How To Create Financial Projections for a Startup Business

Writing Business Plans with Reasonable Projections

An entrepreneur must not get carried away with the excitement of his new business opportunity. Although this enthusiasm is extremely important (it will make success more likely and show funders his commitment to the business), if unchecked enthusiasm is shown in the financial projections of the business plan it can become a liability towards convincing funders. 

Step 1

Basing Projections in Research

Research into the size of the market, the needs of customers, the expected reactions of competitors, and future trends should all provide the background for your projections of growth. While much of the future cannot be foreseen, there is a great deal of information available about the here and now, and funders will expect to understand how you can project the kind of sales, customers, and market share you do within the current situation. If research isn't your strength, you can hire a professional business plan consultant to assist you with research as well as drafting and financial modeling.

Step 2

Explaining Calculations and Assumptions

To determine how many customers may choose your product, you can use rational conversion rates, which you should explain in your plan (perhaps within a chart format in the financial section or appendices). For example, a candy store focusing at first on foot traffic to stop into the store can start with the number of passers-by in the target demographic in an average period during business hours, and then estimate what percentage will stop in to take a look, what percentage of those people will buy, and what the average purchase size will be. Examining these rates for competitors (perhaps by direct observation if possible) is a good way to tie your own numbers to research. If your competitor is successful, has a better location, or has a known brand, make sure to start your own numbers much lower to account for these advantages at the outset.

Step 3

Avoid the Hockey Stick

The “hockey stick” refers to graphs of projections which show the company’s sales and profits remaining at low levels for the beginning months or years of operation and then suddenly shooting into the stratosphere with seemingly unlimited potential for growth. The shape resembles an upright hockey stick due to the almost ninety degree change in the graph’s line. There is no way to project growth of this kind, because there is no way to ensure that a product or service will take off in this way. Runaway success for a business as well as failure can result in situations where enthusiastic founders believe a hockey stick is possible. Showing this kind of growth will only make funders doubt your rationality and ability to focus on the here and now of management, due to your future vision of earth-shattering success.

If research isn't your strength, you can hire a professional business plan consultant to assist you with research as well as drafting and financial modeling.
 

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