Developing realistic financial projections builds credibility when seeking capital for your business. Further, it will assist you in accurately committing resources to a level you can actually achieve. However, you may feel overly optimistic about how your product or service will be received in the market, and, then overestimate the sales and the timeline on the return of the investment. Lenders and investors have sophisticated experience and financial models to quickly see if your projections are inflated and become less likely to offer a deal.
Long term business financial planning can be difficult especially with a new product in a new market. Research will be a critical element to determine customer expectations, costs, and overall marketing trends to better evaluate the return on investment.
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When I performed sales and margin projections in a company I worked for, I considered year over year changes for the same or similar products. The advantages I had was that I was able to receive specific inputs from various staff entities for my models. We were a large company with many resources to determine a more accurate answer. As a small business owner, you will not have the advantage of a large staff who can specialize each aspect of the financial plan or input to a financial model.
Ensure you are realistic in your business financial projections:
- Examine industry standards and processes. What is your competition doing in this market? Is there an issue you have to account for in the projection such as importation fees or special shipping requirements? Conduct a thorough analysis so you are not surprised during production and after entering the market. Issues you failed to account for may cost you more money and hinder your sales.
- Conduct relevant market research. Customer feedback is critical but be cautious on surveys when evaluating value unless a customer has spent the money on the product because the feedback may be skewed.
- Develop accurate financial models. If you don’t have historical sales data, consider using what other companies in your industry are doing for year over year growth. Additionally, be careful on the relationships of variables in your models. For example, the spending of marketing dollars will not gain any additional sales after a certain level.
- Seek a mentor to review. Brutally honest feedback from a trusted mentor can quickly call out a projection that is off its mark, either too low or way overinflated. A mentor who has vast experience should be able to spot any flaws in the methodology.
- Be transparent and communicate often with current and potential investors and lenders. Developing a strong and trustworthy partnership with investors or a lending institution will be critical to your success. It is even possible that they may be able to provide advice to you once you know them better and have developed a positive relationship. Ideally, it is in their interest for you to be successful.
A highly inaccurate business financial plan represents someone out of touch with the market. Further, it leads to a lack of credibility and a potential loss in capital for the business. A realistic plan leads to a better match of resources to goals and to a stronger relationship with investors and lenders.
“Whenever I see a forecast written out to two decimal places, I cannot help but wonder if there is a misunderstanding of the limitations of the data, and an illusion of precision.” Barry Ritholtz, author and equities analyst
How can you ensure you developing realistic financial plans and projections for your business?
Please comment or email me at comment@stephenmclain.com.
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Copyright 2017 – Stephen McLain