Creating Realistic Financial Forecasts for the First Year of Your Startup
In the first year of your startup's operation, you may struggle with creating financial forecasts that will incorporate the changes that occur over that first year. By following these key steps, however, you can create more realistic forecasts that will help satisfy investors and prepare you for the year ahead:
Why Do You Need Financial Forecasts?
Financial forecasts are a critical part of securing investors or other funding for your startup. More importantly, however, they help give you goals to reach for and a yardstick to measure your success.
Is your startup performing as well as you'd hoped?
Are you meeting your goals, or are there steps you need to take in order to make those goals more attainable?
Financial forecasts can help you clearly compare your initial expectations to your business's actual performance.
Calculating Your Expenses
As a new business, you know you have many expenses ahead of you. Many of those expenses are fixed expenses: predictable items that you can put on paper as you endeavor to develop a better understanding of your finances in this first year of operation. Other expenses will vary based on how much room you have in your budget and how much funding you've secured.
Calculate both your fixed and variable expenses, including:
Rent or a mortgage on your building
Costs of employees, including both payroll and insurance
Known equipment expenses
Any associated legal fees that go along with starting or running your company
Any other expenses you can predict
Put Together the Paperwork
Your financial forecasts should include three key details: your income statement, which estimates how much income your business will be able to generate; your cash flow statement, which follows how money will move into and out of your company based on your income and expenses; and your balance sheet, which shows the business's assets and existing balance. Note these key tips when gathering your paperwork:
Ideally, you want to be able to take your financial predictions out for three years. The more detailed you can make these projections, the happier your investors will be.
For the first year of your startup's operation, you'll need to put together monthly income statements. After that, you can start to decrease those statements.
Put together an understanding of your expenses before you start looking at revenue. This will help you keep the right perspective on how much your business needs to earn.
How to Generate Your Numbers
As a startup, you don't have the benefits of past records to help you generate the key pieces of information you need in order to make effective financial forecasts. Fortunately, you do have several pieces of data that will help you estimate.
You probably created these when you designed your initial business plan. Market Projections will give you a better understanding of the addressable market size (the portion of the market your product addresses a need for) and your expected market share. This market share and the price per unit sold, gives you the revenue you can expect.
Working with a virtual accountant or virtual CFO
Choosing a CFO who has experience in your field will allow you use the CFOs experience to make more effective projections.
Financial records from past employment
Past knowledge will help you better understand what the market looks like and the how much revenue you can expect to make.
Your financial forecasts are educated guesses about how your business can be expected to perform --and the right kind of experience and knowledge is critical to ensuring that you're able to make those projections as accurate as possible.
If you're struggling to come up with the financial forecasts you need for your startup or if you need more help creating your financial projections, contact us! We're here to help make handling your startup's finances easier.