A Successful Business Financial Projection Can Be The Key To Securing Financing
A successful business financial projection can be the key to securing financing. The act of creating a financial projection document provides concrete evidence of a project's potential, instills confidence with potential lenders and investors, and helps to establish the credibility of the project's team members. A poorly prepared projection can lead investors, who may be skeptical about certain aspects of your project due to lack of information on its profitability or impact on society, questioning your overall plan for success.
Also called sell sheets or feasibility studies, business finance projections serve as a means for you to present specific data about how you plan on profiting from your idea and how it will benefit others in order to secure funding or raise capital investment. Investors and lenders want to see that your project has a sound business plan backed with data, forecasts and projections.
Business projections should demonstrate that the business opportunity has a high probability of being successful and that it is attractive to investors. A financial projection should be comprehensive, including the entire project cycle from start-up to exit so that investors can get some idea of the company's future growth potential.
Because financial projections are so crucial in securing financing for any business, it is imperative that you prepare your projection before seeking funding or capital investment. It might also help to consult a professional who has experience in preparing projections for businesses.
Based on the type of business you plan to start, finance a number of critical financial measures and evaluate them to determine your business's viability:
Revenues: The total amount you expect to collect from customers. This represents new customers, renewals, add-on segments (such as subscriptions), and other elements that can grow your company. For example, if your revenues are $1 million, you would expect $1 million in revenue per year. If you plan to increase your revenue to $500,000 after one year, you would write that down as an annual growth of 100%.
How will the business make money? What are your main sources of revenue, and how are these segments distributed? For example, if your business is a consulting firm and currently has $1 million in revenues from four clients, you would expect that 60% of your revenues come from Client 1. You might also have 20% from Client 2 and 10% each from Clients 3 and 4. You would also expect to have a main income stream, such as continuing education, which would generate the other 40%.
Costs: "Costs" include all expenses that you will or do incur to run your business. They might include general and administrative expenses (G&A), payroll and benefits, depreciation, rent and utilities, advertising and marketing costs. Your company's profit margin is the percentage you can set aside to cover these costs. For example, if your cost of goods sold (COGS) is $1 million and your profit margin is 20%, your profit is $200,000. If your profit margin is 30%, your profit would be $300,000. Therefore, the higher the profit margin, the easier it is to cover expenses and make a profit.
Income statements tell you if your business has been profitable in the past and whether it will be profitable in the future. Most businesses create income statements for a fiscal year that matches their calendar year, such as January through December or October through September. For example, if your first fiscal year begins January 1, 2017 and ends December 31, 2017 ("FY 2017"), you might use December 31 of each of those years to measure how well your business performed over time.
Balance sheet tells you how much money you have in your bank account, the value of all of your assets (intangible or otherwise), and the liabilities that you owe. For example, if your company's assets are valued at $1 million and its liabilities are $1 million, you would have a net worth of $0.
The profitability of a business must be carefully evaluated. Many factors contribute to this evaluation, including:
• The ability to cover costs with revenues: For example, if revenues are $500,000 for a given year but baseline operating costs are only $350,000, there will be little profit. In this case, you might need to bring in more business and grow sales.
• The ability to cover the costs of outside investments: Another important measure that must be closely monitored is the ability of your business to pay back loans or credit lines if your company requires an outside source of financing. A significant decrease in revenues may force your business to default on its debt obligations. This might be evident by an increase in delinquency rates (120-day payoff) and a decrease in collection percentages (30-day payoff). The key is to evaluate the cumulative impact of risk factors on financial performance so that you can make mitigating adjustments before they become liabilities for your business.
Certain types of businesses require more detailed planning than others. You should take the time to prepare your projections to avoid producing a forecast that is not as accurate as possible. There are vast differences in the required financial information for different kinds of businesses. For example, certain kinds of businesses require detailed data on their customers, so you will need to develop a plan for creating new customer relationships and for developing a marketing program.
Another type of business requires forecasts that more closely match their projected cash flows (revenues and expenses) over the course of several years. Other kinds of businesses, such as retail stores and restaurants, are more straightforward in their reporting requirements since their income statements, balance sheets and cash flow statements provide the necessary information.
Business owners should follow these guidelines when designing financial projections:
• Develop a minimum of five years of financial projections: It is recommended that business owners develop a series of 10-year projections. This will help you identify risks within the first five years, so you can mitigate them over time. It may also be useful to evaluate your capital expenditure requirements for your project and track them over time to determine whether they are appropriate for your business needs.
Conclusion:
Business owners often fail to perform sufficient financial analysis before they start their businesses. Financial forecasting helps you better understand the impact of your business, so you can make more informed decisions. If you need help with this process, talk with a business planning consultant to guide you through the process and provide tips on how to avoid mistakes that may be detrimental to your end goals. If you would like help starting a business or developing your financial projections for a new project, contact a business plan consultant today.
About The Author: Mike Resnick is an international editor in chief and content manager of Small Business Ideas Blog.