By Ed Rappuhn – SCORE Nashville
“My business plan is almost complete. All that’s missing are the financial projections.”
That’s like saying, “My masterpiece is almost finished, I have the canvas, idea and frame; all I need is the paint.” The financial projections are what investors or lenders find most compelling. To do your projections you will need a sales forecast, expense estimates, and a set of financial statements.
Do research to develop realistic sales forecasts. Talk to potential customers and ask if, and how much, they will buy from you. Contact similar companies in comparable markets (in which you won’t compete), and ask about their sales growth, marketing successes and failures, and any surprises they experienced. Don’t base your projections on a percentage of the market; that type of statistic rarely proves accurate. When you come up with your projections, make sure you take into account your growth from zero and seasonality of sales. Be conservative in your estimates.
Expense projections include fixed and variable costs. Fixed costs are rent and utilities, marketing, salaries and similar items. Variable costs typically fluctuate based on sales. Estimate expenses slightly higher than expected to account for unanticipated costs.
You need to prepare and understand a Cash Flow Statement showing the cash flowing in and out of your business. Recognize the lag between when you pay vendors and when customers pay you. This statement determines whether your business survives.
Investors and lenders will also want to see an Income Statement, which many of my clients find difficult to prepare. This shows your profit (or loss) and typically recognizes revenues and expenses in the period in which they occur, rather than when you receive or disperse cash. Capital purchases are depreciated over their useful life rather than expensed as cash is paid. Your Balance Sheet shows your assets (things you own), liabilities (things you owe) and your equity (ownership) at a particular point in time.
A SCORE workshop, “Building Financial Projections for Business Plans,” helps business owners understand this process. You might need help from your mentor or accountant, but the statements you prepare must be done correctly for your business plan to be taken seriously.
I recommend you produce three projections: 1) most likely, 2) worst-case and 3) aggressive. Use the most likely case in your business plan. The worst-case scenario gives you reassurance that even if things don’t progress as well as you expect, you can still survive. The aggressive plan is done to make sure you can finance extraordinary growth; often as much of a challenge as slow growth.
Don’t change your numbers to make your projections look better. Let the results guide you in changing your business model if the initial numbers won’t work. That’s how you improve your odds of success.
Ed Rappuhn is a mentor, workshop facilitator, and the past-chair of SCORE Nashville. SCORE mentors guide entrepreneurs in starting and growing their businesses. Sign up for a free SCORE mentor, find out about our reasonably priced workshops and other services, or volunteer to become a SCORE member at www.scorenashville.org.