Farwah Jafri | June 23 2022
In interviews, people often get asked, ‘where do you see yourself in X years?’ A similar question makes rounds in the business world, ‘’how much money will your business generate in X years? The answer to this question dictates your chances of procuring the investment or capital needed to launch your startup.
Small and medium businesses seeking investors and funding need to master the art of financial projection. Like a startup business plan and market research, forecasting future expenses and revenue is also incredibly important.
In short, financial projections enable you to lure investors and tell the world how lucrative your business plan is. Finding an investor who happily lends you money without probing your business finances is almost impossible.
For investors, the three letters that matter the most are ROI, and the only way to estimate it is through financial projections.
Projecting finances is the art of studying past trends and markets to predict and project a complete financial picture. There are mainly three financial projection types; short-term, medium-term, and long-term projections. The first projects your finances for up to a year, while the long-term entails up to five years.
The strength of a startup business plan mainly relies upon financial projections, insights about business operating expenses, sales forecast, payroll costs, and startup expenses.
In addition, the financial projections of old businesses must have cash flow statements, income statements, break-even analysis, balance sheet, financial ratios, cost of goods sold, and amortization & depreciation projections.
Financial projections lie at the core of a business plan and are integral mainly for two reasons; planning internal finances and seeking external funding. Let’s explore how;
Financial projections help you create a game plan to launch your startup into the sea of businesses seeking success. They help create an initial budget and estimate when your business will break even and how long it would take to achieve your business milestones and financial goals.
Moreover, financial projections aren’t only significant for startups. Its value stays the same even for old and already established businesses. Projecting finances every 6 to 12 months help you assess your growth, identify shortcomings, and create winning strategies.
The financial projection is a means to convince potential investors and seek external funding. Businesses with a solid game plan get more investments and procure the capital to hit the ground running. In contrast, startup owners who request funding without financial projections are deemed unprepared and often uninvestable.
Till you tell the investors your business success potential and how soon they will break even and start making profits, catching their attention and investment is hard.
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Creating financial projections seem troublesome at first. However, if you have the right tools and know the right way, you can project finances yourself. All you need to do is calculate and estimate these three essential startup projections;
Sales projection estimates how much money your business will generate in sales across the defined period. However, sales estimate is not merely calculating the money you will make through sold products and services. To make an accurate sales projection, you also need to factory economic conditions, market downturns, and tariffs affecting your inventory.
Next up, it’s time to project the money required to make the sales you need to meet the above. Projecting expenses requires factoring in both fixed costs and recurring costs. The former entails expenses like rent, and the latter includes bills and utilities. In addition, you also need to project one-time damages and other uncertainties that may potentially hike your expenses.
The third step is to estimate your assets, liabilities, and equity balance. This projection is only applicable for up-and-running businesses having a previous balance sheet needed to project a new one. This projection signifies the financial health of your business and plays a vital role in procuring future investments.
The inability to project finances like a pro shouldn’t hold you from translating your business dream into reality. Fortunately, you can hire pros who share expertise in making financial projections required to procure investments.
Visit Monily.Com to hire fractional CFOs who can help you create a solid startup business plan powered by accurate and concise financial projections and always stay one step ahead.
Farwah is the Product Owner of Monily. She has an MBA from Alliance Manchester Business School, UK. She is passionate about helping businesses overcome challenges that hamper their growth, which is why she is working at Monily to facilitate entrepreneurs to efficiently manage business finances and stay focused on growth.