| Business plan financial projections seem daunting | | | | 40% oreven a 60% margin is great. Never considering |
| becausethey are so uncertain. This very uncertainty, | | | | that if theproduct or service you're offering provides a |
| however, iswhat makes preparing them easy because | | | | realadvantage. If you do this, you may be |
| you can't possibly beright. You can't predict the future. | | | | grosslyunderestimating the price you can get in the |
| None of us can. All youcan be is competent in the | | | | marketplace andunderestimating your business plan |
| way you prepare your business planprojections. | | | | financial projections. |
| Before you finalize your business plan this year, | | | | Consumers don't think in terms of margins. They could |
| considerthese six caveats to preparing your business | | | | careless about what you ought, "reasonably", to get |
| plan financialprojections: | | | | for yourproduct. That's why you must find out the |
| 1. Don't offer pull-out-of-the-air, | | | | most that they'llpay. This is the value of your product |
| "conservative"guesstimates about getting some | | | | or service. Come upwith some reasonable basis for |
| percentage of the overallmarket demand or | | | | determining this real value. |
| year-over-year growth. | | | | Keep in mind the obvious: If the consumer's value on |
| It is a mistake to assume that business investors | | | | thefinal product or service is less than your cost plus |
| willappreciate your being conservative with your | | | | areasonable profit to keep your business growing, |
| business planfinancial projections in the early years of | | | | you're introuble. Your business model will not be |
| your business. | | | | sustainable and yourbusiness plan financial projections |
| Don't think for a Wall Street minute that presenting | | | | useless. |
| "conservative" business plan financial projections | | | | Now calculate the costs of manufacturing and |
| indicates | | | | distributingyour product. These costs flow directly from |
| "realism" to prospective business investors. Business | | | | your revenuesestimates and operations plan. How |
| investorsinvest for one reason: to earn a return on | | | | much will it cost topurchase what equipment and |
| their money. Howlong the money is invested influences | | | | materials, hire what personnel,engage in what selling |
| the amount of the returnearned. Let's say a business | | | | efforts, pay what accountants andlawyers, rent what |
| investor wants to triple aninvestment. Well, if that | | | | kind of space and so forth, to achievethe revenues |
| investment triples in 3 years, thereturn is 44%. If it | | | | you're showing in your business plan |
| triples in five years, the return is | | | | financialprojections. You must be very specific. Project |
| 25%. Adding just two years to the investment period | | | | your costsover time. Keep them tied to the units you |
| nearlyhalves the return! Now do you see why time is | | | | need to sell toachieve the revenues in your business |
| so importantto a business investor? Here are a few | | | | plan financialprojections. |
| other examples: let'ssay a business investor wants to: | | | | Obviously, costs and revenues work hand in hand. |
| Make 5 times an investment in 3 years = 71% return | | | | 4. Keep your fixed cost low. |
| Make 5 times an investment in 5 years = 38% return | | | | Keep in mind that none of these revenues and the |
| Make 7 times an investment in 3 years = 91% return | | | | costestimates are going to be perfectly accurate, |
| Make 7 times an investment in 5 years = 48% return | | | | which meansthe amount of profit or cash available to |
| Make 10 times an investment in 3 years = 115% return | | | | pay "fixed" costisn't going to be accurate either. As a |
| Make 10 times an investment in 5 years = 59% return | | | | result, you can loseyour shirt trying to pay for |
| So, while you may find it attractive to figure out how | | | | equipment, a receptionist, orother activities that don't |
| tomake "just a living" until the business venture | | | | contribute to the sole objectiveof making sales. |
| provesitself, you now understand why business | | | | Wherever possible, rent space, rent time onequipment, |
| investors want salesand earnings to grow absolutely | | | | answer your own phones, etc. To the extent thatyou |
| as fast as possible, withoutbeing deceived, in your | | | | keep costs variable in your business plan |
| business plan financial projections. | | | | financialprojections, you can cut back when sales are |
| On the whole, business investors are risk averse only | | | | slower thanexpected. It's the worst situation to have a |
| to theextent that they don't want to lose their money | | | | big,well-furnished office with an expensive secretary |
| or tie it upin a low return investment. Typically when | | | | whoneeds the job, when the money isn't coming in. |
