Accurate business performance planning requires detailed startup financial projections. They can be created at the outset of a new business and updated throughout the company’s life. Constantly comparing actual performance against your forecasts can help you stay on track and determine if ongoing profitability requires change.
Meaningful startup financial projections need a solid foundation based on actual numbers and logical assumptions about your business. Yet, it’s important to remember that these projections are estimates — they aren’t guaranteed outcomes.
Tips for Mastering Startup Financial Projections
Startup financial projects are invaluable tools for steering new and mature businesses.
By understanding how financial projections work, you can avoid some of the most common financial projection mistakes entrepreneurs make.
Keep Accurate Data
Accurate financial projections require a basis anchored in actual data. Simple, logical systems are the core tenets of an economic system that helps your team accurately and efficiently plan for the future.
For projections, the starting point is often a revenue figure extrapolated from historical data. Your expected revenue is then used to plan your marketing and investment. Without accurate data, your planning might be missing the link.
Gather Your Financial Statements
Accurate financial projections should tie into your existing financial statements.
The income statement is a financial statement that shows a company’s performance in terms of revenue and expenses over time.
The income statement contains key categories of costs – i.e. variable or fixed costs and overheads – and summarizes the company’s profitability. This report is essential for making informed predictions about future performance and managing your budget efficiently.
Cash Flow Statement
It’s important to understand how cash moves through your business, from various sources to different types of expenditures and investments. In short, it tells you how much money is coming in and going out of the business.
You can use that information to understand how well your business is doing and whether you will manage to make it through the next quarter without running out of money.
Understand the various levers that affect your cash flow—for example, if a large customer pays late. Factors like that can affect your projected cash flow for the next period.
The balance sheet is a snapshot of your financial position at a given time. It shows your assets, liabilities, and owner equity.
Knowing your balance sheet is crucial because it helps you understand your business’s financial health and the balance between assets, cash, and debt. It can also help you determine whether you have enough cash flow to cover operating costs and how much money you’re making or losing over time.
Learn the Market
Accurate startup financial projections require insight into the market as a whole. Study your industry and the target markets you’re trying to reach. Learn as much as you can about your current and desired customers. As a result, you’ll gain valuable insight into what products and services they’re looking for and how you can ensure your business can meet their needs.
The more information you have, the better prepared you’ll be when making decisions about your business. Be careful to avoid analysis paralysis, and use the information you gain to make decisions, and take action.
Talk to Your Team
Different perspectives are essential to creating robust financial projections. Often your team is closest to your customers and can provide the most valuable insights about your operations.
Have a conversation with them about what they think will happen in the next few months. Ask them about their perspectives on the market and their thoughts on customer satisfaction, then get their views on how things will change.
These conversations will help you ensure everyone is on the same page and create a more accurate picture of the future of your business.
Think About Sales and Expenses
Both play a significant role in your financial projections. Sales will help you determine how much money you have coming in, while expenses will give you an idea of what costs to run your business.
Assess the link between the two. Higher-than-expected sales may increase profits, yet out-of-control expenses will eat your margins.
Setting goals for your startup is a crucial step toward reaching them. It’s worth considering targets for each major category – including total sales and expenses.
Startup financial projections will help you compare where you are with where you want to go, letting you see if you’re on track or need adjustments. Use the information from your projections to set goals, assess potential challenge areas, and make adjustments.
Reach Out to an Experienced Accountant
Working with a professional accountant is one of the best things you can do for your startup.
An expert can help you with more than basic taxes and accounting. They can help you implement robust financial processes, including reporting and financial projections.
These tools create a more comprehensive outlook of company performance and give you an overview of where it’s headed. If you’re curious about how an experienced accountant can help your business, contact our startup experts at Founders CPA!