Financial Projections

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The most important business decisions you make are regarding resource allocation.

Consider the work you have put into the business plan development so far. You have done a market analysis, you have spent time doing your marketing and sales plan, and established clear objectives. Now you need to establish where to allocate your resources.

Historical financial information

Your business plan, which is for yourself, lenders or strategic investors, will need to include financial information about your business. This information will be historical financials as well as forward looking financial projections.

If you are starting a new business, you will be developing a forward looking pro-forma of your business model and you will need to find other industry data to base your primary assumptions. For existing businesses, you will need to be prepared to share key financial historical data. Most lenders or strategic investors will be looking for the last three to five  years of information. You will most likely want to include your income statements, balance sheet and cash flow statements.

Prospective financial information

You will want to put together a five year plan of your prospective financial statements that include income statement, balance sheet and statement of cash flow.  Also, include what you believe you will need for capital expenditures.

Any prospective financial pro-forma you produce will have a number of assumptions built in. You need to clearly show any and all assumptions. Potential lenders or investors will want to see your assumptions and make sure they are not pie-in-the-sky. 

For example, here are some areas where you might put in some assumptions.

  • Wage growth per year - to retain good employees you will need to pay market wages, and provide growth opportunities to retain quality employees.
  • Sales growth - Be certain to show how you are obtaining your sales growth. If you are growing your sales but not showing matching changes in costs such as the number of employees, or additional potential capital expenditures on new equipment or tools, your assumptions will be flawed.
  • Product and services categories - If you are adding a new or different product or service category make sure you are showing both the sales and the costs associated with those new offerings.

Make sure you point out what your assumptions are and how you arrived at those assumptions. For your credibility and future financial health, you need to make sure that your future projections take into account the other elements of the business. These kinds of gaps are something you should definitely make sure don't exist. You do not want a potential lender or investor to uncover those kind of mistakes.

Whenever possible use graphs and charts that will demonstrate trend lines for your important business financials. Again, make sure that they are following honest assumptions that will show actual trend lines in the business such as seasonality, weather, and other data you gathered in your market analysis.