| you make the claimthat your business plan financial | | | | High fixedcosts in your business plan financial |
| projections are "conservative",it usually just means that | | | | projections also sendthe wrong message to investors |
| you have no idea how and why you'llachieve a certain | | | | that you know more about the |
| level of sales within a certain time frame. | | | | "form" of doing business than about actually making |
| Interesting, these kinds of estimates, provided that | | | | money. |
| you'vedone some good thinking about market | | | | Now pull all your numbers together to prepare the |
| segments and overalldemand, often turn out to be too | | | | financialstatements that summarize your business plan |
| low. Remember, it's just asbad to underestimate your | | | | financialprojections. You need three basic statements: |
| sales, as it is to overestimatethem. | | | | cash flowanalysis, income statements, and balance |
| 2. Avoid calculating costs as a straight percentage | | | | sheets. All ofthese come directly from the above |
| ofrevenues. | | | | calculations. Your cashflow analysis indicates when |
| Sure it's easier to do things this way, especially with | | | | and what amounts of capitalinfusion you'll need to start |
| Excel and other business plan financial projection | | | | and sustain your business plan. |
| software. | | | | Make your income and balance sheet projections on |
| Costs are real, however. You need to know what | | | | theassumption that you'll get the capital. For the first |
| they are veryspecifically. If you've done your | | | | yearor two of your business plan financial projections, |
| homework in developingyour business plan, then you | | | | presenteach of these statements on at least a |
| should already have this information,or at least the | | | | quarterly basis. |
| basis of it. Just estimate and calculate yourcosts on a | | | | Monthly is best. I suggest doing a 24- or 36-month |
| product-by-product basis. | | | | projectiondepending on your growth plans and |
| With these warnings in mind, use the following steps | | | | changes in the industry thatyou foresee. Follow these |
| todevelop your business plan financial projections: | | | | monthly or quarterly projections withannual projections |
| Think about what percentage of the overall market | | | | till you cover a span of 5 years. |
| share yourcompetitors already own. Assume that they | | | | Finally, run through some "what-if" scenarios or |
| will continuetheir present trends in growth. (Note: some | | | | sensitivityanalysis. Though you business plan financial |
| competitors mayalready be trending down and losing | | | | projections shouldbe based on your best, and |
| market share.) Temperyour market share estimates | | | | best-supported estimates of costsand revenues, you |
| with some discussion of how yourentry into the | | | | know you can't be 100% right. That's why it'simportant |
| market will affect these trends. Then,estimate the | | | | to identify those elements or assumptions of |
| percent of total, potential demand that remainsavailable | | | | yourbusiness plan financial projections that you feel are |
| to you. | | | | mostuncertain. Write out the nature of the uncertainty |
| Now, based on the limitations of your operations | | | | and the rangeyou think the estimates will fluctuate up |
| plans,calculate how much of this remaining available | | | | or down. Then changethe estimates accordingly and |
| demand youcan achieve. This is a very simple | | | | re-run all your statements. |
| calculation. Start withyour overall productive unit | | | | Pay close attention to how your business plan |
| capacity and factor it by theexpected yield of sellable | | | | financialprojections, especially cash flows, change |
| product, then multiply these unitsales by their | | | | when you changeeach assumption. This will help you |
| respective selling prices and voila, you havethe | | | | determine how much |
| revenue numbers for your business plan financial | | | | "cushion" you have available and, if business isn't |
| projections. | | | | goingaccording to plan, at what point cash will become |
| Let's take an example. | | | | an issue. |
| Your research indicates that 2 out of every 10 | | | | 5. Do not simply assume that costs and revenues may |
| females age | | | | be |
| 23 to 55 will under go some type of non-invasive | | | | "off", up or down, by some percentage. |
| cosmetictreatment in your area. Your research also | | | | Again, I know that Excel makes it easy to do this. For |
| shows that thisnumber is expected to grow 20% each | | | | allthe same reasoning as above, stay focused on the |
| year over the next 5years. There are 40,000 females | | | | assumptionsand details that make up your business |
| in your target market. Youidentified four competitors in | | | | plan financial projections. |
| your target market. Thesefour competitors currently | | | | It's the details you need to examine for their sensitivity |
