags.
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