2 min read Information derived from financial statements is used to create financial projections and is usually done on a five-year scale. These projections are used internally for business planning and managing. They are shared externally with investors, potential donors, tax agencies, and more. Below, we cover some of the ways you can use your financial projections.
Purpose of Financial Projections
Your company’s financial projections document, also called the pro forma, is a key document you’ll need for your fundraise. Investors will want to see a detailed, five-year financial projection to show that you’ve thought through the financial side of the business.
A quality financial projection shows investors you know your business and have a good idea about what things cost and what customers will pay. Additionally, investors also glean from the financial projections how you are going to use the funds they offer you.
Financial projections are not about predicting the future with great accuracy, but instead showing the causalities and interdependencies of your business. This document answers questions such as:
- If sales double, what is the impact on costs?
- If sales drop by 50%, what happens to cash flow?
Your financial projections will be important for your fundraise. Banks will want to see your projections when you apply for a loan, and investors will want to see them when you raise equity funding.
There are two basic forms of capital: debt and equity. Debt is in the form of a loan with specific terms, including the interest rate and payback plans. Debt has some advantages including:
- You can maintain ownership over your business.
- Interest is tax-deductible.
- Debt can keep management focused on the core business, in particular cash flow and profits.
The advantage of equity is that you don’t have to pay it back immediately, only when you sell the business or go public. Your financial projections will help you decide how much funding you should take from debt and equity.
After completing the financial projections, you may want to create various scenarios of your financial model. Startups are often optimistic, while investors are pessimistic, so it can be helpful to create a best-case scenario and a worst-case scenario.
For the worst-case scenario, keep your revenue at the current level or only with small increases. Check your cash position and runway and adjust the expenses and fundraise plan accordingly. For the best-case scenario, use the revenue targets you have in mind. Check your cash position and runway and adjust the expenses and fundraise plan accordingly.
Here are several common errors:
- As sales grow, so do sales costs – in particular commissions. Make sure these costs are included with the revenue ramp.
- Fundraises typically take longer than expected. For every $1M of funding you seek, it will take you one calendar year to raise it.
- Include your working capital needs for your fundraise planning and its impact on cash position.
- Founders typically work long hours for little to no pay. This is not true with non-founders. Make sure you include reasonable salaries for the work you expect from others.
Feel free to try out our calculators and contact us if you would like to discuss your fundraise: https://tencapital.group/calculators/
Hall T. Martin is the founder and CEO of the TEN Capital Network. TEN Capital has been connecting startups with investors for over ten years. You can connect with Hall about fundraising, business growth, and emerging technologies via LinkedIn or email: firstname.lastname@example.org.