If you’ve ever drafted a business plan, you know that it’s highly essential to outline your startup’s finances. Your business plan will require financial projections (what the cash flow looks like for your business), along with the amount of capital you are trying to raise, which outlines how that capital will be spent.
Many entrepreneurs need funding from outside investors, so they thoroughly cover the financial section of their business plan. However, even if you don’t need funding, it’s still a good idea to compile this information to understand the numbers behind your business better.
If you’ve never written this part of a business plan before, I have rounded up the areas that are essential that you should include in your business plan.
What is a financial projection?
In the simplest form, a financial projection is a forecast of future expenses and revenues. Typically, these projections will account for historical and internal data and will also include a prediction of external market factors.
You will need to develop both the short- and mid-term financial projections. A short-term forecast accounts for the first year of your business, customarily outlined month by month. A mid-term financial estimate typically accounts for the coming three years of business, outlined year by year.
What to include in your financial projections?
Financial projections should include the following:
Three years of Projections:
By drafting out your financial projections for three years, it provides investors enough information to gain insight into your thinking. Many investors and business owners don’t usually find it essential to go past the three-year projections because you begin to increase the inaccuracy of your forecasts due to changing business needs and the ever so often pivot, startups face in the early stages of business.
Projected Income Statement:
A projected income statement is included in your financial projections; it is a forecast of how profitable your company will be in the future. The future time period could be a month, quarter, year or several years.
Projected Cash Flow Statement:
A cash flow statement will help determine whether you will run out of cash. Cash flow is the lifeline of all businesses, particularly start-ups and small enterprises. As a result, it is vital that management predict what is going to happen to cash flow to make sure the business has the funds needed to survive. One thing to keep in mind, you can be a profitable company, but can still run out of cash. For example, you might have a handful of significant customer orders, but with these orders, you may have an invoice where payment is due in 90 days. If you have not planned well, this could be trouble for your startup, forecasting your cash flow will help with this process.
Projected Balance Sheet:
A projected, or pro forma, balance sheet contains assumption data about specific future economic scenarios. You could look at the balance sheet as a “snapshot” of the company’s financial position at a moment or an instant in time.
Tip: Key Assumptions
When building out your financial projections, you want to make sure your assumptions can be easily understood. Adding a narrative document that outlines a list of all of your assumptions and what those assumptions are based on would be essential.
By including these documents, investors can clearly understand that even with your focus on driving sales for your company, you are also taking into consideration the retained earnings and the amount of money you plan to leave in the startup.
Graphs and Charts
You also will want to incorporate graphs and charts into this section, covering the following areas:
A sales forecast, which projects what the course of your sales has been like over the last three years.
An expense budget, which allows you to understand better how much it will cost to make the sales you forecast, and differentiate between fixed costs (like payroll) and variable costs (like marketing expenses).
A break-even analysis which builds to that big moment in business when your expenses match the volume of your sales.
Financial Projections and Raising Capital
When entrepreneurs are raising capital, you will need to have a clear understanding and detailed outline of the amount of money you are raising; you will need to know how it will be spent, the manner in which it will be spent, and how long this capital will last.
Aside from covering these three points, be sure to address the following areas, as well:
A summary of your business.
While your business plan has likely already covered what your company does and your audience, it’s still a good idea to include a summary along with vital details such as whether or not your business has incorporated and your company’s type of legal entity.
Your financial situation.
Many of these details can be found in your financial projections, including cash flow and income statements. However in this portion specifically, you will want to highlight the return on investment investors will receive from investing in your startup, what the terms look like, how long it will take to get a return on investment and your plan for paying off any outstanding debt.
As time progresses, it’s a good idea to return to your business plan and make revisions. Revisit your financial projections and keep updating the numbers to reflect any changes, both positive or negative, that have taken place.
Tip: Check out Guy Kawasaki article on How to Create an Enchanting Financial Forecast, he provides an excel sheet template which many of you may find helpful.
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