Are you an entrepreneur in need of creating financials projections for your startup?
Over the past year, I’ve been introducing my startup theory, currently called the Four Pillars of Startup, to my communities and have received ample excitement for the third pillar focused on Startup Financials. I wrote two columns on the topic (What are the Startup Financials You Need to Know? Part 1 and Part 2) because of the amount of information involved and both have become two of the most popular columns on my site.
What You’ll Learn
As I sat down to plan out my content calendar for the remainder of the year, I decided to incorporate more columns dedicated to startup financials. In this column, I’ll be diving into a method that I’ve been building over the past 5 years to create financials projections for your startup.
This method has been derived from my own studies and experiences as well as from mentors that have been formulating financial projections for tens of years. It is a combination of everything that I have learned and should help you to further understand where your revenues may head in the short term future, i.e. 1 year.
Steps to Build Financial Projections for your Startup
Disclaimer: Financial projections are never accurate and should never be taken as what exactly will happen in the future. While my projections are based off years of experience and mentorship, they still are not fail proof and are merely projections for what may happen with your startup. In many cases, I have seen my companies outperform my projections and, in others, drastically miss the projections set for a given time period. After developing the financial projections for your startup, it is key to track your performance to what was projected. Take note of where your projections fell in line with the actual performance and adjust your projections every 2-3 months based off your performance.
With that, let’s jump into the steps to creating financial projections for your startup. We are going to be using Microsoft Excel or Google Sheets for this activity so please make sure you have one of these two applications on your computer.
Step 1: Open a new Excel file or Google Sheet
Start by labeling your file. Name is something along the lines of “Financial Projections for FreeeUp.” Second, create the columns for your file as can be seen below. We are going to create financial projections for the next 12 months of your business so we are going to label the columns as such. You can also freeze the top row. In Excel, use the View tab and in Google Sheets, use the bar located at the top left hand side to pull down and freeze.
Now you have a foundation for where you can create financial projections for your revenue, costs, and profits over the next 1 year period.
Step 2: Create Expected Revenue Accounts and Format Cells
Follow along with the image below.
Create the Accounts
- Create an “Expected Revenue” row and highlight it a color of your choice. This will help to differentiate your revenue, cost, and profit projections as we expand upon your startup projections in future columns.
- Depending upon the number of products/services that you are planning to sell, add the appropriate number of account items for Average Sale Price of Product/Service, Expected Number of Sales, and Expected Total Sales. For example, if you are a service company and you offer three pricing packages, create three sections so that you can account for sales and expected revenue of each.
- Leave a space then add a final row for Total Expected Sales Revenue
Format the Cells
- For the Average Sale Price of Product/Service and the Expected Number of Sales rows, there is no formatting required. This is where you will enter your projections for these two accounts.
- For the Expected Total Sales for each product or service that you have, enter the following equation:
- = (average sale price of product/service)*(expected number of sales of product/service)
- You can easily do this by clicking on the cell for the first, entering the multiplication symbol, then clicking on the cell for the second.
- Repeat this for each product/service that you are creating projections for.
- For the Total Expected Sales Revenue, simply add the Expected Total Sales for all of your products/services.
- = (expected total sales of product #1)+(expected total sales of product #2)
- Once you’ve finished formatting the cells for Month 1, highlight all the cells in Month 1 and drag it across so that the equations are similarly applied to 12 months. Your sheet should now look like what I have below.
Okay, now we have a very simple table that we can manipulate to project our startup’s financial performance each month of the year. Before we dive into creating projection tables for expenses and profits, we’re going to talk more about how you can form your revenue projections using a variety of different methods with this table.
Step 3: Create Revenue Projections for your Startup
In this step, I will outline three methods that you can use to input your projections for Average Sale Price of Product/Service and the Expected Number of Sales. These three methods all produce their own value and each should be considered before moving forward with the projections activity.
Method #1: Simple Projections in Each Month
The first and simplest method is simply going through each month and entering projections based off of where you believe the company will be in each month.
For Month 1, you will create a projection of how many sales you expect you will make and input the corresponding average sale price for that given product or service. As you input the numbers, your Expected Total Sales and Total Expected Sales Revenue will populate giving you an idea of your projected revenue.
For Example (Refer to the image below)
You have two products that you sell to your target customer and they are both already available for sale. The first costs $99.99 and the second costs $149.99. You enter these two figures for the Average Sale Price of Product/Service in your file. You then project that you’ll be able to sell 10 of the first product and 5 of the second product in Month 1. With these numbers inputted, your table calculate your total sales revenue for each product and gives you the total expected revenue for Month 1.
In a future column, we’ll talk about how that Total Expected Sales Revenue doesn’t mean much until you calculate the Expected Gross Profit and Expected Expenses associated with it.
