Business plan financial projections

Business Plan Financial Projections Stop Worrying About Being Right...

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Being Right...


Business plan financial projections seem daunting because
they are so uncertain. This very uncertainty, however, is
what makes preparing them easy because you can't
possibly be right. You can't predict the future. None of us
can. All you can be is competent in the way you prepare
your business plan projections.

Before you finalize your business plan this year, consider
these six caveats to preparing your business plan financial
projections:

1. Don't offer pull-out-of-the-air, "conservative"
Guess estimates about getting some percentage of the
overall market demand or year-over-year growth.

It is a mistake to assume that business investors will
appreciate your being conservative with your business
plan financial projections in the early years of your
business.


Don't think for a Wall Street minute that presenting
"conservative" business plan financial projections indicates
"realism" to prospective business investors. Business
investors
invest for one reason: to earn a return on their money.
How
long the money is invested influences the amount of the
return
earned. Let's say a business investor wants to triple an
investment. Well, if that investment triples in 3 years, the
return is 44%. If it triples in five years, the return is
25%. Adding just two years to the investment period
nearly
halves the return! Now do you see why time is so
important
to a business investor? Here are a few other examples:
let's
say a business investor wants to:

Make 5 times an investment in 3 years = 71% return







So, while you may find it attractive to figure out how to
make "just a living" until the business venture proves
itself, you now understand why business investors want
sales
and earnings to grow absolutely as fast as possible,
without
being deceived, in your business plan financial projections.


On the whole, business investors are risk averse only to
the
extent that they don't want to lose their money or tie it up
in a low return investment. Typically when you make the
claim
that your business plan financial projections are
"conservative",
it usually just means that you have no idea how and why
you'll
achieve a certain level of sales within a certain time frame.
Interesting, these kinds of estimates, provided that you've
done some good thinking about market segments and
overall
demand, often turn out to be too low. Remember, it's just
as
bad to underestimate your sales, as it is to overestimate
them.


2. Avoid calculating costs as a straight percentage of
revenues.

Sure it's easier to do things this way, especially with
Excel and other business plan financial projection
software.
Costs are real, however. You need to know what they are
very
specifically. If you've done your homework in developing
your business plan, then you should already have this
information,
or at least the basis of it. Just estimate and calculate your
costs on a product-by-product basis.

With these warnings in mind, use the following steps to
develop your business plan financial projections:

Think about what percentage of the overall market share
your competitors already own. Assume that they will
continue their present trends in growth. (Note: some


competitors may already be trending down and losing
market share.) Temper your market share estimates with
some discussion of how your entry into the market will
affect these trends. Then, estimate the percent of total,
potential demand that remains available to you.

Now, based on the limitations of your operations plans,
calculate how much of this remaining available demand
you can achieve. This is a very simple calculation. Start
with your overall productive unit capacity and factor it by
the expected yield of sellable product, then multiply these
unit sales by their respective selling prices and voila, you
have the revenue numbers for your business plan financial
projections.

Let's take an example.

Your research indicates that 2 out of every 10 females age
23 to 55 will under go some type of non-invasive cosmetic
treatment in your area. Your research also shows that this
number is expected to grow 20% each year over the next
5


years. There are 40,000 females in your target market.
You identified four competitors in your target market.
These four competitors currently handle on average 6
procedures a day. You plan to start a non-invasive
cosmetic treatment center that uses the most advanced
technology and is thus capable of performing an average
of 7 procedures a day.
Using this data you calculate the following statistics about
your market and market potential:

Total market 40,000 females x 20% = 8,000 procedures
per year

4 competitors x 6 procedures x 250 days = 6,000
procedures per year

Available procedures: 8,000 less 6,000 = 2,000 per year

Your productive capacity: 7 procedures a day x 250 days
=
1,750 or 21.875% of the total market. The average selling


price for a procedure is $400. Thus, the revenue for the
first year in your business plan financial projection would
be 1,750 procedures times $400 or $700,000.

Now, let's say you're were projecting 2,200 procedures
per year. This would mean that you would have to alter
your operating plan to be able to perform 2,200
procedures. You would also have to demonstrate how you
would capture an additional 200 procedures from your
competitors.
Granted this is an over simplified example, but it should
give you a feel for how this process works.

Regarding price, in most cases you should have a clear
idea of how to price your product or service. There are
usually other, similar products or services out on the
market.
Unless your competitive advantage is a cost reduction
and/or unless price is a critical basis of competition, just
estimate the value of your improvement and add it on to
the average price currently offered in the marketplace. In
order to make this estimate, you'll have to be talking to
potential users. Find out what they pay now. Find out how
they feel about the current price. Ask them if they'd be


willing to pay more and how much more. If you ask
enough people, you'll get a general idea.

3. Never determine price on the basis of a margin you
think is attractive.

The market will pay you only for the value you deliver,
which is determined by the consumer paying the final
price.
It's easy to make the mistake of thinking that a 20%, 40%
or even a 60% margin is great. Never considering that if
the product or service you're offering provides a real
advantage. If you do this, you may be grossly
underestimating the price you can get in the marketplace
and underestimating your business plan financial
projections.
Consumers don't think in terms of margins. They could
care less about what you ought, "reasonably", to get for
your product. That's why you must find out the most that
they'll pay. This is the value of your product or service.
Come up with some reasonable basis for determining this
real value.
Keep in mind the obvious: If the consumer's value on the
final product or service is less than your cost plus a
reasonable profit to keep your business growing, you're in


trouble. Your business model will not be sustainable and
your business plan financial projections useless.

