As the name implies, a financial projection is a prediction of a startup’s performance over a certain period. Good forecasts will predict growth and allow founders and operators to plan their business (headcount, budgets, etc) around that growth.

This article demonstrates the importance of and ways to develop good financial projections, which can be accomplished by using a structured guide and template.

Why Startups Rely on Financial Projections?

When a startup makes a financial projection, it considers its existing revenue and expenses to estimate its future cash flow and establish a future forecast. These projections are often made via a month-to-month breakdown and can predict anywhere from 3 to 5 years into the future. They’re intended to help startups establish goals and develop processes that consider factors such as season, industry trends, financial history and health. Financial predictions can also validate a startup’s progression and entice new investors.

Financial projections typically consist of various components, which include:

• Income statements: Income statements are financial statements that provide a summary of a startup’s revenue streams, expenses and profits. An income statement considers sales forecasts and expenses to determine an expected net income in the coming months.
• Balance sheets: Balance sheets provide an overview of a startup’s assets, liabilities and capital. Balance sheets may also factor in shareholder equity.
• Cash flow statements: Cash flow statements track the money that’s coming into the business as revenue and the money that’s exiting the business as expenditures. There are both direct and indirect cash flow statements. The former calculates all major cash receipts and payments directly from operating activities, while the latter starts with net income and adjusts for non-cash revenue and expenses.

How to Develop Accurate Financial Projections for Your Startup

To establish an accurate forecast for your startup, your assumptions have to be accurate. This is often easier said than done, largely because sales – and revenue – can be difficult to predict. Here’s a look at how to create an accurate financial prediction for your startup:

1. Project your sales: Though creating a sales forecast can be challenging, this is an important part of the overall financial projection. Be sure to select numbers that are conservative, yet realistic. Also be sure to take into consideration certain variables, like the state of the economy, how your industry is trending, supply chain issues and more.
2. Project your expenses: What are your financial needs? That’s the big question to ask yourself at this step. Your financial requirements and expenses can help determine how realistic your business plan is, which can thereby help you determine pricing, your break-even point and how much you’ll have to charge or how much you’ll have to sell to make a profit. You should have a pretty good idea of what your key expenditures are. Variables like salaries, rent prices, utilities and maintenance should all be fairly easy to calculate. Be sure not to forget about any anticipated one-time expenses, like web design and equipment purchases.
3. Project your balance sheet and income statement: Next, you’ll project the financial status of your business and then project your income. It’s this projection that you’ll use to estimate your gross margin and then, eventually, your net income.
4. Project your cash flow: Lastly, you’ll project your company’s cash flow. It’s this projection that predicts all cash-related activity within the startup to break things down on however regular a basis that you choose.

Components of Effective Financial Projections

There are various components that your startup will need to consider when it comes to creating financial projections, all of which help influence the steps that we’ve outlined above. These components include:

• Profit and loss projections: Also known as a P&L, these forecast how much money you’ll bring into your startup and the profit you’ll earn from such sales.
• Cash flow projection: This helps estimate your startup’s future cash levels, projected revenue, and financial health.
• Break-even analysis: As the name implies, this is an analysis of what you need to charge for your product or service to break even. It can help inform your startup how long it will take to make a profit and help leadership set pricing.
• Sales forecast: How much product or service do you expect to sell over a certain period? This helps dictate your sales forecast, which can thereby help determine how much revenue your business can expect to generate over a time period.

Aside from these variables, it’s also important to consider the “what-ifs.” Also referred to as “sensitivity analysis,” this technique projects performance based on changes in the various startup financial projections that they’re based on. By performing a sensitivity analysis, you can learn various potential outcomes and help your startup make more educated decisions.

