When starting your company, a critical part of business finance and the success of your small business is having the right financial projections. Without having this in place, you won’t be able to create plans to expand your venture. But how can you accurately gauge revenue and sales without a track record?
Here are the questions to ask yourself to kick off your business with accurate financial projections for growth:
1. What Are Your Expected Sales?
If your business has yet to take off and there’s no company history, this poses a tricky challenge. Since this figure will be based on hypotheticals, you can look at the growth of competitors and use that as a starting off point. Then, make adjustments based on how your small business is different from your competitors in your product offerings, service market or target demographic.
Other considerations to make in anticipating your sales are fluctuations in revenues. For instance, you may encounter changes in revenue from seasonal sales or higher-than-usual expenses, which we’ll consider below.
2. How Much Revenue Do You Anticipate for Your Business?
Estimated sales are just one slice of the revenue pie, so make sure to factor in all sources of income to come up with your total revenue. For instance, you may also have money coming in from investments and property. Make sure to include all sources of revenue to get an accurate financial forecast for your business.
3. How Much Will You Pay Yourself and Others?
To help estimate your financial projections for growth, figure out how much you’ll pay yourself, your business partners and your employees. If you’re just starting out, consider going lean and paying yourself a minimum salary.
Besides a salary, will you be offering benefits such as health insurance, life insurance or an employer-sponsored retirement plan? As of late 2017, benefits accounted for about 32 percent of employee costs, according to the Bureau of Labor Statistics. If you’re going to provide these benefits, make sure to include them in your projections so these costs don’t surprise you later.
4. What Is Your Profitability?
To start, figure out your company’s overhead. In the early days of your business, this is far easier to predict than your profitability. Look at one-time expenses (e.g., equipment, furniture, company vehicles), fixed costs, (e.g., rent, utilities, insurance, payroll company) and variable costs (e.g., marketing, travel, credit card fees, seasonal help). Your expenses may change according to a price change in your materials, and unexpected expenses can always creep up on you.
Next, subtract your business expenses from your anticipated sales, revenues and taxes. What’s left over is your profitability. It’s useful to have a range of profitability that’s based on a conservative estimate (or the minimum amount you anticipate to make in revenue) and a more liberal estimate (or the higher end of how much you expect to rake in). This range will help you paint a realistic picture of your net income.
5. How Much Capital Will You Re-Invest in the Business to Grow It?
You can use your range of profitability to figure out how much capital you can afford to put back into your business. For instance, you might want to grow your business by hiring more employees, expanding locations, offering more products to your customers, or changing your LLC to an S Corp. Besides money earned from your small business, will you be receiving capital from other sources, such as investors or small business loans? If so, consider these figures when you make your projections.
6. What’s Your Three- and Five-Year Plan?
When you’re just starting out, you’ll probably want to err on the more conservative side of things as you make revenue projections for the next month, quarter and upcoming year. Because you’re basing these projections on very new information, be sure to review your financial records periodically to make sure they’re correct and up-to-date. Once you have enough financial information, you can more accurately come up with financial forecasts and create your business plan for the next few years.
Since financial projections are one cornerstone of business finance, making sure your forecasts are as accurate as possible will help you grow your company. Want to learn more about how to plan and manage a successful business? Reach out to a representative at Incfile today.