Starting a business requires a lot of planning and consideration. The amount of work you put into planning your business operations can determine its success.
To help get your idea off the ground, you may seek a loan or investors to back your venture. Financial backers need to see that the money they are committing to your business proposal is a smart move. Financial projections provide a forecast of the projected sales of your business and the cost of operations.
Projections are intricate documents that require a lot of work to put together. If you need to learn how to create one for your startup, continue reading to learn how.
Start Your Financial Projections With a Sales Forecast
Sales forecasts attempt to calculate your projected earnings up to a year and a half in advance. Sales forecasts can help paint a picture of how viable a business is and help provide goals to reach for the projected period. Businesses use the data from the previous period, along with other factors, to make sales forecasts.
Since you’re just starting your business, you won’t have prior sales data to help you make your first forecast. Business owners tend to use industry trends and market data to help create their initial forecasts. Your available market and consumer trends are two key pieces of information you’ll need for your forecast.
The forecast helps show financial institutions that you understand your target market. It will go a long way towards making them more confident in your idea.
Initial forecasts project sales by the month. After this, sales forecasts are usually done by quarter. Once your business makes it out of that rocky period for new businesses, sales forecasts don’t require as much of a breakdown.
Most financial institutions like to see a three-year projection for the first sales forecast. A good sales forecast will help you get the funds you need and help keep your small business finances in order.
Include an Expense Forecast
An important facet of your business that you need to consider is its operating expenses. Operating expenses are any costs that your business incurs from any operations that help it run.
These costs can be split into two categories. The first category is fixed costs. Fixed costs are regular charges that you pay, like rent for your business location.
The second category is variable costs. Expenses in this category will tend to have fluctuating costs, such as marketing, travel, and other non-regular expenses.
When you draw up an expense forecast, you don’t need to be as detailed as with your sales forecast. You don’t need to itemize every single thing; general figures will suffice.
When you use general figures, you can plan out your short-term and long-term expenses. You’ll also be able to create an action plan for surprise costs.
You’ll also be able to inventory periodical expenses, like subscriptions, upkeep costs, and other incidentals. You’ll also be able to plan for increases in your cost of operations.
When you have an understanding of what it costs to keep your business running, you won’t be as blindsided by surprise costs.
Expenses are a critical part of financial forecasting. You need to understand how much it costs to keep your business running compared to your sales. This will give you a good picture of whether you’re making or losing money.
Plus, once you understand your costs, you can take full advantage of potential tax deductions.
Incorporate a Balance Sheet Projection
Balance sheets detail how a business stands financially. Balance sheets cover a period, usually by quarter. They list business assets, liabilities, and equity balances.
If your business uses accounting software, you can generate a balance sheet from that data after the initial few months your business is in operation.
Balance sheets can help inform your financial projections of what condition your business will be in in a few years.
For initial financial forecasts, you will once again need to use industry data for your balance sheet projection.
What Is Your Break-Even Point?
When businesses first open, they lose money before they begin to make it. New businesses look to the point when this shifts and they begin to make more money than they spend. This is called the break-even point.
It is a rarity for businesses to be profitable in their first or even second year.
Lenders and investors know this, so they want a picture of when your business might become profitable. Once your business begins making a profit, they can begin to collect on their loan or investment. Investors and lenders will almost always want to see a return within the first few years of operation.
However, if they believe your business is an innovative idea, they may be willing to wait eighteen years, as they did with Tesla.
Comprehensive Financial Expertise
Financial projections are an important part of your business’ success. To get the financial backing you want, backers want to see a sales forecast, expense forecast, and a balance sheet projection. Finally, they’ll want to see a projected break-even point that will help determine the profitability of your business.
At Propel CFO, we provide a range of financial services to help business owners get a comprehensive picture of their business’ financial strength. We provide accounting services, tax advisory services, bookkeeping services, and other essential services. If you would like help with your finances, contact us to set up an appointment.