Having a solid business plan is key to securing funding for your business venture, whether seeking investors or taking a loan. Doing your homework will leave a good impression in the mind of potential investors.
Once you have a business plan in place where do you get the most bang for buck? What is a potential investor or lender most interested in? If you think it’s financial projections, you're absolutely right. The focus should be creating a realistic picture of what you can expect to spend and earn in your first few years of operation.
Related Article: Make the Right Forecast for Your Small Business
3 key elements that make up a Financial Projection
1. Startup Costs and Operating Expenses
Money. You'll need it to start up and you'll need it to keep running. During the business planning process, it's vital to break your expenses into start up costs and ongoing costs.
Typical startup costs:
- Lawyer fees
- Registration fees
- Down payment on property or equipment
- Utility installation fees
- Website design
Operating expenses will recur monthly, semi-monthly or yearly. Common operating expenses are:
- Phone and internet service
- Office supplies
- Raw materials
- Certification and association fees
2. The Income Statement (AKA Cash Flow Projection)
An income statement will help project profit or loss, by month, for the first year of operation. After the first year, you may elect to project profit or loss quarterly.
One of the best ways to get started on an Income Statement is to use an interactive spreadsheet where you fill in your basic info and the spreadsheet calculates the values that will help you complete a financial projection. SCORE has a good template to help you get started in their Business Plans & Financial Statements Template Gallery. Or, check out EXCEL’S Interactive Financial Forecasting Template.
3. Balance Sheet
The final step in your financial projection is the Balance Sheet – a snapshot of the financial overview of your business. Depending on which stage you are at in the business planning process, the balance sheet may consist of your own assets and liabilities.
What to include:
- Current Assets: What cash do you have on hand (including personal savings), inventory of product, money owed and accounts receivable, as well as fixed assets.
- Liabilities: what money do you owe? This could be salary and wages, accounts payable, and taxes owed.
Tips on Projecting Income
An important part of your business plan consists of figuring out what you can expect to earn from selling your product or service. When you are just starting out, that can seem a bit complicated, but it doesn't need to be.
- Know your market: Research your target market, your competitors, and how much of the market you can reasonably expect to capture. This part of your preparation will fulfill an important component of your business plan.
- Have a contingency plan: Things don’t always go as expected. Market fluctuations, natural disasters, and a lot of other things can impact your financial forecasting. So consider creating a best case scenario, a worst case scenario, and something in between. "Construct your financials from the bottom-up, and then validate them from the top-down," explains Akira Hirai, entrepreneur. "A bottom-up model starts with details such as when you expect to make certain sales or hire specific employees. Top-down validation means that you examine your overall market potential and compare that to the bottom-up revenue projections."
One often overlooked feature of Excel is the “What-If Analysis” that allows you to explore different scenarios without changing the values in your spreadsheet. This function is particularly useful because you can see how different values affect models, formulas, and projected profits.
- Give yourself a buffer: Starting a business requires capital, as does expanding a business. When business owners prepare a financial forecast to determine their capital needs, they often show revenue growth that is too optimistic and underestimate early-stage expenses. The resulting forecast of capital requirements is too low, sometimes by a substantial amount. Starting with at least 10 percent more capital than you originally forecast will help make sure you don’t face critical capital shortfalls.