GrasshopperAcademy

Estimating Financial Projections

Tips on how to estimate your financial projections for your new or existing business

Those who have knowledge, don't predict. Those who predict, don't have knowledge.

-Lao Tzu, 6th Century BC Chinese Poet

Estimating your financial projections is pretty important…

90% of all startups fail. According to experts at Startup Genome, it has a lot to do with “premature scaling”. Nathan Furr, an entrepreneurship professor at Brigham Young University defines it as:

Source: MarketWatch

“Spending money beyond the essentials on growing the business (e.g., hiring sales

personnel, expensive marketing, perfecting the product, leasing offices, etc.) before

nailing the product/market fit.”

SO HOW DO YOU CREATE FINANCIAL PROJECTIONS THAT WILL LEAD TO

SUCCESS?

By following this roadmap…

1. Choose Your Timeline

2. Organize What You Do Know

4. Make Safety Stops

3. Think Positively (but realistically) on What You Don’t Know

“I always look for projections on what the business will do in the first year, second year, third year and fourth year showing sales, expenses, plots the bottom line as the business progresses.”

“Those assumptions have to be reasonable.”

Choosing your timeline…

— Charles North, President and CEO, Dutchess County Regional Chamber of Commerce

6 Questions Every Business Plan Should Answer

When putting your financials together, take note of the expenses you do know:

1. Cost of Operations2. Employee Salaries

Organize what you do know…

Organize what you do know… Cost of Operations

Ongoing Expenses

• Rent• Utilities• Office Supplies

Startup Costs

• Cost of Goods• Raw Materials• New Equipment

& Furniture

Cost of Operations include:

“One of the main reasons most small businesses fail is that they simply run out of cash. Writing a business plan without basing your forecasts on reality often leads to an unfortunate, and often unnecessary, business failure.”

“Without the benefit of experience or actual historical financials, it's easy to overestimate a new company's revenue and underestimate costs.”

– Cynthia McCahon, Founder and CEO at Enloop, Startup Costs: How Much Cash You'll Need

Organize what you do know… Cost of Operations

FOR MORE ON BUDGETING AND PUTTING TOGETHER EXPENSES, REVIEW

BRAINSTORMING YOUR BUSINESS BUDGET

If you’re a startup, it’s difficult to decide whether or not you can pay employees and whether or not you

should pay yourself.

Organize what you do know… Employee Salaries

“I’m a big believer in goals, and if we set goals we have a tendency to achieve goals. If we don’t set goals we’ll just drift.”

– Anita Campbell, CEO, Small Business TrendsHow to Scale Your Business: From One to Many

“Remember that you’re going to have to force yourself to pay yourself some money at some point, even if you’re bootstrapping. What that will do is that’s going to give you the boost, the impetus, to actually earn more in your business.”

Organize what you do know… Employee Salaries

"I find that even when business owners have a plan written down, they are often a little aggressive in the 12- and 24-month period. They start out with the best-case scenario, and they overstate their success.”

– Rod Woodcock, President and Founder, The Alternative Board Fraser Valley

How to Scale Your Business: From One to Many

“One of the biggest challenges that an entrepreneur has is bringing it back and making it realistic."

Think positively – but realistically – on what you don’t know…

Teamwork Research

Channels Product

Think positively – but realistically – on what you don’t know…

When forecasting revenue, consider the following points:

Who you hire plays a big role in whether or not you’ll achieve your financial goals.

Think positively – but realistically – on what you don’t know: Teamwork

You can’t make educated financial estimates without doing your research. Points to research:

– Business Location– Competition– Seasonality– Overall State of the Economy– Availability of Materials You Need

Think positively – but realistically – on what you don’t know: Research

“If you have a physical location, investing in a great sign outside your location is going to be very meaningful. The product or service matters—if it’s online or offline that is ultimately going to determine where to spend your money.

If you have an offline business, advertise offline. If you have an online business it makes more sense to spend money on Google AdWords. Match up your offer with the channel where you’re ultimately doing business.”

– David Ciccarelli, CEO, Voices.com

How to Scale Your Business: From One to Many

Think positively – but realistically – on what you don’t know: Revenue Channels

“The math just doesn’t work. There is not enough demand for the product or service at a price that will produce a profit for the company. This, for example, would include a start-up trying to compete against Best Buy and its economies of scale.”

– Jay Goltz, The New York TimesTop 10 Reasons Small Businesses Fail

Think positively – but realistically – on what you don’t know: Product

– Edgar R. FiedlerThe Three Rs of Economic Forecasting-Irrational,

Irrelevant and Irreverent , June 1977

Make Safety Stops…

“If you have to forecast, forecast often."

Operating Profit Margin = Operating Income Net Sales

Make Safety Stops… Health Formulas

Gross Profit Margin = Revenue – Cost of Goods SoldRevenue

Gross profit margin is used to asses a company’s financial health. A poor margin indicates that a company will most likely not be able to pay operating expenses.

Operating margin determines how much a company makes on each sale. The better the operating margin, the healthier the company is.

Make Safety Stops… Update Important Documents

• Cash Flow Statement• Balance Sheet• Break-Even Analysis• Income Statements /

Profit & Loss Statement

"Poor accounting. You cannot be in control of a business if you don’t know what is going on. With bad numbers, or no numbers, a company is flying blind, and it happens all of the time.

Why?

For one thing, it is a common — and disastrous — misconception that an outside accounting firm hired primarily to do the taxes will keep watch over the business. In reality, that is the job of the chief financial officer, one of the many hats an entrepreneur has to wear until a real one is hired.“

Make Safety Stops…

– Jay Goltz, The New York TimesTop 10 Reasons Small Businesses Fail

How do you create financial projections that will lead to success?

By following this roadmap:

1. Choose your timeline2. Organize what you do know3. Think positively (but realistically) on what you don't4. Make safety stops

Review…

Choosing your timeline

– First month– First year– First five years

Organize what you do know

– Cost of Operations– Employee Salaries

Review…

Think positively but realistically on what you don’t

– Teamwork– Research– Channels– Product

Make safety stops

– Health Formulas– Update Important

Documents

Review…

The Pros & Cons of Profit Sharing

Next Steps…