Having an awesome business idea is not always enough for you to succeed. One of the major factors that may make or break your business is the way you plan your finances. Namely, statistics show that the main reason why 82% of small businesses fail is poor cash flow management.
To prevent this on time, you need to make solid financial projections which will give you an invaluable insight into your business growth and financial health. These documents are immensely important, as they guide you towards reaching your business goals and make reasonable decisions.
Here is how to create a set of realistic financial estimations.
Create a Projected Balance Sheet
Updated on a monthly basis, this document allows you to look at the big picture and focus on setting some short-term goals. It includes numerous critical monthly metrics, like your cash balance or sales targets, which provide you with the holistic view of your business. Most importantly, your balance sheet serves as the basis for other financial projections and plays an important role in securing funds for your startup from investors or financial institutions.
When it comes to creating a balance sheet, the formula is simple. It consists of three immensely important components and these are your assets (what your business owns), liabilities (shows your bills and long-term debts), and equity (how much your business is worth). Before you start making any financial projections, make sure you understand these elements of your balance sheet and format them properly.
Don’t Stick to Only One Approach
When estimating their financial future, many businesses are overly conservative. On the other hand, some of them are focused making more flexible and ambitious projection. Now, given the fact that neither of these approaches is ideal, you should consider merging them together. In other words, instead of creating just one set of financial projections for your business, you should build at least two of them- one strict, and another more optimistic.
For example, your strict financial projections will tell you not to use more than 2 marketing channels during your first year. Your optimistic estimations, on the contrary, will include at least 3 customer acquisition channels, managed by you and your marketing specialist. Your conservative projections will be focused on low price points, while their ambitious counterparts may include higher prices for premium products, as well.
Now, creating multiple financial projections may be a tedious task, but it really pays off. This approach will keep you on the right track, help you improve your business’ cash flow, and give you a chance to set more realistic goals. At the same time, it will add flexibility to your strategic planning and inspire you to come up with innovative ideas.
Predict your Expenses
For a startup, it’s much simpler to forecast their expenses than their revenue. Therefore, your starting point should be predicting and analyzing some of the most common types of your business’ costs.
Make a list of all fixed expenditures, things like your utility bills, insurance, communication costs, rent, postage, legal fees, the costs of your marketing campaigns, salaries, etc. These are all expenses you will definitely come across in the coming quarter or year. Pay attention to variable expenses as well, such as the cost of the goods sold, customer services, and direct sales.
Keep in mind that some of these costs, such as your marketing campaigns or legal fees will fluctuate parallel with your revenue. For example, if your cash flow grows by 10%, you can expect the cost of your sales to grow by 10%, too. So, when predicting your expenses in the future, you should double or triple your estimates to make sure nothing surprises you.
Focus on your Sales Process
When estimating your financial health, you need to outline each phase of your sales funnel carefully. You should make financial projections for each of these steps in order to get the top line number. Now, there are numerous elements you need to pay attention to, such as:
- The size of the market.
- The percentage of that market you can market to.
- The percentage of people that really visit your online or physical store after learning about your brand.
- The percentage of people that make the purchase after visiting your site or store.
- The percentage of people who leave your site/store without making a purchase.
- How much your customers spend on average.
Update your Strategies Regularly
Your financial projections should never be static. You should never build them at the beginning of the year and then not update them for the next 12 months. In this case, they would be totally purposeless, right?
What you need to do is constantly reassess your financial health and try to understand how close your estimations were to your real-time operating results. Based on the data you gather, you need to make the changes needed and make your projections more data-oriented. By updating your financial forecasts regularly, you will have a better insight into your performance and be able to make better, more strategic decisions in the future.
Also, you will be able to forecast your costs and revenues more precisely, avoid some of the most common mistakes you made before, and make more realistic projections. This is something that will help you not only boost your financial management, but also influence your overall business growth.
Setting realistic financial estimations for your young company is a gradual process that requires you to invest a lot of time and effort. Even though your business model will be constantly changing and evolving, making these projections should be your paramount. This is how you will be able to avoid some unnecessary costs, maintain positive financial health, and make data-backed decisions.