Entrepreneurship involves a lot of planning. Aside from having the passion and interest in penetrating the competitive world of business, entrepreneurs are also expected to have the so-called financial acumen or the ability to know and understand basic finance-related principles and apply them in decision-making.
Financial acumen is required even in the smallest of enterprises. It is needed even in the very first step of establishing a business: creating a business plan. A great plan includes a well-researched section on financial projections.
Startup owners need to make sure that they take this important step before or after establishing a business. This article offers a guide to making financial projections for startups.
1. Consider How Important Financial Projections Are
Research by Gavin Cassar in 2009 asserted that “formal financial projections and regular sales forecasts [are] positively associated with the importance of intangible assets, such as patents, research and development, and those ventures in high-tech industries” (p. 49).
It is important to look at financial projections as either a proposal or a report. It is typically used as a way to gain funding as it shows how feasible and profitable the business can be. It also serves as an estimation of the potentials of the company in consideration of its assets and liabilities.
Given its purpose, financial projections are important in determining whether funding the startup will benefit the investor, or if there are areas that need improvement.
The United States Small Business Administration (n.d.) advises entrepreneurs looking for additional funding to make sure that projections match requests. This applies to individuals that are yet to launch their business and are still in the planning stage, as well as already-launched businesses looking for investors.
2. Start with Sales and Expenses
One of the main goals of a financial projection is to find out how much money the business currently has and needs to have (SBA, n.d.). It also looks at the time frame profits are expected to come in and how it will be achieved. With this, entrepreneurs need to outline potential expenses and sales or the projected cash flow in order to show an expected revenue.
A cash flow projection plays an important role as it tracks every incoming and outgoing transaction within a given amount of time, typically monthly. This is done to have a point of comparison when evaluating financial performance. The goal is to ensure that the cash flow always stays positive and adequate.
3. Focus on Profit and Loss
Another important factor in making financial projections is to take a look at the startup’s profits and losses. According to the SBA, a profit and loss projection shows the probable performance of the company within six months to one year considering past trends. This is also known as an income statement.
Potential funders such as lenders and investors consider this an important factor when evaluating funding requests. These entities always look for profitable ventures.
4. Create a Balance Sheet Forecast
The last part of a financial projection is a balance sheet forecast, which weighs assets against liabilities to find the company’s net worth. It consists of every valuable item owned by the company and its debts. Ultimately, the balance sheet shows how valuable the company is during the evaluation period.
This is an essential part of the projection as it takes an overview of the company’s value at that particular time, which plays a vital role in convincing potential funders.
5. Use Accounting Software
Entrepreneurs needing to do financial projections should consider using accounting software such as Xero and Quickbooks. There is a wide range of options for accounting programs and it is up to the user to find one that best suits their needs.
In general, these programs provide a way to easily generate balance sheets, compute profits and losses, and monitor sales and expenses. They are usually accessible using different devices such as laptops and mobile devices.
6. Work with an Accountant
Making financial projections in proven to be an important part of running a business, especially during financial planning and external or internal audits. It is necessary to ensure that all figures used for projections are grounded on real figures. Actual numbers also matter when it comes to declaring profits and net worth.
An accounting professional can ensure that the numbers are correct and that every key document is factored in. They are trained to deal with financial matters and crunch figures. With their help, businesses can achieve their financial goals and avoid getting in trouble with the law.
Financial projection is one of the most vital aspects of any business, even startups. Entrepreneurs should take the time to do accurate and realistic projections to help them get funding, get a truthful view of their company, and avoid legal issues.
- Cassar, G. (2009). Financial statement and projection preparation in start-up ventures. American accounting association, 84(1), 27-51. Doi:10.2308/accr.2009.84.1.27
- Small Business Administration. (n.d.). Financial projections. Retrieved from https://learn.sba.gov/learning-center-plan/learning-center-how-to-write-a-business-plan/financial-projections-business-plan