All Companies Should Have Financial Projections

28th April, 2014 No Comments Blog

Yes, even if you are just raising your first outside capital from angels – or even friends and family – you should have financial projections.   For a very new company, these need not be particularly complicated, and no one expects them to be accurate, especially when it comes to revenue projections.  But you should have them.

To start with, expense projections for the next 6-12 months are important.  These projections are a yardstick by which you can measure your progress as well as a means for testing (through tweaking your projections) the impact of all the changes that you will experience as you build your company.  What are you planning to do with whatever money you raise or earn from your first customers?  When do you expect to run out of money, if ever, in the absence of additional investment or revenue?  The answers to these questions should look like a simple month-by-month income statement (perhaps without any revenue) modified to include a cash balance.

Also, you should have rough, long-term (5-year) projections of revenue, at least, and major expense line items if possible.  No one expects these to be even close to accurate, so why bother?   I think it’s important to put these together relatively early in the life of a company so that you are really compelled to think about what your business might look like at scale (e.g. in five years).  Can your company achieve the scale you want to achieve without capturing an unrealistically large portion of your addressable market?  Even if you are a consumer-focused company and do not plan to introduce a monetization scheme anytime soon, how much capital will you need to scale the business?  The answers to these questions, though seemingly far off in the future, can greatly impact your product, pricing, hiring, and fundraising decisions today.

As for the long-term projections, if your company is seed or pre-seed stage, you might consider just creating a one-year projection for, say, year five of operations, rather than assembling five full years of crystal-ball-gazing.  This exercise will get at the scale thinking while lightening the number-crunching workload a bit, and, in my view, is fine to start.

Once you have actually taken money from people and/or institutions outside your core team, however, you should have monthly projections for the next 12-24 months that you update with some regularity.  As your company matures and you hire a dedicated finance person or even an outsourced CFO, the projections should become more sophisticated, including full income statement, cash flow, and balance sheet projections together with scenario planning capability.

Again, you don’t have to – and probably shouldn’t – start with anything complicated in the way of financial projections.  Your focus at the outset should be early customers/users and product.  But you should have a set of simple projections that you share with your management team and that helps to guide planning and decision-making.

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