Business Plan Financial Projections Stop Worrying About Being Right...Business PlanFinancial For the best insights on Business PlanProjections Stop Financials, findingWorrying About good investors click hereBeing Right...
Business Plan Financial Projections Stop Worrying About Being Right...Business plan financial projections seem daunting becausethey are so uncertain. This very uncertainty, however, iswhat makes preparing them easy because you cantpossibly be right. You cant predict the future. None of uscan. All you can be is competent in the way you prepareyour business plan projections.Before you finalize your business plan this year, considerthese six caveats to preparing your business plan financialprojections:1. Dont offer pull-out-of-the-air, "conservative"Guess estimates about getting some percentage of theoverall market demand or year-over-year growth.It is a mistake to assume that business investors willappreciate your being conservative with your businessplan financial projections in the early years of yourbusiness.
Business Plan Financial Projections Stop Worrying About Being Right...Dont think for a Wall Street minute that presenting"conservative" business plan financial projections indicates"realism" to prospective business investors. Businessinvestorsinvest for one reason: to earn a return on their money.Howlong the money is invested influences the amount of thereturnearned. Lets say a business investor wants to triple aninvestment. Well, if that investment triples in 3 years, thereturn is 44%. If it triples in five years, the return is25%. Adding just two years to the investment periodnearlyhalves the return! Now do you see why time is soimportantto a business investor? Here are a few other examples:letssay a business investor wants to:Make 5 times an investment in 3 years = 71% return
Business Plan Financial Projections Stop Worrying About Being Right...Make 5 times an investment in 5 years = 38% returnMake 7 times an investment in 3 years = 91% returnMake 7 times an investment in 5 years = 48% returnMake 10 times an investment in 3 years = 115% returnMake 10 times an investment in 5 years = 59% returnSo, while you may find it attractive to figure out how tomake "just a living" until the business venture provesitself, you now understand why business investors wantsalesand earnings to grow absolutely as fast as possible,withoutbeing deceived, in your business plan financial projections.
Business Plan Financial Projections Stop Worrying About Being Right...On the whole, business investors are risk averse only totheextent that they dont want to lose their money or tie it upin a low return investment. Typically when you make theclaimthat your business plan financial projections are"conservative",it usually just means that you have no idea how and whyyoullachieve a certain level of sales within a certain time frame.Interesting, these kinds of estimates, provided that youvedone some good thinking about market segments andoveralldemand, often turn out to be too low. Remember, its justasbad to underestimate your sales, as it is to overestimatethem.
Business Plan Financial Projections Stop Worrying About Being Right...2. Avoid calculating costs as a straight percentage ofrevenues.Sure its easier to do things this way, especially withExcel and other business plan financial projectionsoftware.Costs are real, however. You need to know what they areveryspecifically. If youve done your homework in developingyour business plan, then you should already have thisinformation,or at least the basis of it. Just estimate and calculate yourcosts on a product-by-product basis.With these warnings in mind, use the following steps todevelop your business plan financial projections:Think about what percentage of the overall market shareyour competitors already own. Assume that they willcontinue their present trends in growth. (Note: some
Business Plan Financial Projections Stop Worrying About Being Right...competitors may already be trending down and losingmarket share.) Temper your market share estimates withsome discussion of how your entry into the market willaffect 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 demandyou can achieve. This is a very simple calculation. Startwith your overall productive unit capacity and factor it bythe expected yield of sellable product, then multiply theseunit sales by their respective selling prices and voila, youhave the revenue numbers for your business plan financialprojections.Lets take an example.Your research indicates that 2 out of every 10 females age23 to 55 will under go some type of non-invasive cosmetictreatment in your area. Your research also shows that thisnumber is expected to grow 20% each year over the next5
Business Plan Financial Projections Stop Worrying About Being Right...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 6procedures a day. You plan to start a non-invasivecosmetic treatment center that uses the most advancedtechnology and is thus capable of performing an averageof 7 procedures a day.Using this data you calculate the following statistics aboutyour market and market potential:Total market 40,000 females x 20% = 8,000 proceduresper year4 competitors x 6 procedures x 250 days = 6,000procedures per yearAvailable procedures: 8,000 less 6,000 = 2,000 per yearYour productive capacity: 7 procedures a day x 250 days=1,750 or 21.875% of the total market. The average selling
Business Plan Financial Projections Stop Worrying About Being Right...price for a procedure is $400. Thus, the revenue for thefirst year in your business plan financial projection wouldbe 1,750 procedures times $400 or $700,000.Now, lets say youre were projecting 2,200 proceduresper year. This would mean that you would have to alteryour operating plan to be able to perform 2,200procedures. You would also have to demonstrate how youwould capture an additional 200 procedures from yourcompetitors.Granted this is an over simplified example, but it shouldgive you a feel for how this process works.Regarding price, in most cases you should have a clearidea of how to price your product or service. There areusually other, similar products or services out on themarket.Unless your competitive advantage is a cost reductionand/or unless price is a critical basis of competition, justestimate the value of your improvement and add it on tothe average price currently offered in the marketplace. Inorder to make this estimate, youll have to be talking topotential users. Find out what they pay now. Find out howthey feel about the current price. Ask them if theyd be
Business Plan Financial Projections Stop Worrying About Being Right...willing to pay more and how much more. If you askenough people, youll get a general idea.3. Never determine price on the basis of a margin youthink is attractive.The market will pay you only for the value you deliver,which is determined by the consumer paying the finalprice.Its easy to make the mistake of thinking that a 20%, 40%or even a 60% margin is great. Never considering that ifthe product or service youre offering provides a realadvantage. If you do this, you may be grosslyunderestimating the price you can get in the marketplaceand underestimating your business plan financialprojections.Consumers dont think in terms of margins. They couldcare less about what you ought, "reasonably", to get foryour product. Thats why you must find out the most thattheyll pay. This is the value of your product or service.Come up with some reasonable basis for determining thisreal value.Keep in mind the obvious: If the consumers value on thefinal product or service is less than your cost plus areasonable profit to keep your business growing, youre in