| handle on average 6 procedures aday. You plan to | | | | andtheir impact on the bottom line. You only need to |
| start a non-invasive cosmetic treatmentcenter that | | | | alter thosespecific items that you're most uncertain |
| uses the most advanced technology and is | | | | about. If it's revenuesthat you're worried about, is it the |
| thuscapable of performing an average of 7 | | | | price, the volume, orboth that concerns you most? |
| procedures a day. | | | | How big a swing in the estimateare you worried about, |
| Using this data you calculate the following | | | | in what direction and why? If it'syour cost projections |
| statisticsabout your market and market potential: | | | | that are keeping you awake at night,which cost |
| Total market 40,000 females x 20% = 8,000 | | | | elements and why? Things like rents and laborcosts |
| procedures peryear | | | | can be determined fairly accurately. But maybe |
| 4 competitors x 6 procedures x 250 days = 6,000 | | | | you'reunsure about materials or labor availability or |
| proceduresper year | | | | howefficiently you can produce your products or |
| Available procedures: 8,000 less 6,000 = 2,000 per | | | | provide yourservices. Maybe you'll have to pay extra |
| year | | | | to ensure theiravailability. This kind of thinking forms the |
| Your productive capacity: 7 procedures a day x 250 | | | | basis for running |
| days = | | | | "what-if" or sensitivity analysis on your business plan |
| 1,750 or 21.875% of the total market. The average | | | | financialprojections. |
| sellingprice for a procedure is $400. Thus, the revenue | | | | 6.Do not include every possible businessplan financial |
| for the firstyear in your business plan financial | | | | projection scenario in your business plan. |
| projection would be 1,750procedures times $400 or | | | | Both you and your investors need to know what |
| $700,000. | | | | aspects of thebusiness plan financial projections are |
| Now, let's say you're were projecting 2,200 | | | | most uncertain,represent the most risk, in what |
| procedures peryear. This would mean that you would | | | | direction, why, and howthey affect the bottom line. |
| have to alter youroperating plan to be able to perform | | | | Having hundreds of alternativescenarios to sort |
| 2,200 procedures. Youwould also have to | | | | through is like a man with two watchesshowing two |
| demonstrate how you would capture anadditional 200 | | | | different times... he never knows what time it is. |
| procedures from your competitors. | | | | Lots of alternative business plan financial projections |
| Granted this is an over simplified example, but it | | | | alsoindicate that you're not too sure about anything. |
| shouldgive you a feel for how this process works. | | | | This is animpossible way to communicate with |
| Regarding price, in most cases you should have a | | | | business investors, manageyour business, or make |
| clear ideaof how to price your product or service. | | | | important decisions. It's much moreeffective to identify |
| There are usuallyother, similar products or services out | | | | the risky areas of your plan, tell whyand how they |
| on the market. | | | | impact the bottom line and what actions youplan to |
| Unless your competitive advantage is a cost reduction | | | | take if they occur. This helps you and your |
| and/orunless price is a critical basis of competition, | | | | businessinvestors stay focused on the high impact |
| justestimate the value of your improvement and add it | | | | areas and to thinkclearly about whether other factors |
| on to theaverage price currently offered in the | | | | should be considered aswell. It also lends more |
| marketplace. In orderto make this estimate, you'll have | | | | credibility to your talents andincreases the likelihood of |
| to be talking topotential users. Find out what they pay | | | | your plan's success. |
| now. Find out howthey feel about the current price. | | | | Finish this discussion with a summary of the |
| Ask them if they'd bewilling to pay more and how | | | | criticalaspects of your plan and related contingency |
| much more. If you ask enoughpeople, you'll get a | | | | plans. Ifyou've followed all these steps, then you can |
| general idea. | | | | figure outwhat you'll do if your actual performance |
| 3. Never determine price on the basis of a margin you | | | | turns out to bedifferent than your business plan |
| thinkis attractive. | | | | financial projections. |
| The market will pay you only for the value you | | | | Remember, you're purpose is to demonstrate to |
| deliver,which is determined by the consumer paying the | | | | business investorsthat you're competent; worrying |
| final price. | | | | about protecting their investmentand running a |
| It's easy to make the mistake of thinking that a 20%, | | | | business, not just flying by the seat of your pants. |