Now calculate the costs of manufacturing and distributing
your product. These costs flow directly from your
revenues estimates and operations plan. How much will it
cost to purchase what equipment and materials, hire what
personnel, engage in what selling efforts, pay what
accountants and lawyers, rent what kind of space and so
forth, to achieve the revenues you're showing in your
business plan financial projections. You must be very
specific. Project your costs over time. Keep them tied to
the units you need to sell to achieve the revenues in your
business plan financial projections.

Obviously, costs and revenues work hand in hand.

4. Keep your fixed cost low.

Keep in mind that none of these revenues and the cost
estimates are going to be perfectly accurate, which means
the amount of profit or cash available to pay "fixed" cost
isn't going to be accurate either. As a result, you can lose
your shirt trying to pay for equipment, a receptionist, or


other activities that don't contribute to the sole objective
of making sales. Wherever possible, rent space, rent time
on equipment, answer your own phones, etc. To the
extent that you keep costs variable in your business plan
financial projections, you can cut back when sales are
slower than expected. It's the worst situation to have a
big, well-furnished office with an expensive secretary who
needs the job, when the money isn't coming in. High fixed
costs in your business plan financial projections also send
the wrong message to investors that you know more
about the "form" of doing business than about actually
making money.

Now pull all your numbers together to prepare the
financial statements that summarize your business plan
financial projections. You need three basic statements:
cash flow analysis, income statements, and balance
sheets. All of these come directly from the above
calculations. Your cash flow analysis indicates when and
what amounts of capital infusion you'll need to start and
sustain your business plan.
Make your income and balance sheet projections on the
assumption that you'll get the capital. For the first year or
two of your business plan financial projections, present
each of these statements on at least a quarterly basis.
Monthly is best. I suggest doing a 24- or 36-month
projection depending on your growth plans and changes


in the industry that you foresee. Follow these monthly or
quarterly projections with annual projections till you cover
a span of 5 years.

Finally, run through some "what-if" scenarios or sensitivity
analysis. Though you business plan financial projections
should be based on your best and best-supported
estimates of costs and revenues, you know you can't be
100% right. That's why it's important to identify those
elements or assumptions of your business plan financial
projections that you feel are most uncertain. Write out the
nature of the uncertainty and the range you think the
estimates will fluctuate up or down. Then change the
estimates accordingly and re-run all your statements.
Pay close attention to how your business plan financial
projections, especially cash flows, change when you
change each assumption. This will help you determine
how much
"cushion" you have available and, if business isn't going
according to plan, at what point cash will become an
issue.

5. Do not simply assume that costs and revenues may be
"off", up or down, by some percentage.


Again, I know that Excel makes it easy to do this. For all
the same reasoning as above, stay focused on the
assumptions and details that make up your business plan
financial projections.
It's the details you need to examine for their sensitivity
and their impact on the bottom line. You only need to
alter those specific items that you're most uncertain
about. If it's revenues that you're worried about, is it the
price, the volume, or both that concerns you most? How
big a swing in the estimate are you worried about, in what
direction and why? If it's your cost projections that are
keeping you awake at night, which cost elements and
why? Things like rents and labor costs can be determined
fairly accurately. But maybe you're unsure about materials
or labor availability or how efficiently you can produce
your products or provide your services. Maybe you'll have
to pay extra to ensure their availability. This kind of
thinking forms the basis for running
"what-if" or sensitivity analysis on your business plan
financial projections.


6. Do not include every possible business plan financial
projection scenario in your business plan.

Both you and your investors need to know what aspects of
the business plan financial projections are most uncertain,
represent the most risk, in what direction, why, and how
they affect the bottom line. Having hundreds of alternative
scenarios to sort through is like a man with two watches
showing two different times... he never knows what time
it is.
Lots of alternative business plan financial projections also
indicate that you're not too sure about anything. This is an
impossible way to communicate with business investors,
manage your business, or make important decisions. It's
much more effective to identify the risky areas of your
plan, tell why and how they impact the bottom line and
what actions you plan to take if they occur. This helps you
and your business investors stay focused on the high
impact areas and to think clearly about whether other
factors should be considered as well. It also lends more
credibility to your talents and increases the likelihood of
your plan's success.

Finish this discussion with a summary of the critical
aspects of your plan and related contingency plans. If
you've followed all these steps, then you can figure out


what you'll do if your actual performance turns out to be
different than your business plan financial projections.
Remember, you're purpose is to demonstrate to business
investors that you're competent; worrying about
protecting their investment and running a business, not
just flying by the seat of your pants.

For the best insights on Business Plan Development,
finding good investors click here


About this Author

Mike Elia is a chief financial officer and an advisor to venture capitalists
and leverage buyout specialists. For more information about business plans
and raising capital for your business or to review his business plan manual,
visit Business Plan Secrets Revealed.

Article Source:

http://EzineArticles.com/?expert=Michael_Elia

Business plan financial projections

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Business plan financial projections