How to Create Accurate Revenue Projections and the Common Mistakes Entrepreneurs Make
“Accounting is the language of business, and you have to learn it like a language. To be successful at business, you have to understand the underlying financial values of the business.” –Warren Buffett
As an entrepreneur, you know it is important to have a plan. This includes having a plan for your business, but it also includes having a plan for your finances. One of the most important aspects of financial planning for your business is creating revenue projections, also known as pro forma statements. Revenue projections are the estimated revenue that your business will earn over a certain period. Why create them? Glad you asked.
First, projections help you to track your progress. It allows you to determine whether or not your business is on track when comparing actual results to projections. Second, projections can also assist you in making more informed business decisions. As an example, if you know that you have to achieve a certain level of sales to break even, making decisions that may increase sales becomes more important. Finally, projecting your revenue helps you to plan for the future. Knowing how much money your business will bring in over time will help determine how much money you will need to raise and when.
How To Create Accurate Revenue Projections For Your Startup
When creating revenue projections, keep the following points in mind. First, you need to make sure your projections are realistic and feasible. This means having a good understanding of your industry, your target market, and what you are offering. Second, you should always update your projections when you receive new information. Adjust your original projections if actual results differ from what you expected.
To begin, you can establish SMART (specific, measurable, attainable, relevant and time-bound) milestones. These will help ensure progress can be measured while making areas where improvements need to happen more visible throughout every phase of development.
For example, some SMART milestones may be:
- Obtain 50 customers within the first six months
- Hire two developers in the next three months
- Complete beta prototype within nine months
- Attend three tradeshows in the next 12 months
Next, you will want to add details to support each milestone. This will not only help you grow your business but will enable you to determine expenses and keep track of any additional capital that is needed. For example, you may want to consider how much revenue each customer will generate, what percentage of customers are expected to return, and how long it will take to develop your product or service. Asking yourself these questions, and estimating answers will help support each revenue projection. You can use this information to build a financial model using estimates that are tailored to your business needs.
Since early-stage startups may not have access to past performance data, revenue projections must be devised from the ground up. This requires an accurate understanding of your customers, products and competitors. Focus on near-term projections — 6-12 months. Forecasting further out is less important in the early stages and requires assumptions that may not be entirely accurate. You should re-visit your projections monthly or quarterly. Compare your projections to actual results and update as necessary.
Presenting Revenue Projections
After completing your projections, it is important to know how to present them. Your projections should include enough detail to display a realistic view of your company’s potential.
When presenting to investors, include high-level information on revenue, losses, cash flow, net income, and key performance indicators (KPIs). For your board, in addition to the above items, be sure to review your company’s budget and look at each quarter–noting any differences between planned versus actual results.
Financial statements to include:
- Income statement: Details a company’s performance over a period of time. May also be called a Profit & Loss (P&L) statement.
- Balance sheet: Provides a snapshot of a company’s assets, liabilities, and shareholder equity at a certain point in time.
- Cash flow statements: Use the above to create this. Summarizes how much cash is entering and leaving a business.
A Few Common Mistakes to Avoid
Now that you understand the importance of accurate revenue projections, it is important to be aware of some common mistakes that can occur. The biggest mistake is simply not taking the time to create them. Even if you are unsure if your projections will be correct, the work you do will help you measure your company’s progress and make well-informed decisions. If you base your projections on solid assumptions, it shows you did your homework and mitigates risk for you and investors.
Second, when presenting, avoid using industry jargon or acronyms that may be unclear to investors, board members and other stakeholders. You want the information you provide to be easily understood by everyone involved in supporting your company’s growth. Apply this same concept when thinking through what details you want to share during your presentation. There is a balance between sharing too little and too much, and you’ll want to be mindful of both.
And finally, (but also mentioned a few times already) failing to revise projections regularly can lead to inaccurate information. Always compare your actual results against your projections and update them accordingly on a monthly or quarterly basis.
In closing, creating and iterating on revenue projections are important for all businesses, especially early-stage startups. They allow you to track your progress, make informed decisions, and present a realistic view of your company’s potential to investors and board members. If you need assistance in getting started or would benefit from presenting what you have created to someone, Elevate EIRs are always available.