How to Create Financial Projections for Your Startup
Creating financial projections is an important part of your startup’s business plan. If you’re seeking financing, financial projections help convince prospective lenders and investors that your business will be profitable by offering them a good return on their investment.
If you’re not seeking financing, you may think you don’t need financial projections and can just “wing it.” Big mistake. Financial projections are vital to you, too. First, they enable you to plan and budget for your new business. Second, they serve as a yardstick.
By comparing your actual financial statements to your projections, you’ll be able to see if your business is consistently falling short of your projections or surpassing them. If your projections are falling behind, then you’ll need to make some changes by raising prices, cutting costs or rethinking your business model. Conversely, if your income surpasses your projections, then you may need to hire employees, expand your facility or seek financing sooner than you expected.
In general, financial projections for a startup should go three years into the future, as it’s hard to project further than that without some historical data to use. To get started, create:
A sales forecast.
Project your sales out for at least three years, including monthly sales for the first year, then quarterly for the following years. How many customers can you expect? How many units will be sold? What is the cost of goods sold? How will you price your products?
An expense budget.
Include both fixed costs (e.g. rent for your location) and variable costs (e.g. marketing expenses). You don’t need to do an incredibly detailed breakdown, such as listing the cost of every chair you plan to purchase, but you do need general figures.
Financial projections include three basic documents that make up a business’s financial statements.
1.Income statement: This projects how much money the business will generate by projecting income and expenses, such as sales, cost of goods sold, expenses and capital. For your first year in business, you’ll want to create a monthly income statement. For the second year, quarterly statements will suffice. For the following years, you’ll just need an annual income statement.
Cash flow statement: The cash flow statement is kind of like a checking account register, but goes into more detail on how much money will flow into (income) and out of (expenses) your business. At the end of each period (e.g. monthly, quarterly, annually), you’ll tally it all up to show either a profit or loss.
Balance sheet: The balance sheet shows the business’s overall finances including assets, liabilities and equity. Typically you will create an annual balance sheet for your financial projections.
Projecting three years in the future should enable you to forecast the break-even point, which is the point at which your business stops operating at a loss and starts to turn a profit. Most startups break even in about 18 months, although that threshold will vary based on your business model and industry.
Along with your financial statements and break-even analysis, include any other documents that explain the assumptions behind your financial projections.
Source:https://quickbooks.intuit.com/r/business-planning/how-to-create-financial-projections-for-your-startup/