With this method, you would perform the same activity 11 more times until all of your 12 months are filled out with projections. As an optimistic entrepreneur, you’ll naturally assume growth month over month and you’ll end up with something that looks like this…
With this information, you now have projections for the total revenue that your startup could produce within 12 months granted all of your Expected Number of Sales per month are accurate. What you’ve also created without knowing it are monthly sales goals that you can use for motivating your team and working to keep your projections as accurate as possible.
For example, you projected 10 sales for product #1 and 5 sales for product #2 in Month 1. If you are projecting that, you better be able to back it up with your sales team in those first 30 days. If you don’t think that it’s realistic, you need to readjust your projections. The purpose of creating financial projections for your startup is to challenge yourself to reach particular levels of sales…not to overvalue your sales abilities and inflate the projected financial performance of your company.
Method #2: Applying Average Growth Figures Month over Month
The second method for creating financial projections for your startup is built upon the idea of constant month over month growth starting from Month 1. This is a dangerous method as it is difficult to predict month over month growth rates at such an early stage in your startup, but when used conservatively, it can provide you with new goals for achieving a particular growth rate. Similar to method #1, the main purpose is to provide you with a set of goals to achieve as a team.
For Example (see screen shot below)
For the purpose of this activity, copy and paste the Expected Revenue table that you created with method #1. Erase all of your inputs from method #1 so that you have a clean table to work with. The easiest way to do that is to select the cells you want to erase, right click, and hit clear contents. Take note not to clear contents for the Expected Total Sales cells so that you don’t have to recreate the formulas.
Using method #2, you only need to fill out Average Sale Price and Expected Number of Sales for each product for Month 1. Let’s do that. For the purpose of comparison. Let’s use the same numbers from Month 1 that we used when we created the financial projections using method #1.
We have two products. The first is priced at $99.99 and the second is priced at $149.99. We expect to make 10 sales for the first product and 5 sales for the second product in Month 1. Our Month 1 table now looks exactly the same as what we had created with method #1.
Here’s where things get different. For Month 2, we are going to create projected sales based off of a fixed month over month growth rate. To do that, we are going to build an equation into the Expected Number of Sales row under Month 2. Here is what the equation will be:
- =(expected number of sales in month 1)*(1 + our desired percentage)
For example, let’s say that we project that we could grow an average of 10% month over month. The equation would then look like.
- =(expected number of sales in month 1)*(1 + 0.1)
- =(expected number of sales in month 1)*(1.1)
Here’s what it should look like:
We carry over the $99.99 as the Average Sale Price of Product/Service #1 because that doesn’t change. In order to apply that 10% average month over month growth rate to all 12 months, simply drag the Month 2 Expected Number of Sales cell over through Month 12.
Similarly, apply the same logic to product #2. Carry across the Average Sale Price of $149.99 then add the formula for 10% growth month over month. Drag it all the way across and you will be presented with a full table that looks like this.
You will now see goals that you can work towards in order to grow 10% month over month throughout the 12 month period. If you want to see what figures you would have to hit in order to grow at an inclined rate per month, simply change the 1.1 to a higher figure and drag it across the 12 months.
Method #3: Incorporating Seasonal Industry Trends
The third method is an advanced strategy that takes a bit more research and thought to put together than method #1 and #2, but it can be super effective if you are in an industry that is deeply impacted by the seasons of the year. A prime example, and one that I’ve grown as an entrepreneur in, is the eCommerce industry where average sales increase each quarter of the year leading up to the holiday season.
To give you an idea of how much of an impact it makes, the 4th quarter tends to be 4-5x the amount of sales that you produce in any other quarter of the year. For example, in Quarter 1, you run sales of $100,000. It could be expected that for the 4th quarter, you could achieve sales of $400,000 to $500,000 depending on consumer trends, competition, and many other factors that go into the holiday shopping season.
If you are in an industry similar to retail where average revenues are heavily impacted by seasonality, I highly recommend performing research into the average percentage of sales per month throughout the year. Once you have these figures, you can create a chart that creates projections based off of those average percentages per month with a final expected revenue figure in mind.
If you are interested in creating financial projections for your startup based off method #3, shoot me an email and we can set up a phone call to discuss the right approach to formulating these types of projections.
Projections Are Fun…But They’re Not Easy
Any entrepreneur will get excited by seeing what could happen to their startup’s financial performance if they meet the projected sales figures that they predict over a 12 month period. We all want to see our companies succeed and earning more money is a clear sign of our idea heading in the right direction. With more money, we can hire more people. With more money, we can appeal to more customers. With more money, the sky is the limit.
While it is fun to create financial projections for your startup, you must also be realistic in what they mean and how you can use them to create action steps within other areas of your business. As I expressed above, you should be using the Expected Number of Sales for each product/service to create internal sales goals for you and your team. If you project you will create 15 new customers in Month 1, create an action plan for how you are going to make that happen. Share that action plan with the team and motivate them by showing what the financials of the company could look like if you can reach that goal together.
Stay Tuned for More Startup Financial Projections
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