Are you ready to dive into your new business idea? Most are. Most thrive from the momentum of creating, failing, learning, and repeat. But there is another side to having a business that puts your efforts and potential success into perspective: A financial forecast. There are a variety of financial planning careers that are introduced to develop the skill of financial forecasts. With it, you’ll have a realistic idea of costs and be able to provide expectations to your investors. Without it, you will be blissfully and dangerously unaware of how various scenarios might affect the success of your business.
What Is a Financial Forecast?
It is a document that shows your projections related to costs and expected revenue. Your financial forecast can extend as far into the future as you would like, though most don’t project more than five years out from today. Because external and internal factors frequently change expected outcomes, many successful businesses choose to revisit their financial forecasts as regularly as every six months. You can use this forecast to project what would happen under different scenarios. For instance, you could test to see how adding staff, increasing your time to launch, or reducing costs might affect your business.
Why Should a Startup Forecast Their Financials?
When you are a startup, it can be tempting to avoid the task of creating financial forecasts simply because there are so many unknowns. However, financial models can help you guess less about what is the next best decision to make. By having projections produced, your team can see the big picture in writing. You will all be working from the same set of data. You and your team can see how different scenarios will likely be profitable or not.
Additionally, it will be required by potential investors to validate how much money you need to get started, and how much return they can expect on their investment.
When Should a Startup Create Their First Financial Forecast?
Create your first financial projection early. Ideally, you have tested the feasibility of your business concept and run your first financial forecast before you write your first business plan. All of these steps should happen before you incorporate the business and build prototype products. You’ll want all of these pieces completed before you approach your first potential investor.
How Is a Financial Forecast Created?
Depending on your resources, you can do it yourself, or you can hire a professional. Hiring a professional to help you will save you time and frustration, allow you to have an investor-worthy projection, and give you insight into scenarios beyond your experience. A consultant has likely worked with hundreds of other businesses and has first-hand knowledge of things to do and not do when you are first getting started to help increase your odds of success.
But if you can’t hire someone to help you create your financial forecast, there are many resources online that guide you through the process. You can Google “financial model template” to find downloadable sheets that you can use in Excel and Google Sheets. There are also cloud services that present more robust reporting, such as www.startupfinancialmodel.com.
What Will You Use Your Financial Projections For?
Once you’ve created your initial financial projections, you can use them for many things, such as:
- Risk and profit assessment
- Projecting the values of assumptions that are made based on existing market conditions
- Calculating the margins that are needed to avoid adverse situations and various forms of sensitivity analysis.
- Estimate capital investment requirements, plan capital allocation, and measure financial performance.
Once you’ve created your first financial projections, you will have clarity and be able to focus on what’s most likely to help your business succeed. Alternatively, you might realize you need to adjust your plans immediately before you get started producing a single prototype.
Next Steps for Your Startup
In addition to a financial forecast, there are other pieces you’ll want to have in place before you approach investors. Here are additional resources to help you get your startup’s foundation in place:
- First, How Will Your Business Make Money?
- How to Test the Feasibility of Your Business Concept
- Why Your Business Plan is Essential to Your Success
Your business and your ideas are worth protecting. While nothing in business is guaranteed, investing your time in creating and regularly adjusting your financial forecast can be the thing that guides your business’ strategy, team, and efforts, keeping them on track through setbacks and windfalls.