Monday, February 24, 2014

How to Estimate Financials for Business Plans

Creating good financial projections is a team effort.

Creating good financial projections is a team effort.
 
Most articles on how to write financial projections start by telling you to project sales. As every experienced entrepreneur knows, sales are only the result of a long line of business activities beginning with market research, manufacturing, inventory building, marketing, fulfillment and customer service. All this costs money, which is supposed to come from revenues earned in the previous year or from financing. Without the money, nothing happens, so the best place to start your financial projections is the money you have available.
Step 1:  Create a preliminary first-year budget based on your retained earnings and credit available from your bank. If you're projecting startup financials and don't have retained earnings or credit, use the amount of investment you can reasonably expect to raise, including investment by the founders. A conservative estimate is best because spending too much money too early can force you to cut back just as your business begins to pick up.
 
Step 2:  Estimate the cost of producing your product. You can skimp on administrative expenses and hire sales reps on commission only, but you must pay for any products or services you sell. You also need to balance your product inventory with customer demand. This takes careful study of your target market's demographics, psychographics and buying habits, plus a modest estimation of what percentage of that market you'll be able to capture. An established company is able to assign a reasonably accurate percentage with growth, but a startup must expect at least a quarter of virtually no sales.

Step 3:  Estimate your customer acquisition costs by establishing how you'll market your product and then pricing out your marketing plan. A startup must develop its brand image and customer awareness during its first year, with sales demand appearing slowly during its second or third quarter; so, for a startup, marketing will carry a high priority. A mature company can estimate marketing costs with respect to its plans for market-share expansion or development of new revenue streams.
 
Step 4:  Adjust your production and marketing costs to fit your budget. The remainder is for administrative expenses. This gives you a figure of how much revenue will be required to offset your expenses. There may need to be some further adjustments once you reach this point. Add money to your marketing, figuring marketing costs at approximately 25 percent of total revenues. Marketing will produce your customers. Keep your production expenses efficient.

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