How do I put together projections for a startup?
I was talking to an angel investor about my new startup and he suggested I put together some financial projections, between 3-5 years out. I started trying to map it out and it is harder than I expected. I am having trouble finding data on comparable companies since they are all private companies. Where should I start in trying to come up with reasonable projections?
Hi Anisia, let us look at it in simple terms. 2 things matter - (1)costs incurred (2) revenue earned. Costs is something you can mostly predict since you are aware of most of the expenses you'll undergo - infra, salaries, payouts etc. Revenues is a bit difficult to predict since they depend on how the market responds to your business. So, to simplify this part, I'll suggest you set revenue goals based on your research on how many takers do you see for your offering. Reasonable & well calculated revenue goals can double up as projections. Taking the costs away from the revenues (and also the taxes) will yield the profits. Better to slightly over estimate than under estimate. Basically, the investor is looking for how much confidence do you have in your offering and how well are you set in sustaining that offering over a reasonable period of time.
Hope this helps.
I can speak with some authority concerning product companies. You need to decide the type of retailer your product(s) will fit into and then determine the number of stores those retailers have. In most cases there will be a test order for a limited number of stores. The process of selling into retailers can take as long as 10-12 months to get an order. If the test order is successful then a plan to expand the roll out of the product(s) will take place over a period of six months (+/-).
In any case the sales for the five years should include the process of adding customers using the same test/roll out process.
The retailer will most likely have an inventory turnover rate of approximately four times per year.
Based upon this and a projection of the number of stores the retailer(s) have and using one pack of each product(s) per store.
It then becomes a matter of simple mathematics to show projections of sales.
Once you have completed the process take 50% of the numbers to use a the projections for the investors.
Forget 5 yrs. Create a Funds Needed/StartUp List. Create a Sales Forecast by the month with a total col. on the right for the 1st yr. If your co. gets paid at the time of the sale, use the Sales Forecast as Cash Receipts on the Cash Flow Year One (also done for 12 months with a Total Col. on the right. If Sales will be received later - as in 30, 60, 90 days later. Rework Sales Forecast on a Cash Receipts schedule.
Move on to do Cash Flow for Year One.
It takes time, but it is not based on other companies. It is based on you calling an ins. co. asking how much and when do I need to pay it. You, must decide how much product product or how many hours for a service business your co. will need, will bill, cost of goods if a product, how much to pay accountant, etc.
After Year One is complete, move on to do same sheets for Year Two and Year Three - same format, by the month (never by quarters) with total col. on right.
Building projections is both an art and a science. Start with a list of assumptions about key factors that will impact the business based on research and comps you can find. Depending your industry, you can try to find "neutral competitors" that will not compete with you but have similar models or businesses in other locations and may be willing to talk and share information in the future (this is great for support too!) And it really helps to bring in a consultant or mentor who has had experience with your product or industry and knows industry standards and expenses you may not consider. Good luck!!
When doing projections, consider every single possible cost. Every conceivable purchase needed. It totally depends on what industry you're going in, and what exactly everyone's roles will be etc.
But consider marketing costs, rental space, payroll etc things every business needs to pay for vs what you want to make and what you think you will make. Google annual income for businesses in your field/market/industry and then divide that 3-5 years.
This is a helpful link: https://www.sba.gov/content/financial-projections