When a potential funder receives your business plan, where would he or she turn first? If you guessed the financial projections, you're way ahead of the pack. Focus here, on creating a realistic picture of what you can expect to spend and earn in your first few years of operation, and your business plan will be solid.
So what goes into a Financial Projection? Three key elements:
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 down which of your expenses have to do with starting up and which are ongoing.
Here's a break down of some common startup costs:
- Lawyer fees
- Registration fees
- Down payment on property or equipment
- Utility installation fees
- Website design
Operating expenses will reccur montly, semi-monthly or yearly; you pay them more than once. Common operating expenses have to do with:
- Phone and internet service
- Office supplies
- Raw materials
- Certification and association fees
2. The Income Statement (AKA Cash Flow Projection)
You income statement will help you 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 a 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.
3. Balance Sheet
The final step in your financial projection is the Balance Sheet -- that's 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
A big part of your business plan will 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.
The best place to start is in research -- in your target market, on 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.
Once you are armed with that knowledge, questions your assumptions. You may 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."
Financial Projections and Funding
It's important to know how much money you need to ask for and why. It's the first question that funders will ask you so it pays to make sure your math in impeccable. Knowing that the financial projection section is the first place funders will turn, it makes sense to spend more of your time here than anywhere else.
Study your market, look at the competition, and develop a financial plan that reflects current market realities. Doing your homework will leave a long impression in the mind of potential funders.