When it comes to business plans and financial projections, some sources state they are not worth the time or effort. One old study even concludes that there is no "compelling reason to write a detailed business plan."
While this might be what many new business owners want to hear, it is terrible advice.
A more recent meta-study covering 11,046 organizations has shown that business planning increases performance in both new and established ventures.
The reason? Business plans provide leaders with a roadmap and the data they need for informed decision making. Business plans do this by analyzing and consolidating information on target markets, competition, branding, scaling potential, anticipated challenges, and more.
However, a business plan is not much use unless it also provides thorough financial projections. Financial projections give businesses plans substance and act as clear operational guideposts.
What's more, without financial projections, business owners will likely struggle to secure funding. As well as partnerships, and loans. Besides this, financial projections are also crucial for estimating the true viability of a potential business.
Do you think financial projections are too much of a hassle to include in your business plan? If so, you might be making a crucial mistake, before you have even opened your doors.
To avoid this, keep reading as we break down the importance of financial projections in business plans. We also provide a quick way for you to generate these hard-to-tackle numbers, so make sure you read to the end.
What Are Financial Projections?
If you have landed on this blog post wondering how to how to write financial projections, then you probably have some idea what they are. However, seeing as these business plan sections are not the most riveting for most of us, let's do a quick refresh of what they contain.
Financial projections include the following:
- Sales forecasts
- Expense budgets
- Cashflow statements
- Income projections
- Sensitivity analysis
- Projected balance sheets
- A break-even analysis
These estimates are compiled using supporting information. Such as market research, and research around costs and expenses. However, there will be some areas that are educated guesses, such as sales rates.
Financial Projections Allow You to Show Viability
One of the top reasons why financial projections are important is they allow you to investigate the viability of your business idea. Before you put it into motion.
This is invaluable. Many business ideas may sound great on paper, but don't check out once you run the numbers. In this case, you will be doing yourself a big favor by not starting the venture.
We know this is not what a fresh entrepreneur wants to hear. However, it's essential to realize that not every business idea will be profitable.
Of course, financial projections are merely educated guesses. There might be some rare cases where a seemingly non-profitable idea might take off for unforeseen reasons. However, the chance of this is slim.
What's more, going ahead with a business without establishing forecasted profitability can come with serious consequences. Including bankruptcy, debt, and opportunity costs.
Financial Projections May Cause Other Parts of Your Plan to Be Refined
In the event that your initial projections indicate low profitability, this doesn't always mean that you must abandon your idea completely.
It might be that there are areas in your plan that could be re-thought to allow for higher profit margins.
For example, say you are planning on opening a brick and mortar store. However, once you run the numbers, it appears that your chance of turning a profit over time is low. In this case, you could revise your projections to cover running your business as an online outlet instead.
After establishing the costs associated with this selling model, you can then ascertain if it is a viable alternative.
Other ways to tweak your plan might include increasing your prices, outsourcing areas of your business, or modifying the focus of your offerings.
Financial Projections Can Spur You to Initiate Growth
In some cases, you might find that financial projections paint a dreary picture. However, in others, you may find your estimates predict a higher turnover than you anticipated.
In these instances, you can also use the information to tweak your plan. If you are almost guaranteed to reach specific profit margins within a certain period, you can plan in additional growth focussed investments and faster scaling.
While fast scaling can be stressful, it can also provide benefits, such as enhanced investor interest. What's more, timely scaling can also allow you to enjoy economies of scale sooner rather than later.
As you can see, a business plan isn't necessarily going to be the way you want it the first time around. What with potentially adjusting things like your business model, scaling rate, and more, you might need to change it around until you are happy with the projections.
They Are Essential for Loan Applications and Investment
Another reason why every aspiring entrepreneur needs financial projections in their business plan is they facilitate funding.
According to reports, business owners that have a plan and projections, are twice as likely to receive funding, both from investors and lending institutions
Without realistic financial projections on your business plan, you will have a hard time securing funding from investors. The same holds true for loans.
Both investors and lenders need to be able to analyze the viability of your business model. While it is important to talk about things like marketing strategy and branding on your business plan, the numbers are what lenders and investors are going to hone in on.
If your financial projections are sound, this will enable investors to decide whether your business idea can garner them attractive returns. They will also use the financial projections to pinpoint suitable exit points out of the investment.
When it comes to lenders, they need to make sure that you can pay back the loan. If they can see that there is a very good chance of your business turning an adequate profit, they will be more inclined to grant you a loan.
Keep in mind that you won't do yourself any favors by being overly optimistic with your financial projections. Firstly, lenders and investors are trained to spot these types of overly favorable projections. If they think that your numbers aren't based on sound research and conservative estimates, investors and lenders won't hesitate to pass onto the next candidate.
What's more, overly optimistic financial projections not only hurt your chances of securing funding. They also hurt your chance of success.
The best business plans are the ones that aim to chart as accurately as possible the course of your business and it's financial health. If you are basing business decisions off a plan that overestimates profit margins, this could pose a threat to your operations.
Financial Projections Are a Valuable Business Tool
Speaking of charting a course, business plans and the financial projections they contain are not meant to be created and never looked at again.
Unfortunately, many entrepreneurs make this mistake.
They throw themselves into creating an involved business plan. Once done, they then stick it in a drawer, store it on their computer, and never look at it again unless required to for a loan application.
This robs entrepreneurs of one of the greatest values of a business plan. To really make a business plan work for you, it's essential that you reference it. This is because the financial projections in your business plan can act as guideposts for decision making.
What's more, if you use your business plan and its financial projections as a map, you'll be more likely to direct resources towards reaching milestones. Rather than getting sidetracked by non-essential areas.
Besides keeping you on track, financial projections, and the milestones they are tied to, also provide business owners with a source of feedback. By evaluating your business's progress against projections you can evaluate problem areas and use this feedback to optimize operations.
It's Never Too Late to Benefit From Business Plan Financial Projections
If you're a budding entrepreneur with a brand new idea, creating a business plan that includes sound financial projections will reap you many benefits.
But this isn't the only time financial projections can serve you. Have you been in business for some time, but have yet to create a business plan? If so, it's never too late to enjoy the benefits of one, especially when it comes to financial projections.
Most successful companies review and tweak their financial projections each year. The longer you stay in business, the more accurate and reliable your projections will become, because you will have historic data and performance metrics to work from.
Feel Daunted by the Idea of Generating Financial Projections? We Can Help
As you can see, it is imperative that you include thorough financial projections in your business plan. This will allow you to secure funding should you need it. As well as ascertain how viable your business model is, and how to chart a course to success.
The only catch? Unless you've got a degree in accounting, drawing up financial projections can sound like a nightmare.
Fortunately, getting your numbers lined up doesn't have to be torturous or time-consuming. Why? Because our simulator can do it all for you. All you have to do is answer a list of carefully curated questions and our simulator will automatically calculate all of the key financial data you need to start your business.
Don't let a fear of financial projections stop you from putting together a powerful business plan. Instead, use our interactive financial projection simulator today.
