The Secret to Creating Excellent Financial Projections
As a professional business plan writer Vancouver and Toronto based, I often receive questions on what makes a solid business plan from clients and individuals who are launching their start-up or growing their existing business.
A common question is “How do I create my financial projections?”
There are many things that go into your financial projections, and are often the most difficult part of the plan for most business owners. Here are 3 keys to creating solid financial projections:
1) Based on Solid Benchmarks
Ideally, your financial projections should be based on solid logic (versus “pie in the sky” numbers) where you clearly outline the assumptions you made to arrive at your numbers. Good benchmark sources include:
Past Sales – You can base your pro forma projections based on your company’s past sales history (if available). E.g. Assumed continued X% annual sales growth.
Industry Benchmarks - in Canada our government’s websites offer data for revenue/expense/profit averages for other small-to-medium sized businesses (SME’s) in your industry both nationally and by province.
Draw from Market Research - A yoga business plan Toronto can use market research for average foot traffic the average yoga/Pilates studio receives and calculate based on the GTA population and your average pricing per student.
2) Account for a Gradual Build, Show Seasonal Peaks/Dips
If the average established business in your industry generates $300,000 annually, you may base your financials on the assumption that you reach this level by the end of Year 3. If your business peaks in the summer months, your financials should reflect this. Make your projections realistic and don’t be lazy.
3. Account for Accurate Cash Flow
Remember that sales and cash in are usually not the same thing. E.g. If you sell B2B you may need to account for e.g 30% accounts receivable sales that you will not receive until the following month or later. Chart out your next 3 years and make sure that your revenue projections maintain healthy cash flow.
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