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.