How can business plans be better while your financial information is worse?
When creating a business plan, product/market definition, scalability, management experience and market need are much more difficult to correct than the financial aspect. However, a good business plan with poor financial projections (small in terms of revenue) will survive and grow.
The worst and most common mistake is putting absurd returns and revenues.
So, in honor of this epidemic of bad financials, here’s a five-step plan for better financial projections for startup:
Start with a sales forecast
Always do it bottoms-up, always. Never tops down. You start with per-unit pricing details, thus building a sales plan with concrete, specific assumptions. Examples:
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- If it’s a plan for a website, base your prediction on metrics that you and others can compare to other websites, such as unique visits, page views, and conversions.
- If it’s a product retailed through distributors, check the number of stores you can reach and the distributors needed to reach them, making projections of unit sales per store per month.
Never consider forecasting a market, assuming you will have a certain percentage of the whole. This doesn’t work, and no investor will give you credit.
Do it monthly for 12 months, then annually for the second and third years. Your sales forecast should include your direct costs (also called unit costs) and the cost of goods sold. You don’t pay the product cost if you don’t sell.
If you have no idea, don’t despair. Don’t say, “but it’s a new business. How could I know?”
Do this to obtain revenue and forecasts per unit. Then, get some comparisons from similar industries to show you what gross margin (sales minus sales costs) can be and average profitability.
And if you still have no idea:
- Keep your day job, or
- Find some partners who know the industry
Expense forecast
We call expenses rent, water, electricity, telephone, payroll, advertising, websites, traveling, etc. If you have no idea, you will need to find financial profiles.
This is also a spreadsheet, with the same months and years as the sales forecast horizontally across the top and the categories vertically down the left.
When you define your expenses, you have everything you need to make an estimated profit or loss analysis. The standard format starts with sales and subtracts direct costs to calculate gross margin. Then you subtract operating expenses to calculate earnings before interest and taxes (called EBIT, the E being for “earnings.”).
Something is wrong if your projections have profits greater than 10% of the sales percentage. This is because you underestimate your costs or expenses or have an exceptionally strong business (many customers). It is usually almost always the first.
Tip: No matter what business you are in, if your gross profit is more than 15%, then I suggest you subtract 15% from your forecasted profit and add that amount to your expenses (as in marketing operating expenses). Having very high profits usually means not projecting all of your expenses. As well as marketing is the area where the majority of individuals underestimate expenditures. Plus, in a real business, well-timed marketing expenses are better than profits because they grow your business, which becomes more valuable in the long run.
For more information you should visit business plan consultant.
Startup costs
Make a list of expenses you will have to pay before starting. Common startup expenses include legal expenses, website development, logos, signage, location, computers, etc. Then make a list of assets you will need. These are vehicles, equipment, furniture, inventory (initial inventory) and working capital (bank). Money in the bank is the toughest. If you go back and examine your running gains and losses, this will give you an idea. You have to have money to support your initial losses. Read the next step and then come back to it again and again.
Understand cash flow
Unfortunately, showing profit does not mean having money in the bank. The biggest problems are business-to-business sales, which typically mean you get paid a month later, and product companies because they typically have to buy inputs before selling.
Your cash flow is critical and intuitive if you’re in a business that pays two months in advance for what you sell today and will be paid for three months starting today. You will need money in the bank to handle running expenses while you wait to sell and get paid for it.
On the other hand, if you’re selling to people who pay immediately by cash, check, or credit card, especially if you’re not putting money into buying and maintaining products, your cash flow is more predictable.
If you have no idea and make business-to-business sales and maintaining inventory, look into templates, software, books, tutorials, or someone who can help you.
Don’t take cash flow as earnings, even if you expect to be profitable. Ironically, some of the worst cash flow problems come with high growth rates.
Review and revise regularly
Yes, you must make a forecast for 12 months plus two years to come. But don’t expect your predictions to be accurate. They never are. You make financial forecasts to set sales and spending expectations and relationships, but that’s the beginning.
Review the results every month. Compare actual results to what you had planned. Correct.
Final Thought:
By definition, all financial forecasts are false. We are human, and we do not accurately predict the future. So, don’t expect accuracy. Instead, go for plausibility and follow the regular plan versus actual analysis, review, and revisions. This is called MANAGEMENT.
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