How To Create Realistic Financial Projections For Startup Companies

Financial projections for startup companies are incredibly important for several reasons. You will need financial projections to secure financing from prospective lenders and investors, as well as to make sure your business is on the right track.

Comparing actual financial statements with projections allows you to determine if your business is breaking even, falling short or surpassing overall goals. As a result you are prepared to make the best decisions to help your business maintain healthy growth. 

DGK has the experience necessary to create realistic financial projections startup companies can depend on for guidance and to help secure financing. 

  

How Far Into The Future Should Startup Financial Projections Extend?

A quality financial projection highlights all facets of your business, including what comes in and what goes out in order to produce profits.

These projections generally extend three-years into the future. The goal behind this time frame is to break past the period of losing money nearly all startups face. In general, start up companies take around 18-months to hit the break-even point. By projecting out three-years you have the opportunity to forecast actual profit potential.

Two Key Components Of Financial Projections

The two key components all financial projections must include are sales forecast and an expense budget.

A Sales Forecast is a projection of sales extending out three-years into the future. In general, you tally monthly sales for the first year and quarterly sales for the following year. Important questions to consider when creating sales forecasts include: How many customers do you expect to obtain in the coming years? How many units do you plan to sell? What are the costs of goods sold?   

An Expense Budget incorporates both fixed costs and variable costs. Fixed costs include things like rent, while variable costs include things like marketing. An expense budget may include general figures as opposed to an exact break down of every last office supply purchased.  

3 Important Documents You’ll Need

Three core documents are required to create a financial projection statement: income statement, cash flow statement and balance sheet.

Income Statement shows how much money your business will produce by calculating projected income and expenses.

Cash Flow Statement goes into greater detail regarding all income and expenses for your business. At the end of a given period you total up all income and expenses to see if your business earned a profit, broke even or lost money.

Balance Sheet details your business’ overall finances. This includes assets, equity and any liabilities.

How To Determine Future Sales  

Perhaps the most challenging aspect is to determine how much money your business will be making three years from now. Some helpful tips in doing so…

- Make use of all market research you originally conducted when developing your business model and plan. Census data provides keen insights regarding profits of others in your industry. Industry associations and publications are also helpful tools to look into.  

- If you worked in your industry prior to starting a company you can use this experience to help create realistic financial projections.

- Get help from an experienced accountant with in-depth first-hand knowledge regarding small businesses and startups within your industry.  Under the guidance of our expertise, you’ll have a realistic list of expenses, as well as sales and profits you can expect to incur under good management. 

After creating a first draft, you should go back through and carefully extract or highlight any and all ‘assumptions’. You could then go back through in the future and see how these assumptions change and fluctuate based upon certain factors. 

Let Us Help You Create Beneficial Financial Projections

Experienced lenders and investors know that financial projections are simply estimates and anything can change. That doesn’t mean financial projections should be unrealistic, on the contrary they should be conservative and as realistic as possible.

It is not uncommon for a startup company to greatly overestimate figures, after all your business is your baby and naturally you have high hopes and expectations. Keep in mind that it’s always better to supersede expectations than to come up short. Plus, lenders and investors are trained to be skeptical of inflated projections that sound too good to be true.  

Allow our experienced accountants help your startup business create sound financial projections that benefit you long into the future.

Common Types Of Employer-Sponsored Retirement Plans

There is no one size fits all employer-sponsored retirement plan. Instead, there are many options out there, and the best one for you depends on a number of factors. In general, an employer-sponsored retirement plan provides useful benefits to both employees and employers. These plans include things like automatic paycheck dedications transferred to savings, tax breaks and some companies even offer to match employee contributions up to a certain amount.     

Two Main Categories Of Employer-Sponsored Retirement Plans

There are two main categories that define retirement plans: a defined benefit plan and a defined contribution plan.

A defined benefit plan provides a guaranteed monthly benefit amount at the time of retirement. Also known as pension plans, defined benefit plans are sponsored by employers whom generally hire investment managers to handle accounts. The employer takes on the risk in this type of plan.

A defined contribution plan does not offer the same guaranteed payout at the time of retirement. A 401(k) is an example of a defined contribution plan. These types of plans include contributions from both employer and employee, often at a set percentage rate of an employee’s annual salary. The employee takes on the risk in this type of plan. The overall value of the account will change based upon the value of investments. At the time of retirement, employees receive the account balance based upon contributions plus or minus gains and losses from investments.  

Common Types Of Retirement Plans Offered By Employers

There are many types of retirement plans including 401(k) plans, 457 plans, Roth 401(k) plans, SIMPLE plans, 403(b) plans and many more. Talking the options over with a certified accountant will help you to determine the best plan for you.

1.     401(k) Plan

This is the most common type of employer-sponsored retirement plan. Most large, for-profit businesses offer this type of plan to employees. The employee is responsible for funding this plan but many companies offer to match a certain percentage of employee contributions. Employees have the opportunity to select which investments their money goes towards and retain complete control of the account at the time of retirement.

Employee contributions are eligible for annual tax deductions up to $18,000 as of 2016. If you are 50-years or older you are granted a catch-up provision that allows you to contribute an additional $6,000 per year. You pay tax on the money when you go to withdraw it from your 401(k).

Related Article: 7 Things You Need To Know About Your 401(k)

2.     Roth 401(k) Plan

This type of plan offers the same benefits as a traditional Roth IRA with the same employee contribution limits as a traditional 401(k) plan. A Roth 401(k) does not offer tax-deductions for contributions, but when you withdraw this money during retirement you will not pay tax as long you are over 59 ½ years old and have maintained money in the account for a minimum of 5 years.

