How to Build Financial Projections for Your Startup in 3 Easy Steps

This post is also available in:

Accurate financial projections are instrumental in making business decisions with confidence. But that’s not all; startup financial projections help secure funding, conduct risk assessments, and track performance. 

Startup owners rely on accurate financial projections not only for the effective allocation of resources but also to uncover valuable opportunities and enhance investor confidence. However, to ensure financial projections can contribute towards startup growth, it is important to build them after thorough market research and use realistic assumptions while regularly updating the projections. 

Let’s find out how all successful startups have built their financial projections and their role in their race to the moon. 

Financial Projection for a Startup | Definition and Benefits

Startup financial projections are educated assumptions about the business’s future growth in relation to its financial performance. Specifically, these projections are built around key questions such as:

• How much a customer is willing to pay for the product?
• What’s the cost of acquiring a customer in the industry?
• How many customers will be recurring?

And several more questions follow in this series…

These projections are essential to build a startup business plan. Why? Well, since startups lack historical financial data, they have to make assumptions or simply suggestions on how the company will perform on different parameters. 

Source

These projections serve as placeholders for the business owners to create a startup business plan. In fact, in an era where 47% of startups fail for a lack of proper financial planning, having a plan to look forward to is essential to survive and grow.

Benefits of Making Startup Financial Projections

When a startup builds a financial planning document, projections are an integral part of the process. While using projections to obtain loans, secure funding, and forecast potential growth and risks is common, there are also several other important benefits to consider.

Source

• Financial projections significantly enhance focus on startup growth by helping the team prioritize initiatives that yield the highest return on investment. Given that 27% of projects run over the budget, these projections play a crucial role in aligning budgeted expenses with the prescribed limits. Additionally, a shared financial vision fosters improved teamwork and resource alignment, ultimately leading to the achievement of desired outcomes.

• Make Decisions to Mitigate Risks and Seize Opportunities: Well-built financial projections with the support of digital banking transformation helps in identifying potential financial risks. Knowing the risks, startups can build mitigating strategies. At the same time, accurate projections help startups discover and capitalize on opportunities in every department. 

• Demonstrates Credibility and Impress Investors: Proper financial projections show professionalism and an in-depth understanding of the industry and its potential. Not only does this increase investor’s confidence but it also helps build trust. 

• Helps Startup Founders Negotiate Better: By viewing startup financial projections as essential pathways for future growth, founders can, in turn, negotiate more effectively with suppliers, customers, and partners. Moreover, using the same projections, they can also negotiate better with investors to secure more funding. 

From risk assessment to making accurate predictions, financial projections are instrumental for a startup. Using projections, founders can establish their current position vis-a-vis the scope for future growth.. 

Elements of Financial Projection Reports

A financial projection report has several components, including sales, revenue, forecasts, costs, etc. Here’s an overview of the major startup-related components. 

Element of Financial Projection Report	Description
Startup Expenses	Startups in the growth phase must account for several expenses, including: – Accounting – Advertising and marketing – Legal fees – Licenses and permits – Insurance – Rental and office equipment – Utilities – Customer Service And the list goes on… For easier management, many of these are put under operating expenses and other heads. To make management easier for your startup, consider using an automated invoice processing solution. This will streamline your startup’s payable processes and increase work efficiency.
Sales Forecast	As an essential element of financial forecasting, sales forecasts help determine how much the startup is likely to sell within a given time period. By utilizing this forecast data, startup founders can set specific targets and make more informed, data-driven business decisions. Furthermore, the sales forecast report is compiled using a combination of industry insights, historical sales data, and future sales expectations. To prepare the report, the following data is required: – Customer Acquisition Cost (CAC) – Cost of Goods Sold (COGS) – Sales quotas and attainment – Pipeline coverageCustomer – Relationship Management (CRM) – Average Revenue per User
Cash Flow Statements	These statements highlight a startup’s incoming cash totals, including investments and operating profit. Plus, you will find expected expenses in the same sheet, including operational expenses and debt.
Income Statement	This includes information on revenue, expenses, and profits over some time. Income and expenditure numbers are required to determine net income and taxes.
Balance Sheet	A balance sheet is the financial health indicator of your startup. It has details on company assets, business liabilities, and shareholders’ equity, which helps identify a company’s net worth. Plus, you will find details on the company’s assets and debt in the same document.
Break-Even Analysis	A break-even analysis is the point when the profit you generate equals the initial investment. This is the point where a startup hasn’t gained money, but it hasn’t even lost anything. It’s recommended to identify the BEP before launching the business.
Financial Ratios	These include some common ratios or figures investors check to assess a startup’s financial health. Some common ones are: – Efficiency ratio – Leverage ratio – Liquidity ratio – Market value ratio – Profitability ratio

Key Steps to Making Financial Projections for a Startup Business

Financial projections allow bankers, investors, founders, and others to clearly visualize how you intend to allocate the investments and generate revenue. Furthermore, they are a crucial part of any startup business plan. Below are the key steps you should follow to create a comprehensive financial projection document.

1. Collect the Startup’s Historical Financial Data

Firstly, gather your startup’s past year financial statements, including balance sheets, income, cash flow, and information on operational metrics. From there, analyze these statements to collect data on customer trends, identify periods of recession and growth, and pinpoint exactly where your business faced challenges.

For a better understanding, you can also use a data visualization service to make it more engaging and easier to understand. 

However, fresh startups may not have previous years financial records; they can simply collect industry trends and conduct market research. This will let you understand the target audience, know their potential to spend, and build your company’s vision. 

Once you collect all the relevant data and financial statements, understand them and assess the impact of internal & external factors on financial performance to create accurate projections. 

2. Determining Your Expenses and Revenue Projections

List all the key expenses your startup needs to kick off things. Create a list of fixed, variable, and operating expenses, including;

• Salaries
• Rent
• Insurance
• Marketing
• Maintenance
• One-time purchases

There may be many more, depending on your line of work. In addition to the expenses, also set assumptions based on market conditions, future trends, and economic conditions. 

In the second leg, create revenue projections or forecast return on investment. Determine how much money you can make from the startup and, more importantly, the profit you’ll make after covering all the expenses.

3. Monitor Financial Forecasting and Make Changes

Startups often mistake their financial projects to be immutable once created. Instead, financial projections and their creation are an ongoing process. Instead of creating them once and looking at them after one year, make these projects a part of your organization’s daily communication. 

“Startup financial projections are akin to a roadmap as they guide on a journey. However, you should also be ever-ready to take detours as the market conditions shift.” – Vineet Gupta, Founder of 2XSaS

Regularly review and update the projections based on new developments in the organization and as you receive new information. This must be done to ensure your startup stays agile & responsive to the changing market conditions. 

The exercise should include regularly comparing actual financial results with the projections and subsequently making necessary changes. Next, analyze discrepancies carefully and identify areas requiring adjustment, which will ultimately lead to revising the forecasts.

Key Takeaways

• Financial projections provide a blueprint for startups to make the right decisions and attract investors. 
• They help startup founders and their teams align their focus, seize opportunities, and identify risks. 
• Well-built startup financial forecasting improves investor confidence and increases the founder’s negotiation power. 
• To create financial projects, gather market data, conduct historical analysis, and create expense, revenue, and sales projections. 
• Conduct regular financial projection reviews to update the numbers in accordance with market trends and startup performance. 

About the Author:

This article was created in collaboration with Joy D’Cruz – a content marketing specialist currently working with SaSHunt. Joy has a keen interest in researching topics related to B2B and SaaS. During weekends, he enjoys spending time watching YouTube.