The business plan is one of the most important pillars of any new business, and the financial projections of your first two years are one of its essential components.
Those forecasts are the capital inflows and outflows, the sales and your balance sheet estimates. They show bankers and investors how they plan to pay their debts, use their capital, and expand their company. It also lets you define your financial requirements, manage rates and development schedules, schedule major expenses and track cash flow.
It’s normal that some of your initial forecasts – especially your sales volume – are based on guesswork. Here are the steps you can take to create financial projections for startup.
1. Project Your Expenses And Sales
As you create a business strategy, mention the key expenses and the accompanying running costs for beginning a company. Ensure the recurrent costs are covered-wages, leases, fuel, compensation, promotions, raw materials, repairs, etc. and regular purchasing of computers, construct websites, and cars. Survey costs in your business and have a more accurate calculation.
Set up a revenue projection and use it to predict your monthly projected profit. You should provide a practical forecast by close analysis of the future business.
2. Make Financial Projections
Consider your costs and income in a cash balance forecast that involves capital inflows and cash outflows in the first 12 months. You will make quarterly or annual estimates for the second year.
To make your projections, you can use an Excel spreadsheet or the tools available in your accounting software. Don’t assume that sales instantly equate to money in the bank. Incorporate them into your cash flow only when you expect to get paid according to your industry standards and your team’s experience.
Use your cash flow projections to prepare income statements (profit and loss) and projected annual balance sheets.
3. Determine Your Financial Needs
Your financial projections will allow you to see if your business plan is realistic and contains gaps, and to assess the financing you need. They are essential to establish a loan application.
4. Use Projections To Plan
It is helpful to include multiple scenarios – most likely, optimistic, and pessimistic – for each projection to help you anticipate the financial impacts of each.
Your projections also help you analyze the impacts of the different strategies of your new business. What would happen if your prices were different? What if bill payment was faster? What if you chose more efficient equipment? Making different assessments shows how such decisions impact your finances.
5. Plan For The Unexpected
What would you do if an unforeseen event swept through your projections? It helps to plan for the unexpected. Also, remember to set aside funds to deal with any eventuality. Many businesses like to have enough cash (cash in the bank and unused portion of their line of credit) to cover at least 90 days of business.
6. Follow Up
When starting your business, compare your projections with the results to see if you are meeting your goals or if you need to change your approach. Tracking helps you better understand your business’s cash flow cycle and quickly identify gaps when they’re usually more comfortable to correct.