How do I create financial projections for a start-up business?

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Kruze Consulting Startup Q&A Author
Vanessa Kruze Founder, CPA

Creating financial projections for your startup will depend on your industry, where you are in your financing, and where you plan to take the business.

For starters, begin outlining what your key expenses will be. For example: payroll, rent, COGS in some cases, M&E, etc. Tim Berry (in this thread) did a beautiful job of outlining how these financials should be shown. While you may have a good idea of what these categories will cost, ask around to your network to make sure that you’re in the ballpark. Rents and salaries can vary widely depending on your metro.

And while you may be able to start with a template, keep in mind that your business is unique, and therefore your metrics and costs will be as well. You won’t need to start from scratch if you’re working with a professional (whether that be your VC firm, your CFO, or a seasoned angel investor/advisor in your industry): they’ll know the important metrics and average costs.

Here are some common points that you’ll want to include in your financial model:

  • 3 Years of Projections.Occasionally investors will ask for more/less, but start with 3 years.

  • 3 Statement Model. Include a Profit & Loss Statement, Balance Sheet, and Statement of Cash Flows. Each should balance and tie back to each other (this gets tricky).

  • Your KPI’s should be your Drivers. Every company has a dashboard of metrics that they track growth and success by. A few examples include number of users, customers, margin, customer acquisition cost, Twitter followers, website traffic, etc. Look to the past and show that there is a correlation between X (could be # of Sales Reps) and Y (could be your revenue), then use this as a driver towards the future projections.

  • Churn. Customers will leave. Account for this.

  • Waterfalls. Your financial model should be dynamic. Waterfalls show how you actually performed against your projection and then resets the future accordingly.

Don’t show an investor a financial model that shows smooth growth “up and to the right.” No company’s growth is without bumps. These models take a lot of time to build and are highly personalized, so it really is best to consult with a professional. If you’re planning on raising $3M+ you should come prepared with a well thought out financial model.

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