HOW DO MAKE FINANCIAL PROJECTIONS FOR BUSINESS PLANS? HOW DO YOU ESTIMATE FINANCIAL PROJECTIONS FOR BUSINESS PLANS?
A business plan is an important tool for managing and growing your business. A well-designed plan lays out a vision of growth and the steps needed to get there. A plan is also an essential communications tool for attracting financing as well as managers and staff as your business grows. A business plan is one of the key building blocks of any new company. One of its main components should be financial projections for your first few years.
WHAT ARE FINANCIAL PROJECTIONS?
Financial projections use existing or estimated financial data to forecast your business’s future income and expenses. They often include different scenarios so you can see how changes to one aspect of your finances (such as higher sales or lower operating expenses) might affect your profitability. Typically the projection will account for internal or historical data and will include a prediction of external market factors.
In general, you’ll need to develop both short-term and mid-term financial projections. A short-term projection accounts for the first year of your new business, normally outlined month by month. A mid-term financial projection typically accounts for the following 3 years of business, outlined year by year.
How do you make financial projections?
Here are the steps to create your financial projections for your start-up.
- Project your spending and sales.
- Create financial projections.
- Determine your financial needs.
- Use the projections for planning.
- Plan for contingencies.
- Performance monitoring.
FINANCIAL PROJECTIONS FOR BUSINESS PLANS
Developing a detailed set of financial projections will help to demonstrate to the investor that you have properly thought out the financial implications of your company’s growth plans. Private equity firms will use these projections to determine if:
- Your company offers enough growth potential to deliver the type of return on investment that the investor is seeking.
- The projections are realistic enough to give the company a reasonable chance of attaining them.
Investors will expect to see a full set of cohesive financial statements – including a balance sheet, income statement and cash-flow statement, for a period of three to five years. It is usual to show monthly income and cash flow statements until the breakeven point is reached followed by yearly data for the remaining time frame. Ensure that these are easy to update and adjust.
MAJOR ASSUMPTIONS TO DEVELOP FINANCIAL PROJECTIONS
Do include notes that explain the major assumptions used to develop the revenue and expense items and explain the research you have undertaken to support these assumptions.
- Preparation of the projections Realistically assess sales, costs (both fixed and variable), cash flow and working capital. Assess your present and prospective future margins in detail, bearing in mind the potential impact of competition.
- Assess the value attributed to the company’s net tangible assets.
- State the level of gearing (i.e. debt to shareholders’ fund’s ratio). State how much debt is secured on what assets and the current value of those assets.
- Include all costs associated with the business. Remember to split sales costs (e.g. communications to potential and current customers) and marketing costs (e.g. research into potential sales areas). What are the sale prices or fee-charging structures?
- Provide budgets for each area of your company’s activities. What are you doing to ensure that you and your management keep within these or improve on these budgets?
- Present different scenarios for the financial projections of sales, costs and cash flow for both the short and long term. Ask “what if?” questions to ensure that key factors and their impact on the financings required are carefully and realistically assessed. For example, what if sales decline by 20%, or supplier costs increase by 30% or both? How does this impact the profit and cash flow projections?
- If it is envisioned that more than one round of financing will be required (often the case with technology-based businesses in particular), identify the likely timing and any associated progress “milestones” which need to be achieved. Keep the plan feasible. Avoid being over-optimistic. Highlight challenges and show how they will be met.
- It’s always good to have some contingency planning ahead of time. Setting aside cash reserves etc is also good. Many entrepreneurs like to have enough cash for 90 days of operations (including cash in the bank and/or room on their line of credit).
You might wish to consider using an external accountant to review the financial projections and act as a “devil’s advocate” for this part of the plan.
- Areas to cover in your business plan
- The advantages of private equity over senior debt
- Stages of venture capital funding
- World’s top 10 private equity firms
- Private Equity Investment Strategies
- Top sources for startup funding
- Leveraged Buyouts
- Private Equity
- Mezzanine Financing
- Dividend Recapitalizations