New startups don’t have a history of operations or sales, so they often have trouble knowing how to create financial projections for their business plan or pitch deck. This article explains some options for creating realistic financial forecasting projections as a startup when you don’t have the typical data.
Why You Need Models for Financials
Having realistic financial projections serve several purposes for startups. First, investors will want to review financial projections to get a feel for the viability of your business. When you seek funding, presenting a thoroughly- researched financial projection as part of your business plan or pitch deck shows a level of professionalism and readiness and can also help to reduce concerns with financial viability associated with a startup. Ideally, the financial models will show a path to profitability, or at least substantial revenue growth, in a short period of time.
Second, if you’re seeking a tech partner, presenting a view of your financial projections may help to bring the right person on board. The more you can reduce the sense of risk, the better.
Financial models also help startups internally since they provide a goalpost that can be used for decision-making. When considering how many resources to pour into a new project or product, a sales forecast can provide guidance. Or, if you’re seeking additional funding, financial projections can help you to determine if it makes sense to pursue funding or stay the course, increasing revenue organically.
How to Create Financial Projections for Startups
It can be challenging to create financial projections when you have no history of sales. But you can get a fairly accurate picture using the following steps.
1. Analyze Current Financial Situation
Start with your current financial position to set the foundation for your financial projections. Analyze your fixed costs, like rent and utilities, as well as your variable expenses, like the cost of goods sold and labor. Include any loans you have and any likely future expenses such as increases in staffing. Reviewing your current expenses helps you to predict your future financial status.
2. Check out Your Competition
Reviewing your competitors’ financial history can provide some insight into a realistic path and also reveal opportunities you can leverage. If your competitors are publicly traded, you can review their financial statements to gather this information. If they are privately owned, look at the market perception of their companies, including reviews and articles. Examine their recent actions as well as any competitive intelligence you can gather on them to gain insight about their activities and opportunities.
3. Survey Prospects and Customers
Prospects and current customers can provide great insight into the market perception of your startup. They can also provide guidance to help you determine if you’re on the right path or if you’re missing potential opportunities. If you have no current product offerings, focus on prospects to glean data about market opportunity. These insights will help inform your sales forecast and your overall business planning.
4. Investigate Weaknesses
Determine if there are any improvements you can make, including reducing or eliminating unnecessary expenses or correcting a process inefficiency. While these improvements may not relate immediately to your financial projections, any weaknesses you find will eventually result in a negative financial impact.
5. Evaluate Secondary Research
Leveraging secondary research, including economic cycles, industry trends, consumer demand, and market conditions, can also help to make your financial models more realistic. Many external factors will impact your business and should be taken into account when you work up financial projections. Though you may not fully know the impacts, thinking through them demonstrates a level of sophistication with your projections that investors and partners will appreciate.
6. Run Financial Models
Once you’ve collected all of this data, it’s time to start running some numbers. Consider aggressive and conservative scenarios as well as ranges in between. Factor in variables like growth, market impacts, and customer adoption. Consider cost and expense increases with the growth you project and review how the results change the model projections. Though you’ll decide on single model to move forward with, it’s a good idea to keep the best and worst-case scenarios.
Lacking historical data can make developing financial forecasting projections as a startup more challenging. But projections are a required component of any pitch deck or business plan. Taking advantage of all the available information described above will provide you with a realistic starting point.
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