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Business Discussions | 25 June, 2023

How to Develop an Accurate Financial Projection for Your Startup

Starting a new business is exciting and a bit scary too. With so many new businesses on the horizon, it’s more important than ever to have a solid business plan.

It’s one of the key elements for the success of any business. Creating a financial projection now helps you make appropriate plans and forecasts for the future of your startup.

If you’re unsure where to begin, we can help!

Here’s a guide to developing financial projections for your startup.

What Is a Financial Projection?

A financial projection involves analyzing financial data that can help you predict future expenses and revenue for a project. This process is essential for a startup.

It helps you plan to get your business up and running and make projections for the first few years. Projection analysis is helpful for sharing with investors if you’re trying to raise funds for your business.

For a startup, financial projections can help you:

  • Determine if your startup is financially feasible
  • Determine the financing you need to sustain the business
  • Create expense and revenue projections

If you’re seeking investors or outside funding, people investing in your startup will expect to see financial projections as part of your business plan.

If writing a business plan seems like a daunting task, consider enlisting the help of a professional business plan writing service

Project Spending and Sales

As you create a business plan, list all the key expenditures you’ll have to get your business off the ground and running. Include any recurring expenses such as rent, salaries, insurance, marketing, maintenance, raw materials, and others.

Include one-time expenses such as website design, equipment, machinery, and vehicles. Research current industry spending to get an accurate idea of the prices.

Develop a sales forecast to project anticipated monthly income. Analysis of your potential market can help you determine realistic numbers.

Create Financial Projections

Create a cash flow projection that shows your expenses and revenue for your first year of operation. For year two, make a quarterly or yearly financial projection.

You can use Excel spreadsheets or other accounting software tools to create projections. Don’t regard sales as immediate cash in the bank.

Your cash flow projections can help you prepare balance sheet projections and estimated annual income (profit and loss) statements.

Questions your financial projection should answer include:

  • What does the financial future of your startup look like?
  • How much cash do you need to run the business?
  • Where will the cash come from?
  • How do you plan to use it?

Perform Market Research

If you’re starting a business, you shouldn’t underestimate the value of market research. It helps you learn about the industry, understand your target audience, and identify your prospective customers.

For long-term success, it’s critical to understand the consumer trends of your target audience. Knowing your customers’ demographics helps you understand their needs and make decisions about how to successfully market your products or services.

Use Projections for Planning

Financial projections can help you see whether your business plan is realistic. This can help you see the shortfalls and what types of financing you will need.

It’s a good idea to include optimistic and pessimistic scenarios for each projection. This can help you foresee the financial impact of your projections.

Projections can help you analyze various strategies for growing your new business. What if you modified your pricing? What if you purchased more efficient equipment? What if you were able to speed up your billing process?

It’s important to consider options and what is and isn’t working for your business. Plugging in the numbers helps you see how a different decision could affect your finances.

Plan for Contingencies

Business plans, like life plans, don’t always follow a smooth path. An unexpected turn of events can throw off your projections. 

That’s why it’s always smart to plan for contingencies. Conversion rates, unexpected market conditions, and a fluctuating economy can all play a role in altering your financial projections.

Remember that perfect financial forecasting doesn’t exist. Be realistic with your target goals, and keep your projections based on data.

Many entrepreneurs like to keep a cash reserve for 90 days of operations, just in case. This can be a lifesaver for your business when things don’t go as planned.

Set a Timeframe for ROI

Setting a timeframe for when you can expect a return on your investment will help you set and track business goals. This can also be a persuading factor for investors who want a true picture of what they can expect.

Using a financial forecast of revenue and expenses helps you predict profitability, create marketing campaigns, determine prices, and set an opening date for your new business.

Monitor Your Progress

As your startup gets off the ground, compare your projections against the results you’re seeing. Check to see if you’re on target and if you need to make any changes.

Continuous monitoring helps you understand the cash flow cycle of your business. This helps you spot potential shortfalls early on when they’re easier to address.

Creating a Financial Projection for Your Startup

A financial projection paints a picture of the financial performance of your business now and in the future. If you’re trying to get your startup off the ground, it all begins with a thorough business plan.

If the idea of business plans and financial projections seems overwhelming to you, we offer financial forecasting consulting and much more.

A great business plan is the foundation for success. Let Bsbcon help you create a bespoke business plan that’s right for your business.

Contact us today to get started.