Business Plan Financial Projections Stop Worrying About Being Right...trouble. Your business model will not be sustainable andyour business plan financial projections useless.Now calculate the costs of manufacturing and distributingyour product. These costs flow directly from yourrevenues estimates and operations plan. How much will itcost to purchase what equipment and materials, hire whatpersonnel, engage in what selling efforts, pay whataccountants and lawyers, rent what kind of space and soforth, to achieve the revenues youre showing in yourbusiness plan financial projections. You must be veryspecific. Project your costs over time. Keep them tied tothe units you need to sell to achieve the revenues in yourbusiness 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 costestimates are going to be perfectly accurate, which meansthe amount of profit or cash available to pay "fixed" costisnt going to be accurate either. As a result, you can loseyour shirt trying to pay for equipment, a receptionist, or
Business Plan Financial Projections Stop Worrying About Being Right...other activities that dont contribute to the sole objectiveof making sales. Wherever possible, rent space, rent timeon equipment, answer your own phones, etc. To theextent that you keep costs variable in your business planfinancial projections, you can cut back when sales areslower than expected. Its the worst situation to have abig, well-furnished office with an expensive secretary whoneeds the job, when the money isnt coming in. High fixedcosts in your business plan financial projections also sendthe wrong message to investors that you know moreabout the "form" of doing business than about actuallymaking money.Now pull all your numbers together to prepare thefinancial statements that summarize your business planfinancial projections. You need three basic statements:cash flow analysis, income statements, and balancesheets. All of these come directly from the abovecalculations. Your cash flow analysis indicates when andwhat amounts of capital infusion youll need to start andsustain your business plan.Make your income and balance sheet projections on theassumption that youll get the capital. For the first year ortwo of your business plan financial projections, presenteach of these statements on at least a quarterly basis.Monthly is best. I suggest doing a 24- or 36-monthprojection depending on your growth plans and changes
Business Plan Financial Projections Stop Worrying About Being Right...in the industry that you foresee. Follow these monthly orquarterly projections with annual projections till you covera span of 5 years.Finally, run through some "what-if" scenarios or sensitivityanalysis. Though you business plan financial projectionsshould be based on your best and best-supportedestimates of costs and revenues, you know you cant be100% right. Thats why its important to identify thoseelements or assumptions of your business plan financialprojections that you feel are most uncertain. Write out thenature of the uncertainty and the range you think theestimates will fluctuate up or down. Then change theestimates accordingly and re-run all your statements.Pay close attention to how your business plan financialprojections, especially cash flows, change when youchange each assumption. This will help you determinehow much"cushion" you have available and, if business isnt goingaccording to plan, at what point cash will become anissue.5. Do not simply assume that costs and revenues may be"off", up or down, by some percentage.
Business Plan Financial Projections Stop Worrying About Being Right...Again, I know that Excel makes it easy to do this. For allthe same reasoning as above, stay focused on theassumptions and details that make up your business planfinancial projections.Its the details you need to examine for their sensitivityand their impact on the bottom line. You only need toalter those specific items that youre most uncertainabout. If its revenues that youre worried about, is it theprice, the volume, or both that concerns you most? Howbig a swing in the estimate are you worried about, in whatdirection and why? If its your cost projections that arekeeping you awake at night, which cost elements andwhy? Things like rents and labor costs can be determinedfairly accurately. But maybe youre unsure about materialsor labor availability or how efficiently you can produceyour products or provide your services. Maybe youll haveto pay extra to ensure their availability. This kind ofthinking forms the basis for running"what-if" or sensitivity analysis on your business planfinancial projections.
Business Plan Financial Projections Stop Worrying About Being Right...6. Do not include every possible business plan financialprojection scenario in your business plan.Both you and your investors need to know what aspects ofthe business plan financial projections are most uncertain,represent the most risk, in what direction, why, and howthey affect the bottom line. Having hundreds of alternativescenarios to sort through is like a man with two watchesshowing two different times... he never knows what timeit is.Lots of alternative business plan financial projections alsoindicate that youre not too sure about anything. This is animpossible way to communicate with business investors,manage your business, or make important decisions. Itsmuch more effective to identify the risky areas of yourplan, tell why and how they impact the bottom line andwhat actions you plan to take if they occur. This helps youand your business investors stay focused on the highimpact areas and to think clearly about whether otherfactors should be considered as well. It also lends morecredibility to your talents and increases the likelihood ofyour plans success.Finish this discussion with a summary of the criticalaspects of your plan and related contingency plans. Ifyouve followed all these steps, then you can figure out
Business Plan Financial Projections Stop Worrying About Being Right...what youll do if your actual performance turns out to bedifferent than your business plan financial projections.Remember, youre purpose is to demonstrate to businessinvestors that youre competent; worrying aboutprotecting their investment and running a business, notjust flying by the seat of your pants.For the best insights on Business Plan Development,finding good investors click here
Business Plan Financial Projections Stop Worrying About Being Right...About this AuthorMike Elia is a chief financial officer and an advisor to venture capitalistsand leverage buyout specialists. For more information about business plansand 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