Utilizing Financial Ratios for Startup Growth

The goal of any startup is to build the business and thrive in the market – and various financial metrics can be used to track and help further stimulate growth. Here’s a look at some of the ratios that you need to know:

• Burn rate: This is the rate at which your startup spends money, which helps provide an overview of your startup’s financial status based on how quickly it uses its cash to cover costs. It’s commonly detailed as a monthly average.
• Runway: This metric details how long a startup can function before it requires any sort of additional funding.
• Return on investment (ROI): This metric evaluates the efficiency of an investment or is used to compare several different investments. Think of it as the profit that is made as a result of the investments that your startup makes.
• Net profit margin: This is a metric that details how much net income your business earns.
• Debt-to-equity ratio (D/E): This is a metric that compares the outstanding debt that your startup owes to its equity. The higher the debt-equity ratio, the more indicative that the startup is financing its operations by assuming debt. Ideally, you want to be able to streamline operations.
• Return on equity (ROE): A metric that helps define your startup’s overall profitability based on net income and shareholder equity. A higher return on equity is typically more attractive to shareholders.

These ratios don’t just play a role in your startup’s financial projections, but also in attracting investors. They can help evaluate your startup’s overall health and entice more investors to help finance your business. Remember, investors want to be a part of a business that they believe in. These ratios can help make an attractive case for your startup.

Forecasting Future Success: Tips and Strategies

Financial forecasts are just that: predictions. While there is some uncertainty behind them, it’s important to ensure that they’re presented as accurately as possible. So how do you improve the accuracy of your assumptions and predictions? Beside using as realistic of numbers as possible for developing your initial financial projection template, startups should plan to monitor and adjust your forecasts ongoingly as your business evolves. Remember, while forecasts can help you predict years into the future, it’s very unlikely that all the variables that help make up a forecast will stay consistent over this period.

Some of the strategies for effective forecasting include:

• Market analysis: A market analysis is designed to assess your startup’s market against the competition within the same market or industry. This can help determine the options your customers have when it comes to selecting the products or services that you offer.
• Competitor benchmarking: Competitor benchmarking is a metric that compares your startup’s metrics against its competition. This can help you identify areas where you can improve forecasting within your startup. It can also help your startup develop strategies to retain customers and provide a better overall experience.
• Use trusted, reliable sources: Your financial projections should be influenced by reliable, credible sources.

Maximizing the Benefits of Financial Projections for Startup Success

Your startup’s financial projections can do more than just predict how successful your startup will be. These projections can also help with strategic planning and risk management and help entice new investors to buy into your startup’s vision.

Financial projections can help forecast business growth, determine if and when you’ll make a profit, and help your startup establish benchmarks for meeting any predetermined goals.

Finally, your financial projections can also serve as a key communication tool with your startup’s shareholders and investors.

Financial Projections Template

Financial projections can be complicated. It’s a lot of work to consider all the variables and metrics that you’ll need to form an accurate prediction. One way to ensure accuracy is to download Graphite’s financial projections template to help make the best, most accurate financial projection. You can customize it to meet the unique forecasting needs of your startup business. There are several other resources that you can use to make an accurate financial projection. At Graphite Financial, we offer financial models, calculators, checklists to follow at the end of the month and cash flow forecasting assistance.

Boost Your Startup with Graphite Financial

For more information and expert assistance with your financial projections, contact Graphite Financial today. At Graphite, we specialize in helping startups with financial projection services that are customized to their unique business needs. We’ll create tailored financial projections for your startup to help you plan accordingly, manage risk and entice new investors.

For more information and to schedule a consultation, contact us today. The benefits of working with an expert for your financial forecasting needs can help get your startup on the right path to growth and success.

Frequently Asked Questions

Why are financial projections important for startups?

Financial projections are important for any business, but especially for startups. Good financial projections help determine a startup’s overall health, growth and profitability. They can also help entice new investors.

How accurate are financial projections for startups?

While projections are just that – predictions – they should be calculated to be as accurate as possible. The more accurate they are, the more accurate a depiction that you’ll get regarding your startup.

How often should startups update their financial projections?

Financial projections often look many months or even several years into the future. For long-term projections, it’s usually advised to update them at least once a year. For shorter-term projections, update them more regularly.

What factors should startups consider when making assumptions for their financial projections?

There are various factors that startups need to keep in mind when making financial projections. Some of them include performing a thorough market analysis and doing competitor benchmarking. Another key component is performing a sensitivity analysis to navigate the various “what-ifs” that may occur over time. A sensitivity analysis is important for any business, but especially important for a startup.