how to do financial projections for a startup

A sales capacity model (in conjunction with the headcount plan) will help you to estimate the performance of your sales team and the revenue they expect to generate. If you’re a SaaS startup, it’s vital to ensure your financial projections are realistic, achievable, and based on accurate data. In this article, we run through a comprehensive guide on how to build financial projections and why accounting services for startups they’re so important to a startup. Realistic projections help you build a financial plan for your startup business. For example, they help determine the investment needed to deliver on revenue growth targets and set an appropriate expense budget. This article will provide you with free templates and tips to help you create startup financial projections that will attract investors in 2022.

Top-down vs. bottom-up forecasting methods

But isolating our assumptions as the only variables that drive our financial projections, allows us to focus the conversation on just a few key areas. Therefore our financial projections give us an insight as to how certain parts of the business (like our sales forecast) will start driving other aspects of the business (like our staffing plan). Want to make your startup financial modeling a bit more predictable, reliable, and appealing? Our cost-effective solutions scale with your business, meaning you only pay for what you need.

Estimate costs and expenses

Lending institutions and investors have seen too many entrepreneurs who are overly optimistic about their own businesses. Include monthly sales for the first year, then quarterly for the following two years. And when the cost of goods sold is also taken into account, gross profit can be estimated for each of those years. To establish credibility with potential investors and lenders, pro forma statements should ideally show projections three years in advance. If your projections are falling behind, then you’ll need to make some changes by raising prices, cutting costs, or rethinking your business model. Conversely, if your immediate revenue exceeds your pro forma income, then you may need to hire employees, expand your facility, or seek financing sooner than you expected.

how to do financial projections for a startup

Forecast Cash Flow Statement, Income Statement, and Balance Sheet

how to do financial projections for a startup

The break-even point (BEP) is the number at which a business has the same expenses as its revenue. In other words, it occurs when your operations generate enough revenue to cover all of your business’s costs and expenses. The BEP will differ depending on the type of business, market conditions, and other factors. Here's how to compile your financial projections and fit the results into the three above statements.

In addition, we will also include future hires based on our business model projection and resources needed to reach our revenue and profitability targets. The balance sheet is important because it shows the startup’s financial stability and its ability to pay its debts. Another important report is the Balance Sheet, which provides an overview of the startup’s assets (i.e. accounts receivable, liabilities (i.e. accounts payable, and equity at a specific point in time. This report is important because it shows the startup’s ability to generate profits and covers all aspects of the startup’s expenses.

Revenue metrics

If you have a loss, there is obviously no income to be taxed by the tax authorities. This loss can be leveraged in future tax reporting periods to offset taxable income (you can ‘carry it forward’), which reduce the amount of tax you will pay in that specific tax reporting period. A sales forecast attempts to predict what your monthly sales will be for up to 18 months after launching your business.

Three outcomes of a startup’s financial model

There are different ways of raising money for your startup and these can be categorized into two main categories. Below you can find an example of a tax carryforward calculation based on a corporate income tax rate of 23%. If the funds required for production are not available for the startup then the order might be cancelled leaving both parties unsatisfied. If this happens consistently, the startup could go bankrupt even though orders are coming in. Well, when you focus only on costs and revenues and not on the timing of receiving and sending payments you could end up in serious trouble.

how to do financial projections for a startup

how to do financial projections for a startup

This is based on the sales forecast, your balance sheet and other assumptions you’ve used to create your expenses projection. Costs of sales (COS) are the costs directly related to a product or service, and they represent the cost of producing revenue. Product costs will include raw materials, labor, production equipment depreciation, etc. Service industry companies’ COS include salaries of professional service providers; software-as-a-service companies’ COS include hosting fees.

Your balance sheet will show your business’s net worth at a given time. The income statement is where you will do the bulk of your forecasting. We’ll break down a financial projection and how to utilize it to give your business the best start possible.

  • It’s about building resilience and ensuring the startup’s longevity amidst uncertainties.
  • A thorough breakdown of costs ensures you’re not caught off guard by unexpected expenditures.
  • It helps them understand how much money they will need and when required.
  • Sure, there are a lot of things that can go wrong, but you believe in your company, and you want to focus on best case scenarios.

For business plan purposes, it’s important that you follow the best practices of financial projection closely. This will ensure you get accurate insight, which is vital for existing businesses and new business startups alike. “If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months,” wrote Inc. The cash flow statement will include projected cash flows from operating, investing and financing your business activities. Now, once you’ve got your three statement model, the incomes statement, balance sheet, cash flow statement, you’ll need to layer in actuals. You’re going to want to show what you budgeted and what you’re actually doing, and do so in a way that explains how the company’s projections will grow over time.

  • Use the bottom up method for your short term sales forecast (1-2 years ahead) and the top down method for the longer term (3-5 years ahead).
  • By showing potential investors that you clearly understand your startup’s financial situation, you can demonstrate that you are a responsible and capable entrepreneur.
  • Conversely, if your immediate revenue exceeds your pro forma income, then you may need to hire employees, expand your facility, or seek financing sooner than you expected.
  • We’re going to zip through each of the tabs in the income statement to explain what they mean and how they relate to each other.

Additionally, scenario planning, or creating multiple projections with different assumptions, can be hugely beneficial in this planning process. Scenario planning allows you to see various potential outcomes, giving you an expected range of results or an idea of how different strategies might impact the business. The more of these scenarios you model, the better your understanding will be of the best case and worst case scenarios for the company. The more accurate these financial projections are, the more useful they can be in driving growth of the company.