It is important to create clear and accurate financial projections for your business in the startup phase.
Most business owners complain that developing accurate financial plans takes time, and that time could be used for sales rather than planning. However, few investors will invest in your business if they do not have a clear prediction.
The right financial projections will help you with personnel and operational planning that will take your business to the next level.
Here are ways to help you create a financial estimate for your business. Start with cost
Is your business in the startup stage? If this is the case, it is easier to forecast expenses than income. So start with an estimate of current expenses like rent, utility bills, phone bills, legal fees, advertising, COGS, materials, and customer service costs. .
Double your estimates for marketing and advertising, as they tend to exceed expectations. Triple legal and insurance costs because they are so unpredictable. Check the main odds to make sure your prediction is correct
Don’t forget about expenses, especially after giving a positive revenue forecast. Most entrepreneurs focus on hitting revenue goals and assume they can adjust costs if sales don’t materialize. Positive thinking can help you improve sales but not enough to pay the bills.
Using key ratios, you can reconcile your revenue and expense projections. Here are some ratios that can guide to making an accurate forecast:
Gross profit margin
It is the ratio of total direct costs to total revenue for a given period. Write down assumptions that can increase your gross margin by 10-20%. For example, if your customer service and sales fees are low now, they could be high in the future.
Operating profit margin
Operating margin measures the profit a company makes on sales in dollars, after paying variable production costs – such as wages and raw materials, and before interest or taxes are paid. . Expect to see positive movement in this rate.
As your revenue grows, overhead will make up a small percentage of your total costs, so your operating margin will increase. Most entrepreneurs make the mistake of predicting breakeven too early and they assume they won’t need funding to get there.
Total number of employees per customer
Are you an individual entrepreneur and plan to grow your own business? Then pay attention to this ratio.
Divide the number of employees in your business (only one employee if you do everything yourself) by the total number of customers you have. Next, ask yourself if you want to manage all of those accounts 5 years from now when the business has grown. If not, you need to reevaluate your assumptions about payroll or revenue, or both.