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Creating financial projections for your startup is both an art and a science.

Although investors want to see cold, hard numbers, it is tough to predict your financial performance three years down the road, especially if you are still raising seed money. Regardless, a short- and medium-term financial projection is a required part of your business plan if you want serious investors attention. Here are some tips for crafting solid financial projections. Get Comfortable with Spreadsheets Spreadsheet software is the starting point for all financial projections. Microsoft Excel is the most common, and chances are you already have it on your computer; there are also special software packages you can buy to help with financial projections. Spreadsheets offer flexibility, allowing you to quickly change assumptions or weigh alternate scenarios. About.coms Guide to Spreadsheets can help you get started. Go Beyond the Income Statement The income statement is a standard measuring tool used to convey your projected revenues and expenses. A good financial projection also will include a projected balance sheet, which shows the breakdown of assets, liabilities and owners equity. In addition, it will include a cash flow projection, which reveals the actual movement of cash through your company in a given period. Your financial projections should include estimates of how much money you plan to borrow and interest repayments on those loans. Additionally, be sure to follow the Generally Accepted Accounting Principles, or GAAP, which are set forth by the Financial Accounting Standards Board, the private-sector organization responsible for setting financial accounting and reporting standards in the U.S. If financial reporting is new territory for you, have an accountant review your projections. Provide Short-Term and Medium-Term Projections You should be able to offer investors: A short-term projection of the first year, broken down by month A three-year projection, broken down by year A five-year projection. Dont include this one in the business plan, since the further into the future you project, the harder it is to predict; however, have it available in case an investor asks for it.

When projecting growth, consider the state of the market in which you are operating, as well as trends in raw material and labor costs, and whether you foresee needing additional funding in the future. Account for Startup Fees Fees related to licenses, permits and equipment should be included in the short-term projections. Also keep in mind the difference between fixed and variable costs; differentiate where appropriate. Variable costs usually will be included under the category of cost of goods sold. Offer Two Scenarios ONLY Investors will want to see a best-case and worst-case scenario, but dont inundate your business plan with myriad medium-case scenarios. It will likely just cause confusion. Make Your Assumptions Reasonable and Clear As mentioned before, financial forecasting is as much art as it is science: Youll have to assume certain things, such as your revenue growth, how your raw material and administrative costs will grow, and how effective youll be at collecting on accounts receivable. Its best to be realistic in your projections as you try to recruit investors. If your industry is going through a contraction period and youre projecting revenue growth of 20 percent a month, red flags will begin to pop up. Business Plan Financial Projections

You may be expanding your business or starting a new business for many reasons. Your financial backers, however, are interested in their investment. To them, the heart of your business plan is represented by the financial projections which must include income statements, balance sheets, and cash flow statements. These statements must convince your backers of two very important details: your business will generate enough cash to (1) repay your backers and (2) fuel your incentive to succeed. If you only need financial projections, whether for your business plan, or for planning your business, give us a call we can help! We've posted a brief discussion about financial statements here: Understanding Financial Statements Example Income Statements
The income statement (profit and loss statement) shows the revenue, expenses, and net income (or net loss) for a period of time. Net income is the amount by which total revenue exceeds total expenses. The resulting profit is added to the retained earnings account (accumulated earnings of a company since its inception less dividends). A net loss reduces the retained earnings account. The projected income statements demonstrate that your business has the ability to earn profits over time.

Revenues Cost of Sales Gross Profit Accounting Advertising & Promotion Bank Charges Compensation & Benefits Consulting Fees Insurance Lease - Facilities Legal & Professional Licenses & Fees Maintenance Miscellaneous Office supplies Security Telephone Utilities Website Total Operating Exp. EBIDTA Depreciation Operating Profit Interest Expense

Year 1 $1,976,000 1,213,659 $762,341 6,000 15,000 41,496 246,643 2,400 1,000 336,000 500 500 600 1,800 2,700 720 1,800 4,200 1,800 663,159 $99,182 4,916 $94,266 43,199

Year 2 $2,074,800 1,274,342 $800,458 6,300 12,360 43,571 254,042 0 1,050 336,000 500 510 612 1,836 2,754 742 1,836 4,410 1,800 668,323 $132,135 4,916 $127,219 40,274

Year 3 $2,178,540 1,338,059 $840,481 6,615 12,731 45,749 261,663 0 1,103 336,000 500 520 624 1,873 2,809 764 1,873 4,631 1,800 679,255 $161,226 4,916 $156,310 37,059

Year 4 $2,287,467 1,404,962 $882,505 6,946 13,113 48,037 269,513 0 1,158 336,000 500 531 637 1,910 2,865 787 1,910 4,862 1,800 690,569 $191,936 4,916 $187,020 33,524

Year 5 $2,401,840 1,475,210 $926,630 7,293 13,506 50,439 277,598 0 1,216 336,000 500 541 649 1,948 2,923 810 1,948 5,105 1,800 702,276 $224,354 4,916 $219,438 29,639

Financial Projections: Business Plan Basics Your financial plan will be highly scrutinized by your business plan reader. All the ideas, concepts and strategies discussed throughout your entire business plan form the basis for, and should flow into, your financial statements and projections in some manner. When it gets down to it, your reader wants to know if and when you will make money and become profitable. Financial statements and projections should follow Generally Accepted Accounting Standards and must (at a minimum) include properly prepared balance sheets, income statements and cash flow statements. Bankers and investors are familiar with the correct content, organization and presentation of financial statements, and expect to see them in your business plan. Don't cut corners or attempt to devise your own method of financial and pro forma statement presentation. In most cases, capital sources expect financial projections for a three to five year period, and historical statements for the past three years (or since inception if operating period is less than three years). Consider organizing your financial statements as follows: Income Statements

Year 1 - Monthly Projections Years 2 thru 5 - Quarterly or Yearly Projections Existing businesses should provide income statements for the last 3 years if available.

Balance Sheets

Year 1 - Quarterly Projections Years 2 thru 5 - Yearly Projections Existing businesses should provide current balance sheet and balance sheets from the prior 2 years if available.

Cash Flows

Year 1 - Monthly Projections Years 2 thru 5 - Quarterly or Yearly Projections

Other information that you may consider including:

Financial Assumptions These are critical to properly convey the "reasons behind the numbers" for outsiders reviewing your financial projections. Explain how you calculated the numbers you used in your financial statements. For example, we will sell 1000 units per month at $5.00 per unit. This is projected to increase by 4% every month, etc. Break-Even Analysis These figures demonstrate the volume of sales, in units and dollars that must be generated to cover fixed and variable expenses. At the break-even point, you start becoming profitable. Normally this data is presented in a graph format with sales on the X-axis and units sold on the Y-axis. Sources and Uses of Funds This section explains to your reader which sources you expect to secure capital from, and what you specifically plan to spend it on. Investment Structure and Objectives This section outlines the amount of capital needed, various investment structures, and the estimated return to your investor. It is critically important to tell your investor how they will recoup their money, when they can cash out, and what they will receive as a return. Financial Ratios Providing standard financial ratios helps your business plan reader to analyze how well your company will perform compared to other companies within your industry. For existing companies, show the trends over the last 3 to 5 years to outline any improvements in your performance. For more information about preparing the financial projection section of your business plan, check out:

Financial Projections Mistakes to Avoid Business Plan Financial Ratios

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