Alongside accounting basics, an important part of business planning includes the preparation of financial projections to predict the outcome of an organization’s future income and expenses. This section will show potential investors about how a startup company will operate in its first few years.
How are financial projections prepared in a business plan?
“A business plan is a written document (prepared in advance of starting a business) describing the nature of the company, the financial background, the sales, and marketing strategy, and containing a projected profit and loss statement.” It is one of the key building blocks of new business and can serve several different purposes.
Writing a business plan is not an easy task –many people spend a year or more. From product costing to its marketing and sales plan––from internal operations to financial projections––it ties all together seamlessly. One of its main components of a business plan should be financial projections for a company first two or three years. These projections are forecasts of a startup income, cash inflows and outlays, and balance sheets.
For the owner, writing this section accurately and convincingly (for investors) is essential in locating capital to build. No doubt, creating financial projections for startups is both a science and an art. Although investors want to see hard, cold numbers, it can be difficult to predict the financial performance of the next three years down the road.
Regardless, short- and medium-term projections are an essential part of a business plan if an owner wants serious attention from investors. It shows bankers and investors what an owner intends to do with the money, future plans of the growth, and how the owner will repay loans. Remember, the stakeholders won’t provide money for startup operation that doesn’t have a clear business plan (including financial projections) to assure return on investment and growth.
What are the most important financial projections for startups?
The financial section of a startup business plan should include a sales forecast, cash flow statement, expenses budget, balance sheet, and a profit and loss statement. The company must follow the GAAP–generally accepted accounting principles set forth by the Financial Accounting Standards Board.
Read below to learn the steps used to write financial projections for startup companies.
1. Sales Forecast
The first and the most important section of a financial projection is the sales forecast. It includes an estimate of what sales a startup business will make in the next three years––broken down month-wise. Moreover, it should also include the expected sale price of the goods over time, the number of expected sold units, and the estimated cost of each product. This last item is vital to compute the gross margin of new venture sales.
As a startup business, the owner does not have past results to review, which makes forecasting sales difficult. However, it is possible, though, if an owner has a good understanding of the market and industry trends as a whole.
2. Projected Budget
What a company is selling has to cost something, and this section is where an owner needs to show projected expenses. These include the cost of the units being sold, to a startup business, in addition to overhead. It breaks down fixed costs and variable costs. The startup owner will next write a projected budget, in a business plan, for the same three years period. But this budget needs not to be in such detail as the sales forecast. Besides, it should also consider foreseeable cost increases due to rising rent and inflation.
3. Cash Flow Projection
The third step of the financial projection combines sales forecast and projected budget into a cash flow projection. This statement breaks down how much cash is coming into the business vs. how much is going out on a monthly basis. In short, the goal of this projection is to predict (as close as possible) a road map of the next few years for a startup. Also, this section helps reveal weaknesses in future cash flow statements.
4. Profit And Loss Statement
The startup’s financial projections should include a profit and loss statement that includes all the data used above and computes how much debt, or how much profit, the business stands to make at various points along the 3 years of the projection. This statement should also incorporate the break-even projection based on company direct expenses.
5. Projected Balance Sheet
A company provides a breakdown of all of its assets and liabilities in the balance sheet. This graph will take all the above data established by a company previously and display them together in one place. But the preparation of a balance sheet isn’t simple, and only an accountant can resolve the complexities come in this way.
In particular, a projected balance sheet, prepared at the initial stage, can be altered later to take into account changing situations. It means that all projections remain relevant even as the startup takes off. Moreover, the investors are much interested in the projected balance sheet as it will let them see startup projections at a glance.
Prospective investors will be interested and more attentive to the financial section of the business plan. Because too little or too much outside funding will inhibit return on investment; therefore, funding needs must be projected accurately. This requires a reliable and well-written strategic business plan for the capital-raising process for a startup.
Similarly, a business plan helps the owner identify financing needs, plan production, major expenditures, optimize product pricing, and monitor cash flow. Moreover, it helps management focus on the growth of the new company.
Is there a need to hire a business plan consultant?
Business plan consultants help business owners to format their startup plan, get the details right and are generally involved in areas such as marketing, management, finance, and accounting. They help you prepare a detailed business plan, including all the above-mentioned important projections for your new company. Also, they are responsible for improving the startup’s operations by assessing weaknesses and recommending the best solutions.
Thank you for reading!