3 Common Mistakes to Avoid When Creating Financial Projections for Your Business Plan
You probably know that over 50 percent of businesses fail within a decade. But did you know that the vast majority of these businesses fail because of cash flow challenges?
It’s true that unforeseen circumstances, like the COVID-19 pandemic, can create financial challenges for many businesses, but more often than not, it’s due to a lack of adequate financial planning. You start planning for your business’s financial health when drawing the business plan.
Financial projections are a central part of any business plan, and you need to know how to go about making them. To help you in this regard, we’re sharing a few common mistakes you ought to avoid.
Shooting for Profits Too Soon
In business, the mission is simple: make a profit.
However, while some businesses are profitable within the first year of operation, others take several years before breaking even. Unfortunately, it’s hardly possible to accurately tell when your upcoming business is going to become profitable. This leads to a common financial forecasting mistake: aiming for quick profitability.
It’s understandable if you’re looking for outside investment and want to show your potential investors that your business has great profitability potential. But many seasoned investors aren’t swayed by how quickly a business becomes profitable. They’re more concerned with growth and market capitalization.
As such, be realistic with your profit forecasts and focus on demonstrating the business’s growth prospects.
Underestimating Expenses
To make a profit, revenues must be greater than expenses. This means expense forecasts are a key part of a business’s financial projections.
When a business is yet to start operating, it can be hard to tell just how much you’re going to spend on various things, such as rent, sales and marketing, and labor. Besides primary expenses, there’s also a raft of secondary expenses that will arise in the course of running a business.
Overestimating expenses seems to be the safer bet since you need to raise adequate startup and working capital and it’s better to err on the side of caution, but many owners end up underestimating them anyway.
Why?
They wrongly assume that funders/investors are going to look at the business unfavorably if it has big expenses. Yes, over-the-top expenses are undesirable as that means the business will be burning through boatloads of money, but the growth rate justifies it, no problem!
Not Going Deeper on Cash Flow
Cash flow is money coming in and going out of your business. On the surface, this looks like a balance of expenses and revenues.
Correct, but there’s more to cash flow than meets the eye. Good cash flow projections must take into account inventory, accounts receivables, and other assets that are not in liquid cash. You must also keep in mind that being cash flow positive doesn’t necessarily mean a business is profitable.
As you can tell, making a solid financial projection business plan isn’t a layman’s job. You should hire business plan consultants to help you draw it.
Financial Projections Done Well
Drawing a business plan is an important step in creating a business and can make a difference between success and failure. Financial projections are a vital part of a good business plan. They paint a picture of how the business will be performing financially.
