How to create financial projections for your startup | Start your business

Today, we're learning how to create financial projections.

Forget memory lane, let's take a walk into the wild mystical world of the future.

That's right, we're going to see the future...

of your business.

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A strong financial projection tells you the essentials of where your business is headed.

Like how much money you'll make and when you'll make it.

Financial projections are key, not just in deciding whether you can afford to go see your favorite band's 2031 reunion tour, but also for securing lenders.

More than that, financial projections are an important part of any healthy business.

They inform you about sales trends, incoming risks, opportunities, and really fundamental stuff like will I be able to pay my employees and cover my bills?

There are two types of forecasts that make a complete financial projection.

One, a sales forecast.

How many units of your product or service are you going to sell over the next three years?

Also include how many customers you expect to have and how much profit you'll make.

Two, an expense budget.

Make a prediction about any and all expenses over this three-year span.

There are going to be fixed costs like paying rent on your office, but also variable costs like marketing campaigns.

Don't go crazy here.

Just make an educated guess.

Okay, that's the pudding.

Now it's time for the proof.

We need to include financial statements that help give your sales forecast and your expense budget some credibility.

These statements contain invaluable information on how your business is actually doing, otherwise known as your actuals.

Like flipping over tarot cards, each statement helps build the case for your financial future.

Behind card number one, an income statement.

She represents growth, desire, setbacks, and by that, I mean the statement shows your profits and losses to date.

Income statements show four elements.

Revenues, expenses, gains, and losses.

Card number two is a cashflow statement.

Concern with the divine fluidity of being, and also what you do with your money, cashflow is all about money going into your business, cash in hand, and money leaving your business, cash outlay for bills.

Cashflow matters because it shows the most realistic view of how your business is doing.

For example, say you've made a ton of sales this month.

Yay!

But all of your clients haven't gotten around to paying their invoices, and unpaid invoices mean you won't have the cold, hard cash you need to pay your bills.

Make sure your cash flow statements cover three things.

One operating activities.

These are the daily expenses of running a business.

Two investing activities.

Any investment in your long-term future.

Three financing activities.

Shows any investments from financers or any payment to shareholders.

The third card is your balance sheet.

It's about balance of assets and liability.

Make sure your balance sheet shows off three things.

One assets.

This is any resource of economic value that you own.

This could be cash, inventory, or property.

Two liability.

These are generally debts such as payables and loans.

Anything that will cost you money.

Three owner's equity.

After all liabilities are paid with assets, any leftover amount is considered owner's equity.

Balance sheets are split between assets on one side and liabilities and owner's equity on the other side.

The total dollar amount of assets must equal the total dollar of liabilities plus equity.

So the formula for an annual balance sheet looks like this: assets equal liabilities plus owner's equity.

So now that you have your three financial statements— cashflow statement, income statement, and your balance sheet— put it all together and you have an informed sales forecast and expense budget.

To be clear, the first time around won't be as easy as making instant coffee, but with a little practice and you should practice and revise throughout the year, it's totally doable.

Last thing I'll say, when creating your projection, be optimistic but realistic.

Look around your industry and use your existing knowledge and your actuals to make sure your projections paint a good picture of your business without overstepping.

Looks like you're well on your way to creating your first financial projection.

Give yourself a big high five, Nostradamus.

You've earned it.