Launching a business is exciting, but it’s not all fun and games. Before you can start executing your vision, you’ll need a well thought out business plan that includes financial projections.
Many entrepreneurs get overwhelmed when it’s time to create financial projections, but it’s helpful to remember that these calculations will create the foundation of your business and keep you on track to achieving your goals. They’re also important when it comes to getting funding from investors. Read on to learn more about what financial projections are and how to build them into your business plan.
Financial predictions forecast your company's future income and expenses using existing or estimated financial data. They contain multiple scenarios (usually best and worst case) so you can see how changes to one part of your finances may affect your profitability.
Financial projections may be overwhelming, particularly for startups or young businesses. After all, how can you predict the future when you have very little data? Financial projections are educated guesses.
The purpose is not for you to be held strictly to your predictions (though getting too far off course may understandably upset investors), but rather to show that you have planned carefully for multiple scenarios. However, the more models you run, the more accurate your predictions are likely to be.
There are many ways to create accurate financial projections, such as:
You may have to get resourceful, but it’s possible to come up with fairly reliable financial projections. This is where a data-simulation platform like Causal can help. Not only does Causal help you organize data, blow past cumbersome equations, and get straight to analysis – there are handy templates baked into Causal to get you started.
If financial projections aren’t about perfect accuracy, then why are they important for a business plan? First, financial projections show investors your business’s projected growth potential. They demonstrate that you’re serious and have put significant effort into planning for the success of the business. In fact, investors may not even consider you without one.
Beyond attracting investors, financial projections are a good exercise that will help you understand your business and prepare for the unknown future, successful or unsuccessful. Financial predictions can help you plan your beginning budget, determine when you can anticipate the business to become profitable, and create benchmarks for attaining financial goals.
Financial projections don’t involve one simple, standalone calculation. Instead, multiple projections are used to give an overall view of the business. These elements can then be combined and tested to see how changes affect the overall financial health of the business. You can see why this is a valuable exercise for any business owner, even if you aren’t seeking funding. For each of the elements below, you’ll need a “best case” and “worst case” scenario.
Traditionally, the cash flow statement shows the amount of cash and cash equivalents entering and leaving a company. If your business is already operational, this should be fairly easy to obtain. However, businesses that have not yet launched can use expected sales projections and expense budgets instead. Many of the calculations that follow will rely on the same information, so it’s worthwhile to spend time on this upfront and generate solid, reliable information.
The profit and loss (P&L) statement is often referred to as the income statement and summarizes the revenues, costs, and expenses incurred over a given period. Again, startups can rely on their projected sales and expenses for this. A three-year period is suggested.
The balance sheet shows a summary of assets and liabilities. This would include any assets and liabilities the business currently has, regardless of whether or not you have launched. For example, equipment, inventory, and preorder inventories are assets. Liabilities would include anything owed, such as a mortgage on the property or unpaid invoices from suppliers. The balance sheet subtracts liabilities from assets to show a business’s current standing.
Before launching a business, it’s important to establish the date upon which you believe that profits will equal losses – the breakeven point. After this, the business becomes profitable. Investors want to know when their investment will start paying dividends, so it makes sense that they pay close attention to this number.
Once your business is up and running, you’ll need to continue monitoring your projections to see how they compare to the actual outcomes. Variance analysis is the process of comparing your actual financial results to your projections. You'll be able to see if your company is consistently falling short of or exceeding its expectations using this research. If you notice that you’re behind, you’ll need to make some changes to avoid upsetting investors and ultimately losing the business. This may mean you need to temporarily raise prices, reduce staff, or change vendors.
Financial projections aren’t completely set in stone, but they should be as accurate as possible. Many businesses are overly optimistic when it comes to financial modeling, which threatens the business, investors, and employees. It’s ok to be optimistic, but you also need to ensure that predictions are realistic and achievable. Investors will expect you to at least come close to hitting goals.
Financial projections aren’t just for obtaining funding. They also help you better understand your business and stay on track for financial goals, which means you can focus on executing your vision.
There are plenty of resources available to help you with your financial projections, including our data platform. Best of all, Causal is free to get started. So, put aside the crystal ball and give Causal a try when it’s time to lay out your financial projections.