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?
I usually like to start by understanding the full market size. This data is usually available at most government statistic sites (Statistics Canada in my case) or the local chamber of commerce if you're going local. These figures are available and quantifiable by the taxes conteibuted by each industry.
You can then guesstimate the percentage that each competitor holds in marketshare and assess what marketshare you aim to capture each month, quarter or by end of year 1, 2 through 5.
Now that you have the sales figures, begin by assessing the direct cost of producing/delvering your product/service to your customers... based on sales projection determined above.
Then work out your overheads and salaries that you have for the management team and other non-direct costs.
This should give you the revenue which you subtract the direct costs to get your gross margin and then subtract the indirect costs giving you your net profits.
You can find online definitions of what could be direct and non-direcy costs.
I hope this helped and good luck.
There is no single (or simple) approach to developing financial projections for a new business. A lot of factors will be influence this but a few considerations to help you in this process.
The expense projections are relatively straightforward and reflect any non product cost expectations (payroll, rent, S&M budget, etc.). Additional expenses will come up but you can probably extrapolate these based on the revenue and requirements to sell. The other expense is any cost to develop or produce the goods/services you are selling.
With regards to revenue, you can either look at it through a top down or bottoms up. Top down is looking at your total available market and assuming how much of the market you will be able to address. This might be helpful as a "reality check" for your projections or even a way to get some basis for how quickly you can grow or if there is a market. The more thorough approach is bottoms up. In this scenario you project the specific sales you will make. This can be based on initial market feedback, comparison with competitors (i.e. their growth), or making assumptions on how much you can sell - e.g. x number of sales people with target sales of y and any growth expected.
As always there are a lot of factors to consider and any projections are a work in progress. Part of this process is to make sure you understand the addressable market and the dynamics that will influence your business and capital needs.
The best place to begin any projection is with an initial break-even analysis for the first year of operations. That entails estimating your start-up costs, both fixed and variable. Then you need to figure out how much of what you plan to sell you will have to sell to cover those costs. This is where the analysis of who you are going to try to sell to becomes the real question for you and any angel investor. What type of customer, buying how much of your products or services can you justify, considering your competition? What is faster, better, or cheaper, about your value proposition to convince prospective customers to switch? If you watch "Shark Tank" you will see how difficult it is for many entrepreneurs to justify the investment they are looking for from the "Sharks". Your angel investors have the same questions - what is your justification?
Hi Anisia ,
Broadly speaking, initially to put together the projections you need to focus on what you have in your mind .
Try and jot down for each year the following:
1-The volume or units to be sold or services rendered each year.
2-The price of each product or services each year with the price increases.
1 and 2 will give you the sales for each year.
3-Cost of units to be sold or services to be rendered.
4-Cost of utilities,maintenance, rent , salaries, etc. directly related to product and of the place where you will make and keep the product or services.
3 and 4 will give you the costs of goods sold for each year.
5-All costs related to administration , sales and marketing the product or services each year.
6-All financial costs for example any bank arrangement expenses or interest charges etc. for each year.
After 5 and 6 you will be able to identify your operating bottom line.
The other three main things which you need to finalize are :
a) Headcount you want to keep each year - their salaries and other costs will be a part of above costs
b) Assets you want to purchase to run your business like computer equipment, machinery etc and costs like depreciation and maintenance relating to these assets will be a part of the above costs. They are called fixed assets used to benefit over a period of time more than 1 year .
c) Capital you want to invest either through your own resources or through bank loan.If you will invest through your own resources you will have to identify a return you want to achieve from your business. If you are arranging a loan , you have to identify the costs of these loans to the company over and above the return you want to achieve which will be part of the above costs.
This will give you a first cut profit and loss from where you can move forward to prepare cash flow and other statements.
During preparation of these figures you can benchmark the competition also for example price being charges in the market of the same product or service, set ups being maintained for similar product or services in the market and their related costs. And for all variables you can take both internal and external market view to finalize your own projection.
The only thing which is qualitative in nature and depends on your technical acumen and would not be defined on this analyses is Product and Service Quality.You have to set your own standards in this area considering the products and services available in the market.
Best Of Luck,
As a part of your Business Plan you will need to first project all of your possible expenses for each year, relative to your projected income for the same period. While this seems like a daunting task it really is just putting together your dreams of how many widgets or how much service you can provide annually in your projected new business. Start with a month, how many can you sell in one month, and what expenses will I realistically have for that same month.
First - You will need to project your sales of widgets or services and what the cost of goods for those are.
Next - What are the known or projected Operating Expenses for that same period.
Next - What Selling Expenses will I have for that same period (Advertising Promo pieces or Direct Media Advertising, Sales Salaries and related expenses for that same period).
Next - What Administration Expenses will I have for that same period (Owners Salaries, Office Expenses, and related expenses). Remember, if you have confidence that your business will be successful you must consider the salary provided to the owners because it is no longer a hobby but a business for profit)
Once you have the monthly information gathered, expand it to annual and then on to the requested 3 year projections.
It is not an easy, quick, answer and you must work diligently to lay everything out. You may not find comparable companies, but you can project your selling price of your widgets and how much they cost. Then you have to ask others about specific costs, such as a Realtor for costs to purchase or lease a facility; an Insurance Agent for an estimate of basic insurance costs to cover building, contents, and liability; a friend or another business regarding basic costs to run a business. None of these items are easy and you much work diligently to lay everything out, but if you feel confident that your business will succeed, you can work it out. Don't lose heart when things don't come to you by snapping your fingers.
Your Financial Projections are only a part of it, you need to spend time in developing your Business Plan to the point that investors or lenders will believe in your business as much as you do. I have FREE templates that will help you lay out your projections and to develop your Business Plan.
