As a startup business owner, along with the basics of accounting, it is essential to understand the different financial forecasting models and how to implement the model that is right for your startup business to be successful. In order to grow and scale you will need capital.
Financial projections for startups are extremely necessary in order to obtain funding for. They help convince investors that your business will be profitable to invest in and will offer them returns on their investment. Apart from this, as business owners you can benefit as accurate forecasting allows you to budget for their new business and benchmark milestones.
Financial forecasting or financial projections for a business plan as it is sometimes referred to is basically a metric of future profits and expenses taken from historical company data. It is important for pitching to investors for a cash investment on your future sales and revenue, creating budgets and maintaining cash flow, approaching a financial institution for investment, and informing stakeholders of the future of the company based on the projections.
The big question that most entrepreneurs ask is – How to create financial projections for startups? There are different methods for forecasting that companies can utilize in order to create financial projections for your startup and each is unique in its approach.
Quantitative Forecasting: This is also known as Statistical Forecasting and uses hard data like statistics, facts and historical numbers to form opinions about the future. For example, Quantitative forecasting makes use of the previous year sales to make a prediction of this year’s sales, without taking into account external predictions such as market opinions.
Qualitative Forecasting: A bit more complex than quantitative forecasting, this method doesn’t just use hard data to form a prediction but researchers might also include soft data such as opinions and estimates and more tangible factors than just numbers.
Sales Forecast: A sales forecast can project your company’s sales for at least three fiscal years including monthly sales for the first year, then quarterly for the coming two years. This type of forecast provides answers to a number of questions such as:
· How many customers can you expect to sell to?
· How many units of the goods will be sold?
· What is the cost of the goods that are sold?
· How will the products be priced?
Sales projections are capable of forecasting revenue of a startup. When the cost of goods sold is accounted for, gross profit can be estimated for each of those years.
Expense Forecast: Expenses that businesses incur from performing their normal business operations are known as operating expenses. These include fixed costs such as rent, payroll, etc., and variable expenses such as marketing. While you do not need an extremely detailed breakdown, it is advisable to put in general figures as it allows you to:
· Plan ahead for upcoming short-term and long-term expenses based on previous years quarters
· Prepare for unprecedented expenses that could possibly occur
· Check and keep track of which expenses occur periodically
· Plan for increased expenses based on projected output and operations
Top-down Forecast: This method involves taking the market outlook as a whole to project future estimates of the company. This will allow you to begin with a big picture and slowly make your way down to create a view of the company based on various components. This approach is perfect for new companies with very little historical data to refer to. For example if you were in the business of selling car parts, you would:
1. Examine closely the market for car sales as a whole
2. Narrow it down to new and used or pre-owned cars
3. Further narrow it down to make and model until you get to the specific ones you produce
Bottom-up Forecast: As the name suggests, this method works in the exact opposite fashion to Top-down forecasts. Instead of starting off with the big picture you reverse the order. For example:
1. Begin with the product or service that you provide
2. Work your way up to view the market of your company’s product or service as a whole
Bottom-up forecast is a far more involved process than top down since it uses historical data of the company to make assumptions on achieving certain specific objectives for the upcoming term. Organizing the historical data of the company can be added work but it is well worth the time and effort put in to do so.
Despite the method you may choose to adopt, financial forecasting or projections are not without its demerits or limitations and its benefits. One should bear this in mind when creating a business projections template for your startup and to do so it is advisable to get expert help in case you are doubtful about where to begin. CoffeMug.ai uses a sophisticated AI powered system that connects you with angel investors and a range of other funding sources, including VCs. In addition, our qualified team members will assist you in analyzing the essential papers, such as the pitch deck, business plan, and financial forecast, and will provide their expert advice for a more effective presentation.
Q. What are business financial projections?
A. Financial projections forecast your company’s future income and expenses using existing or estimated financial data. They frequently contain many scenarios so you can see how adjustments to one part of your finances (for example, increased sales or reduced operational expenses) may affect your profitability.
Q. How are financial projections important to businesses?
A. Financial projections allow you to see when you could require finance and when it’s optimal to invest in capital. They assist you in keeping track of cash flow, changing pricing, and altering production schedules.
Q. What differentiates forecasts from projections?
A. A forecast is based on assumptions that represent the conditions that the company expects to exist and the course of action that is likely to be taken. A projection is created to show one or more hypothetical courses of action that the company could take.
Q. How can you tell if projections are authentic?
A. A large number of forecast/observation samples may be pooled over time to get accurate and reliable verification statistics.