10 secrets to creating successful startup financial projections
Credible financial projections are a critical part of your startup’s business plan. When you’re looking for external investment, it is crucial to show that your company is financially viable.
It’s essential to think of financial projections as the desired outcome for your business in the coming years. Projections will also help you keep track of your business’s growth over time.
Follow these ten secrets to achieve successful financial projections for your business:
1. Never underestimate marketing expenses
Marketing and advertising drive profits, and can typically fall between 5% and 20% of revenue. It is important to bear in mind that a company usually requires a higher marketing spend during years 1 and 2, as it focuses on driving brand awareness during that time. A common mistake is underestimating marketing expenses, which can initially run as high as 30% of sales for certain companies.
2. Provide a rational business strategy
Your financial projections must reflect a credible business strategy. Use a three-year template to demonstrate the evolution of expenses and revenues over the course of this time. Also, include profit expectations and funding throughout this period.
3. Include funding expectations
Explicitly list your funding requirements as a line item and never show projections without them, or your investors will assume that no funding is required during that time period.
4. Include cash flow
Never confuse making a profit with good cash flow. It’s easy to underestimate the length of a sales cycle and the knock on effect that this has on cash flow. Aim to include an annual cash flow estimate in your projections to show a picture of your business’s entire financial health.
5.Do your homework
Doing your homework is the best way to display that you have thought your projections through. Create comparable metrics with peer companies, making it easy for your investors to evaluate your business’s projections with your competitors.
6. List company milestones
Investors require milestones to evaluate your business’s profitability. Milestones should be achievable by a clear deadline and affect your company’s bottom line.
Map out the milestones you expect to achieve as a result of your capital funding, such as:
- Capturing an increased percentage of your market share
- Investing in the creation of new products or services
- Increasing sales
- Hiring new employees
7. Use historical data as a guide
If you exclude historical data, potential investors will have no context for your current figures. Providing two to three years of historical data can act as a baseline as to where your business is now and what it has achieved so far.
The bridge between the two sets of data – historical and projections – will clearly display growth within context.
8. Include all predictable expenses
One of the common mistakes when creating financial projections is excluding or underestimating expenses. In order to avoid unwelcome surprises, consider including the following:
- Business licence fees
- Incorporation fees
- Industry-specific licensing
- Customer contract negotiation
- Legal fees relating to trademarks and copyrights
9. Analyse IT costs
IT-related expenses are among some of the most costly for a business. Even if your company is not in a technology-specific industry, you’ll need a website, and this comes with associated costs, including:
- Data security
- Website maintenance
- Hosting fees
- Data storage
- Help desk
10. Estimate capital investment
Make clear how much capital investment is required in each year for equipment, inventory, hardware and software. Do this over a three-year timeline for full transparency.
A good capital plan should demonstrate three things:
- Correspondence with growth in revenue and returns on assets
- The scalability of your business
- A purchasing plan that clearly shows investors how funds will be allocated across the business
Financial projections can show investors a clear path to an attractive return. With sound financial projections, you’ll have the support of investors to ensure further growth of your business.