Two Parts of Financial Projections: The Known and Unknown
If you are seeking money, lenders might not give you any until your financial projections accurately express the risk and solve how the funds will get paid back. This financial forecast is also a crucial component of any business plan.
Financial projections are typically three to five years, with the first year expressed monthly. The second and third years are presented quarterly. And, if the forecast extends to five years, the last two are present annually.
When crafting a projection, there are essentially two basic components; the known and unknown. If you were sitting in a math class, the professor would call them the dependent and independent variables. To the business owner, they take the form of expenses and sales.
The whole purpose of the financial projection is to quantify the action items and goals stated in your business plan. Where do these numbers come from and how are they applied?
They are housed within the trade association, industry groups, and trade publications specific to the industry you seek to engage. The information is commonly referred to as financial benchmark data (just type financial benchmark into the search box of the organization’s website to find the data quickly).
For example, if you are a solo practice physician, you’d use the Medical Group Management Association’s financial benchmarks for single-specialty medical practices. The data tells you how much a patient pays for an office visit, what percent is spent on advertising, how much malpractice insurance costs, or how many employees is necessary to operate a medical practice.
National Association of Manufacturers http://www.nam.org/
American Marketing Association http://www.marketingpower.com
Medical Group Management Association http://www.mgma.com/
American Association of Exporters and Importers: http://www.aaei.org/
American Advertising Federation: http://www.aaf.org/
American society of Agrimony: https://www.agronomy.org/
Constructing financial projections
- It’s best to start with the expenses you will regularly pay each month, such as rent, utilities, and hourly pay for employees.
- If you sell a product, you determine how much inventory you will carry and what it will cost to restock the shelves.
- If you aren’t sure what some of the expenses are, the budget hedge determines what the cost might be.
Answering the unknown: how much sales will occur each month?
- You must determine what you will charge for each product or hour of service you sell.
- Then, answer this: how many customers must walk in the door at what selling price to cover operating costs and to pay off any debt incurred? We call this the break-even point. From this financial floor, you work forward, modifying your idea until all the numbers make sense to you and your banker.