To win over investors, obtain bank loans, or simply produce a long-term growth strategy for your business, these future revenue forecasts can help your business in a wide range of areas by getting your financial projections right.
It’s one of the most important elements of any business plan. In the rest of the discussion, we will try to understand the basic meaning, projections' importance in creating a pitch deck, and how to make one. Established businesses have a history of past performance which can be analyzed and used together with any newly developed financial plans and targets to produce its financial projections. However, startups, by their very nature, have no such history, and different methods need to be adopted
In the simplest terms,
Startup financial projections are a forecast of a business’s future income and outgoings.
The financial projection shows forecasts and predictions on the financial estimates and numbers that range from revenues and expenses pertaining to financial statements and takes external market factors and internal data into account.
Developing Financial Projections for Startups
In the absence of performance history, startup financial projections need to be based on
aspirations for the business,
targets,
goals
milestones
action plans in process
Importance Of Financial Projections
1. An essential part of a pitch deck: Financial projections are a key staple in every pitch deck, it show the potential of the business. They answer questions like:
How much can you make?
Is this even a business idea worth pursuing?
Is it profitable enough to be sustainable over the long run?
What will be the ROI on your time?
What types of investors or buyers might there be for this business?
How long will it take to breakeven?
How much do you need to sell to hit your goals ?
2. Quantify the future goals: If your document is written well, it will tell a story. The Financial Projections Business Plan or pitch deck does the same thing. This is where you will quantify everything you’ve explained throughout the rest of the document. It will tell your business’s story numerically. For example, the price you’ve decided to charge for your product combined with your expected sales volume will become your revenue. Your market research and marketing plan will have helped decide what these numbers will be.
3. Current business financial position: When you present the Financial Projections in the business plan or pitch deck, there are a number of things that your investor will be expecting. A business that already has been in operation, they will be looking for historic figures.
Although “actuals” are not projections, they will inform the projections.
Historic actuals are one of the many things that will help justify the financial projections. As your projections can’t simply be a guess.
need to be supported by other information like actual performance or committed future sales, will help to support the numbers you include.
Financial Projection: How to make a one?
Revenue will influence the rest of the profit and loss (P&L) assumptions. So if revenue estimates are materially misstated, the company risks overstaffing or understaffing and/or purchasing assets incorrectly. Revenue is also a key metric for potential investors. Estimates do not need to be precise, but they do need to be realistic and supported by a viable story.
Stage 1: Collect critical information
Four crucial inputs are used to calculate the revenue for a new business: revenue levers, revenue drivers, activity assumptions, and pricing.
Stage 2: Converting information into the revenue estimate
Now that you have the revenue inputs, it's as straightforward as inputting the data into a model that calculates total revenue.
In its simplest form,
the calculation is the revenue driver assumption multiplied by the price for each revenue lever.
If the driver is marketing spend, there will be an additional step to convert money spent to revenue earned.
Create revenue calculations for three to five years by year, quarter, or month.
A monthly calculation is helpful if your revenue driver is new clients, as clients will be attained throughout the year and will not provide a full year's revenue in year 1. The monthly or quarterly detail should be summarized by year to report the total annual impact.
Stage 3: Recheck final revenue outcome
Take a step back from the detail and reflect on the total revenue result.
check the competitors or companies in the same industry and compare net revenue.
If there are no companies to provide financial comparisons, perhaps check with the potential investment banker or capital provider. It may be able to provide a range of financials that are typical in a similar industry.
If forecasted revenue in year 2 is higher than the industry leader, then review the calculations for accuracy and activity assumptions for reasonableness .
Consider the growth year over year. The business should show steady growth over the years at a realistic rate. Then calculate the compound annual growth rate (CAGR) to easily identify growth over a period of time. CAGR is an easy comparison tool for investors to use.
In the end
If you are unable to get your financial projection right, these numbers will reflect as a guess made by you as the founder of your startup. It's important to understand your financial position before making any projection but as a founder, you may have roles to play, and lots of things get done as well.
At flyboat, we closely examine each and every financial details of our client always deliver the near-term projection of your finance. Our team expertise can be really beneficial if you have very little knowledge of finance and your requirement is a unique pitch deck.
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Related article :Financial Modeling for Startups: Ultimate Guide
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