Probably one of the most uncomfortable things a first time entrepreneur has to attempt is their first set of financial projections. Frequently I hear the following:
“Well…I don’t know how many people will buy from me!”
“I just took a WAG (wild ass guess).”
“This is so stupid…why am I doing this!”
“How the hell am I suppose to know?!?”
To all of them my answer is “YOU are the expert in the business you are starting and You have to set some expectations for the banks and/or investors.”
As you may have heard, “Financial projections are part art and part science”.
So what does that mean?
It means that you won’t know really how to do them until you have done them. Sure there are some things you can estimate based on your knowledge and experience with a particular type of business, but the rest has to come from research. And, that research, is part of the overall business plan. In other words, the “part art” is the educated guess or the assumptions you base your projections on, which inturn is based on your expectations. Your expectations are based on the research you completed in the written section of your business plan, that is the “part science”.
Regarding the comments above, the last one: “How am I suppose to know?!?” is peticularaly troubling. As mentioned before, you are suppose to be the expert. But also, you should have done the research to set your expectations based on a reasonable set of (documented) assumptions. Banks and investors will expect you to know your stuff upside down and backwards. If you bring in a boiler plate business plan with canned financial projections, or ones written primarily by another person with numbers that you can’t explain, you won’t be getting any money any time soon.
After all that I hear: “Well, all of that’s nice, but I still don’t know technically how to complete my financial projections.” So here is the process:
Make sure you have a solid financial projection program to begin with. It can be a standalone program or excel templates but make sure the three statements (Income Statement, Balance Sheets, and Cash Flows) are interconnected.
A well researched and written business plan is a must.Every section of the business plan holds key data related to the financial statements.
Build a Beginning Balance Sheet or Sources and Use of Funds. Your Operations Plan should have laid out the assets you need to purchase to get started (Building / Equipment / Furniture & Fixtures / Inventory). Get firm quotes from several sources on each. Then document your funding based on sound business banking criteria including proper equity injection. Finally, your balance sheet should “balance” – i.e. sources of funds=uses of funds (otherwise they wouldn’t call it a balance sheet!).
Build your sales / revenue projections. The data in the Market Potential section of your business plan or independent Marketing Plan will help you bracket your expectations for sales but in general, Sales projections are determined two ways: Driven from market data: Target market size is determined in units or dollar volume and you estimate the amount of that market you can capture…bracketed by competitive factors (number, advantages, price) and industry factors (growth, decline, obsolescence). Driven from budgets: When pursuing a broad market strategy it is better to determine break even point then estimate a sales goal to reach break even and eventually profitability.
Build your expense projection. Again, the information you compiled in your operations plan and other parts of your business plan will help you determine appropriate business overhead expenses. For example your location/building will determine your lease, utility, maintenance, insurance and property taxes. Your inventory section will help you determine cost of goods sold and cash flow terms such as accounts payable. The marketing section will help you budget your advertising and promotion expense. And, your personnel section will help you forecast your salaries and wages, payroll taxes and benefits.
There is no great mystery to building financial projections. With the right forecasting software, it can be fairly simple to do. And now that we have demystified the “art and science” of it, you have the tools you need to get started and confidently plan the launch of your new business idea.
On a final note, you don’t have to go it alone. There are business consultants located at Small Business Development Centers all across the country. These counselors are usually well versed in business planning and helping your produce solid financial projections for your business. So look them up and get started today!
On Friday, I received some news about my full time job that is not all good. The long and short of it is that in December I will have to reapply for my position and have a new boss…and possibly a pay cut.
As I moped around the house a couple of days later I received a text message from a friend that he is thinking of closing his business after loosing his biggest client. I immediately stopped feeling sorry for myself and texted back:
“You haven’t failed until you quit trying. Life is a series of choices & I am sure whatever you choose will be the right path for you…but there is always a way.”