Employees can offer to match contributions to a Roth 401(k), but these contributions must be placed into a regular 401(k). Employee contribution limits remain the same for both Roth 401(k) and 401(k) plans. If you have both a 401(k) and a Roth 401(k), combined contributions to both accounts cannot exceed the maximum contribution allowed to a standard 401(k) plan.

3.     403(b) Plan

A 403(b) plan is virtually the same thing as a 401(k) plan, but it is designated for nonprofit organizations such as hospitals, public school systems, churches and so forth. Employees largely fund these plans, and contributions come with tax deductions up to a specified amount. Employers have the option to match contributions based on a certain percentage. At the time this money is taken out of the account it is subject to taxation.

4.     SIMPLE Plan

SIMPLE (Savings Incentive Match Plan for Employees) is an IRA plan typically offered by smaller businesses. Employees make tax-deductible contributions to the plan and employers match contributions up to 3% of the employee’s salary, or make nonelective contributions.

The max amount of money you can contribute to a SIMPLE IRA plan in 2016 is $12,500. If you are 50-years or older the maximum amount goes up to $15,500 (or an additional $3,000).

These four plans are far from your only options. Allow DGK Group to assist you in finding the right employer-sponsored retirement plan for you.

Audit Help For Small Businesses: How To Prepare For An Audit By The IRS

Audit Help For Small Businesses: How To Prepare For An Audit By The IRS

There is a great deal of stress associated with business audits, but with proper preparations the entire ordeal can be a lot less intimidating. There are few, if any, people that are unafraid of the IRS—even if you’ve done everything right as best to your ability. When you are notified of an audit you should respond to the IRS as quickly as possible. Once you send in a response it’s time to start preparing all necessary documents.

If you do not come prepared to your meeting the auditor is forced to estimate income and expenses, which comes with a separate penalty for poor record keeping. Don’t let this happen to you. Fear not the IRS with DGK Group on your side! We help obtain and assess all necessary information for small business audits.

What You Need To Find & Assess Prior To Your Audit

Tax Return(s) For Years Being Audited

The first thing to look at is the tax returns being audited. You’ll need to dig these returns out of your files in order to understand how you or your tax preparer assessed and came up with all listed figures.

The most important factor is the ability to back up all claims listed on your taxes with hard facts. If someone prepared your taxes you are in luck because they can help you go through all figures and explain things in plain terms.

All Records That Back Up Data On Tax Returns

The IRS has the legal rights to investigate any records used to help prepare tax returns. These records include receipts, checks and anything else that will validate the numbers you claimed.

It’s important that all of this information is well organized and easy to understand.

If you simply toss a huge envelope of random receipts at the auditor things aren’t going to go well. If the IRS has to start digging through your records, chances are they are going to make it worth their time by finding other things to go after you for.

Avoid needless digging by providing the facts in a clear and concise manner. Auditors don’t want to do more work than they have to. As a result, they tend to reward neat recordkeeping. Auditors are usually accountants by trade, meaning neat record keeping appeals to them. On the other hand, poor or messy record keeping raises huge red flags.  

Proof Of Tax Benefits

You may need to do some research on tax laws in order to back up deductions or tax benefits you received. This is where a professional really comes in handy. No matter how much research you conduct, there’s no way to have the same background knowledge as a professional accountant with vast experience working with and around tax laws.

What To Bring To Your Audit

The items you are required to bring to an audit should be listed on your audit notice. The most basic documents required include:

Bank Statements & Receipts

You will need to bring bank statements for both personal and business accounts in your name. Even canceled checks or invoices should be kept in your records and brought with you. Any payments made in cash should be backed up with receipts, handwritten notes, petty cash vouchers or some other form of proof.

Books & Records

Tax code laws state that small businesses don’t have to maintain formal books, but that doesn’t mean an auditor won’t try to tell you otherwise. It is legal for a small business to keep all records using a checkbook, cash register tape or other documented measure. If you do maintain more formal and detailed records be sure to bring them, as they can be very helpful.

Electronic Records

Print out bank and charge card statements in order to produce proof of payments and expenses. These electronic records must list the amount, date, name and address of payee. These details are not always included in online bank statements, which is why other forms of record keeping remain so important.  

Appointment Books & Logs

If you schedule appointments your business likely maintains an appointment book or log full of services provided throughout the year. If this helps back up some of the things listed on your taxes, bring it along. If the entry appears logical it may be accepted as proof.  

Records Of Office Equipment

‘Listed property’ used for both business and professional purposes include computers, cell phones and vehicles. This category does not include materials used strictly for business. If equipment is used for both business and pleasure the auditor may request a copy of all records of usage. If you don’t have records of this, you’ll have to create a working list from memory using things like documented projects as reference.

Auto Records

If you use vehicles for business make sure to keep careful record of expenses and uses. For instance, a collection of fuel receipts marked with the use of the vehicle at the time of filling up.  You could also add up all gas receipts and then divide the total number by the gas mileage your vehicle gets in order to show mileage traveled.

Travel & Entertainment Records

If you included travel and entertainment expenses on your taxes make sure to bring documented proof of these charges. In order to be considered valid you need written record as well as receipts. Keep detailed logs of all business expenses as you go to help make this less challenging. 

Learn about the common misconceptions with IRS Tax Audits here

DGK Group is here to help make your audit go smoother, reducing your risk for paying steep back taxes and fees. Contact us today to learn more.