Financial Projections - Overview
You can’t know everything about your business or the business environment today, let alone over the next few years. However, lenders and investors will expect you to make projections about how the business will fare financially.
You will need to project for the next 12 months month-by-month, and the 2 years after that quarter-by-quarter.
Actually, the best thing that can come out of the time it will take to do your financial projections is a much deeper and clearer understanding on your part of how your business works financially. How much money will you really need to get it started and make to be profitable?
At their simplest, financial projections reflect this equation:
Revenue (sales) - Expenses (costs) = Profits
Narrative Section of your Financial Plan
Before the many spreadsheets that are typically part of your business plan, you need a page or so of written explanation about the thinking that went into developing your spreadsheets.
Many “assumptions” or “variables” go into doing a good revenue or expense projections, including:
Sales volume
Selling prices
Selling costs (how much you will spend on marketing and making sales)
Interest rates (if you are borrowing money)
Material costs
Equipment expenditures
Bad debt provisions (if you allow your customers to buy on credit)
Accounts receivables (how long it will take customers to pay you)
Accounts payable (how long it will take for you to pay your sills)
Salaries (what you pay yourself and your employees)
….and even when you open and how much cash you start out with.
There are four key areas you will want to cover in this Narrative Section to explain how your spreadsheets work:
• Discuss how you know what amounts you plan to spend on major items and explain the timing - which months the sales will be made and the cash will be spent for each item.
• Discuss how you will react if some of these assumptions prove incorrect over time. Will you have enough of a cushion financially if sales don’t come in as quickly as you expect, or it costs you more to start your business than you projected?
• A statement of what you will use the borrowed money for.
• Optional: Compare your numbers and ratios to the RMA Annual Statement Analysis figures for your industry. If there are differences between your numbers and those of your industry, you must explain why.
Statement of Funding Purpose Example:
We believe that initial funding of $156,000 will be sufficient to get ABC.com Delivery Service to initial profitability. We intend to raise this cash with bank loans, equipment leasing, and cash investment by the owners of $20,000. As part of this cash, we are looking for a start-up capital loan in the amount of $100,000.
We will secure the loans and leases by the value of the equipment and by the personal guarantee of the majority owner. Given the level of performance we anticipate in our financial projections, we believe we will be profitable after 12 months.
These are the financial documents that lenders and venture capitalists will expect you to provide as part of your Plan
New businesses:
• Proforma Balance Sheet (snap shot of the day you open for business)
• Proforma income projections (income/profit and loss statements) for three years. Give detail by month the first year and by quarter the 2nd and 3rd year)
• Breakeven analysis
• A List of assumptions and other notes
• Personal Financial Statement
Existing businesses:
• Balance Sheet (3 years)
• Income statements (3 years)
• Cash flow
• Breakeven Analysis
• Income Tax Returns (3 years)
• Capital equipment list
• Personal Financial Statement