Indeed…good advice even for myslef. Life is full of choices. A series of actions and reactions. But, sometimes, intertwined between those choices are moments. Some of mine that immediately spring to mind are: My first kiss, Jamming to blaring records in a dark room with my dad, My first day of college, My last day of college, My wedding day, Buying our first home, The birth of our three children, starting my first business, surviving the failure the same business.
In times like these it is comforting to remember those little moments and I am happy to have found this video to remind me that there are many more to come.
While Mr. BizPlan is on summer vacation Brandon Laughridge of www.SBALoans.com offered to fill in for this months small business loans post. Enjoy!
For most small business owners, soliciting venture capitalists isn’t part of the standard business plan…Now, it probably should be near the top of the list.
A little-known SBA loan program that directs venture capital to small businesses just got a big boost from the federal government. American entrepreneurs now have access to a $2 billion pool of capital aimed at spurring economic recovery and growth.
The SBA’s Small Business Investment Corporation (SBIC) program loans money to qualified venture capitalists. These federally licensed firms can use tax dollars to supplement private capital with a catch – they must help fund small businesses.
SBICs provide crucial capital for small businesses, from startup funding for fledgling companies to cash for growth and development for more established firms. Any business that meets the SBA’s definition of a small business can receive SBIC funding.
That funding pool is significantly deeper today. Provisions in the federal stimulus package (the American Recovery and Reinvestment Act of 2009) altered some of the program’s rules and restrictions. The goal was to free up even more capital for small business lending.
Some of the changes include:
SBICs can now obtain up to $150 million in federal dollars for a single fund, instead of the former maximum of $137 million
SBICs have to invest 25 percent of their capital into small businesses
SBICs can now invest up to 30 percent of an SBA-backed fund into a single company, instead of only 20 percent
SBICs with multiple venture capital funds can borrow up to $225 million total
The SBIC program has doled out more than $55 billion in venture capital to more than 100,000 small businesses since its creation in 1958. Companies like Apple and FedEx have received SBIC funding.
U.S. Sen. Olympia Snowe, R-Maine, lauded the provisions in mid-July.
“SBICs provide critical investment dollars to thousands of small businesses nationwide, and by implementing the provisions we passed in the Recovery Act, the SBA will make this program significantly more effective,” said Snowe, ranking member on the Senate Committee on Small Business and Entrepreneurship. “As I noted in a letter to SBA Administrator Mills last month, while $3 billion of SBIC debentures were available for Fiscal Year 2008, the SBA used a meager $650.3 million, or 21.7 percent, of that funding. Putting these vital steps into action will help reverse this trend of underutilization.”
So…when I am not consulting, contemplating or starting small businesses, I like to trade stocks. Born a risk adverse penny pincher and trained in the art of long run returns and diversification (read Modern Portfolio Theory – beta calculation anyone) I am a fundamentalist at heart.
I own three portfolios: 1) my 401K/Roth IRA – which are indexed to the S&P 500 via the SPY etf, 2) Long term positions in various companies including GE, Goldman Sachs, Wells Fargo, etc… and 3) My “Mad Money” account which I like to trade in and out of egregious amounts of double and triple levered etfs which produce awesome gains and massive losses (currently up 35% YTD).
Anyway…there is this blog I joined on a two week trial and it is full of some of the most amazing day-traders I have ever had the pleasure of knowing (I am not going to say the name but email me if you insist on knowing) and one of those traders posted the following which I am going to share with you. I don’t know his real name but his username is rp. Granted this person is a bear (dare I say, perma-bear?) but his analysis is spot on:
I will be back with a blog post shortly people…been busy around Mr. BizPlan’s office.
Until then…check these out:
The Venture Capital Bubble about to burst?
A surprisingly cool video from a virtual PBX company
New Business Plan Software
Also…check out the new business plan software partner we have posted on the site called Funding Roadmap. We will post a review in the coming days but what we have seen so far we really like…particularly the feature that allows you to create additional login accounts to give to potential investors so they can review your plan and a video elevator pitch online. Wicked cool and at a bargain price, especially after our 10% off with our coupon code.
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