Lots of good answers below. So all I will add is to make sure you give yourself a buffer as there will most certainly be unforeseen costs that pop up. I hate to admit this, but payroll taxes caught me by surprise as well as a few other nick nack things that all add up. So whatever numbers you come up with, allow a few thousand dollar buffer on your monthly expenses as this saved my you know what when all these other expenses blind sided me.
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!!
Honestly, empty projections based on mathematics are a waste of time. Understand the development curve of your product(s) and your sales channel, when to widen a range, when to add in another export market, estimate when will a technology curve allow you to make a product development leap, when to increase marketing spend, when to increase staff to address these new aspirations. The investor is looking to explore your vision. The first three years of forecasting will evidence your understanding of the business, the costs and can be sanity checked. Years 4-5 are blue sky thinking.
Presently I am following the approach proposed by Zafar and Bud Phelps below. I just want to add one point about hypothesis, and one about support:
When you do your sales projections, start by making a month-by month table of promotional activities. Make a hypothesis of ROI. For example, each contact I meet will generate an average of 0.25 sales by referencing me to a client, or a clicks and conversions rate for ads, etc.
Once you know your sales projection, make a hypothesis on how and in what time frame you turn sales in revenue (ex: a sold service will be delivered over time, billed x days average after delivery, and paid x days after billed.
Revenues can come from different products and services, so I made one spreadsheet for each. You can have those same types of hypotheses for your expenses. Those hypotheses become useful Key performance indicators (KPIs), you can either adjust your projections if you find you can't meet them, or beef up your performance, or both.
I think it is important to assess hypotheses every month and generate monthly cash flow projections, because it lets you know if you're going to be short and need a line of credit.
I have a special software provided by a local organization; unfortunately, it is in French : http://www.sajeenaffaires.org/en/previsio-software.php.
However, you can quite easily make excel spreadsheets for everything: promotions, sales, startup costs, investments, financing, etc., even hours of work for HR needs and personal planning. Excel allows you to factor in your hypotheses. Also, although I have not tried it, a trial period of a good accounting software might allow you to generate your projections. I think some have a projections or budget feature.
Lots of good answers here! Regarding a resource to lookup private company revenues I recommend Melissa Data https://www.melissadata.com/lookups/business.asp. Now the revenues may be wildly off due to the way they collect the data through public records, but what you can definitely find is the NAICS codes for the companies like the one you are creating. I would then request a complete list of companies using the NAICS codes that match your target. Research those companies thoroughly and you should be able to get an idea of market pricing.
Regardless of whether you are a service or a product, investors are going to focus on some key metrics that you can apply to almost any scenario.
1. CCA - cost of customer acquisition - what is going to cost you to acquire customers?
2. ACL - average customer lifetime - how long will your customers be with you?
3. CLV - customer lifetime value - how much money are going to make on a customer based on their ACL?
4. GM - gross margin - what will you earn based on revenue minus fixed costs?
5. CM - contribution margin - what will you earn based on revenue minus fixed and variable costs?
When you understand your costs and customer acquisition schedule make sure you are priced right to achieve a good margin for your industry which can vary greatly. i.e. a food consumer packaged good may have a GM of 35% where a SaaS company could be 75%. Good Luck and let me know if you have any further questions.
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
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.
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.
As my first partner and mentor told me "the road to Hell is paved with projections." And he was correct.
With that said, you don't say what kind of business - selling products or selling services. And you don't say how long you are in business.
The first is easier as you can get a solid handle on costs, assuming you are not making your own. Then all you need is to project sales, which you can do based on your history (assuming you were in business for a period of time).
With services it gets tricky as you have to match cost of people to the services, which can imply different levels or more efficiencies with experienced people. And if you are the business and you are selling services, you now have to determine what you have done and project that forward. Obviously that has other factors which need to be addressed, e.g., don't project based on working for a large company, your success thus far, etc.
So, provide more details and we can talk.
Anisia, you'll need a monthly cash flow for at least the first year, probably 2 and preferably more given that with startups there are many variables that will firm up as you go, and lead times on the revenue side (i.e. market traction) can vary widely from initial expectations. I've found it helpful to produce 3 sets of projections with an optimistic, pessimistic and middle with respect to revenues. Your most important variables are usually revenue growth (how fast you can reach break-even), marketing costs (what it costs to get there), product costs (do you have enough gross margin?), and ROI (to excite investors). Just the process of doing this and playing with the impact of your key variables will be very educational for you about where you need to put your focus to make your business viable.
Who are your target customers (market)? What revenue do you project receiving from this market in first year of operation? 2nd year? 3rd year through 5th year of business? What will be your projected costs (do not forget your salary) of operations per year of providing this service/product? Pro-forma income statement, financial plan, when do you project your company will reach the break-even-point (BEP)? there are templates available online, which can guide you in developing this. You are correct, it is not easy or something you can put together in 30 minutes. This information should be part of your basic business plan. Your angel asked this question, to determine the risk of investment and if there is potential for return on that investment.
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.
yes, you have to put min of 3 years projection.. you will have to assume practical figures for the first years and can add 10% growth in the second year and 20% for 3rd year. you have to make it happen.
Go to BeResource.com and start off with a basic business plan.... Tis business plan outline was done by Montgomery County Community College in Blue Bell, Montgomery County PA
You could try starting with a counselor from SCORE, the retired executives that work with the SBA. They have a template for doing projections. But a word of caution: I have often worked with clients who have been through SCORE, and their projections are sometimes exceedingly detailed and wildly off the mark.
If you want help from an expert, I do this for my clients all the time. You can reach me through LinkedIn - linkedin.com/in/edallon