Creating a successful start-up involves completely understanding your financial landscape. In order to do so, it is important to be able to create forecasts and projections for your startup. We have compiled a list of keys to creating financial projections for startups.
Start by Identifying Forecasts and Projections
Firstly, it is important to be able to identify the difference between a financial projection and a forecast. Financial forecasts are data projections based on what is likely to occur based on past trends and input from various factors. Financial projections use data to anticipate hypothetical scenarios and possibilities.
After you understand the types of models, you can begin to determine which ones are necessary for your startup goals. Startups use financial projections to determine the financial health of the overall business. Compiling income and expense reports is key to analyzing this metric.
Apart from understanding financial health, financial projections are used to entice investors to invest. By producing data that shows a possible return on investment, investors have a sense of the benefit of putting money into a potential startup.
Additionally, projections allow businesses to adjust to market trends and make changes in the event of a downturn.
Building a Financial Projection
Now we will describe steps to build a projection.
- Collect Critical Information – This should include all relevant financial information. Expense reports, income statements, investment reports, sales projections, and market trends.
- Use Critical Information – Once all pertinent financial information has been compiled, use it to create revenue projections. Revenue projections are key to determining profits and losses, return on investment, and potential growth or deficit for the startup.
- Review and Revise – Once the revenue projection has been created, continue to refine the data, and add new input as it arrives. It is important to not let projection models stagnate. Stagnant projections are often inaccurate and can lead to negative results.
Breakdown of Financial Projections
There are a number of factors that comprise a financial projection. Be sure to include all possible factors in your projection. Individual businesses needs’ will vary but should generally include:
- All expenses, advertising, payroll, insurance, IT and technical support, 3rd party or outside assistance
- Income streams, capital investments, profit/loss projections, and any company-owned assets
- Cash flow estimates as up to date as possible
- Shortlist assessments of projected costs vs. Revenue
Creating a More Professional Projection
It is important to remember the audience of your financial projection. Oftentimes this will be board members, executives, or investors. One of the keys to a successful financial projection is to make it understandable to the target audience.
Since the primary audience is not likely to be the company accountant, we recommend creating simplified charts and graphs to show revenue and expenses. We also suggest using round whole numbers when showing numerical estimates in thousands or millions of dollars. Lastly, don’t give more detail than is necessary to reach the point, be thorough but succinct.
These are our keys to creating a financial projection for startups to help make them successful.