A cash cushion, or emergency fund, serves as a foundational component to any well designed…
Your business planning needs to include financial projections.
We know two things about the projections at the pre-launch stage of a business.
- They are wrong
- Despite the projections being wrong, the process of creating them is incredibly valuable
Why, if we know the projections will be wrong, should we waste time and energy building out said projections?
Because even simple projections answer essential questions:
- How many clients do you need (or products do you need to sell), and at one price point, to become profitable?
- How long will it take you to break even and become profitable?
- Is the client acquisition (product sales) growth you need realistic?
- Is your price point, given your target client, reasonable?
- How will your personal expenses impact the business? Will you need to adjust your lifestyle, do you have enough saved to defer a salary?
Before we dive into any analysis, you can see a number of significant questions answered by the basic formula:
# of Clients x Average Price = Estimated Revenue
Volume of Product Sold x Average Price = Estimated Revenue
Revenue and Expenses
Your early projections roll into two major line items; revenue and expenses. You should be able to fairly accurately estimate the cost of operating your business – the expenses. Some of your expenses may be variable and tied to revenue, but doing your homework up-front and understanding your fixed expenses will be extremely beneficial in expediting your decision making later.
Maybe revenue growth comes in slower than you forecasted. Imagine how glad you will be to know exactly which expenses are vital to your business and which are “nice to haves”. This clarity will allow you to cut back on the nice to haves without second guessing yourself. Or, if business progresses better than anticipated, you will know exactly where you can double down to get the biggest bang for your buck.
Keep It Simple
Keep statement one in mind when building out your projections – they are wrong. You shouldn’t be wasting time forecasting depreciation of a couch five years out. Identify the true drivers of your business and focus on getting a firm grasp on how those drivers might progress over time. At this stage, your building a system that helps you identify if you are on or off track. You don’t want to be making reactive decisions and feeling unsure of what is driving cash flow.
The projections will flag if something is working or not. For example, if you thought you’d grow by ten clients a month and are only seeing four, it’s time to ask questions. Is the price too high? Is my marketing right? Am I reaching the right client, etc. And that is exactly what you want your projections to do- prompt the right questions! Keeping a pulse on your projections should prevent you from spiraling out of control if things don’t progress as you expected, or from feeling insecure about your success if things go well. “Am I just getting lucky?” can be an equally scary feeling. Projections will help you ask the right questions about your business during the good and bad times.
Put in the valuable time and energy to create projections for your business. Be reasonable about the limitations inherent in these projections. The primary objective of the projections is to prompt the right questions so that you can expedite decision making with clarity and confidence.
Get in touch if you need help building out your business projections!