Entrepreneurs who start a new business from scratch may not have a financial history to prove that their business idea works.  In forming a business plan, projected financial data must be incorporated in order to show investors how much money the business plans to make.  However, it is important that you tread carefully in this section, as overstating your financial projects or not justifying them accurately will not bode well for your funding. 

Accurate Assumptions

When you create a projected financial plan, you must make assumptions about your income and expenses.  Expenses may be easier to project since there may be more solid data, such as rent information, known cost of goods, etc.  However, in making your income projections, be sure to incorporate realistic numbers and financial goals that can be accomplished.  You can incorporate industry averages or the revenues of your competitors, as long as you justify how and why the numbers are related to your business. 

Consider how many units of your product you need to sell and at what price you need to sell them.  Will there be a seasonal spike in sales?  Do you expect to expand your marketing and thus your customer base?  Make sure you go over any factors that may affect your sales income. 

Keep in mind that when assuming income and expenses, it is always best to over-assume expenses and under-assume income projections.  This shows venture capitalists that you are cautious and realistic about operating a business. 

Fixed and Variable Expenses

As mentioned, expenses may be easier to project.  Try to obtain the most complete data about your expenses, such as amount of rent you will be paying, salaries, estimated electricity, material and production costs.  Always break your expenses into fixed and variable.  Fixed expenses are those that are projected to remain the same, such as monthly rent, insurance costs, and cost of certain materials.  Variable expenses are those that may vary from month to month, such as electricity and utilities, hourly salaries and overtime, fuel costs, etc.

Projecting Income, Cash Flow, and Balance Sheet Statements

Your income statement will be an estimate only.  Using your expense calculations, you can then consider a conservative sales figure.  If you have enough data and a good marketing plan, your income statements can be projected 2 to 3 years into the future.

Your cash flow statement must show how your business will be able to meet its expenses month to month.  It may include cash from sales, as well as financing activities.  Remember, cash is king; project this statement as accurately as you can to keep your business with enough cash to stay afloat.

Balance sheets will explain all the capital contributions the owners have invested, as well as the projected assets intended to purchase and liabilities, such as loans, that will need to be met.  The balance sheet is meant to be a snapshot picture of the owners’ equity status at any given time, usually at the end of quarter or year.

Projected financial statements are not easy to assume.  But with the right financial analyst and experience in the industry, these can be created using the best and most accurate estimated data available.

Tags: angel investor, angel investors, find venture capital, start up business financial projections, venture capital

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