How to create financial projections for your startup?

While raising funds for your startup, it's important to show investors your business's current financial position and explain how their investment will help you achieve your goals.

Similarly, to make strategic and well-informed financial decisions for your startup, you must plan your business more appropriately by accurately estimating the company's revenue and expenses.

In the above situations, you should create sound and realistic financial projections for your startup.

What is financial projections for a startup?

Financial projections include a detailed analysis of the company's historical financial data and its plans for the future that help you anticipate future revenue and expenses for several months or years.

Preparing sound financial projections becomes essential for a startup as it can help you prepare for the initial years of a new business launch. Also, the detailed financial projections of revenue and expenses in a startup provide a helpful analysis to the potential investors while raising funds for your startup.

How can you create realistic financial projections for your startup?

Learning to make and analyze these projections can help you build your startup into a successful and profitable company. The following are the five (5) principles for creating your startup's financial projections, enabling you to have a productive investment conversation with the best possible outcome:

1. Be realistic - It is needless to state that all investors will discount your projections, so you need to be aggressive while building financial projections for your startup. However, too aggressive data could potentially jeopardize the achievability of your financial plan, so a balanced projection that falls between aggressive and realistic is an ideal scenario. You need to present that your business has significant potential to scale and generate attractive profits, being realistic to achieve.

2. Be clear and logical - The financial projections for your startup should demonstrate a clear strategy regarding unit economics and operational efficiencies backed by relevant financial analysis and ratios that show your expertise in financials. You should perform market research to have benchmark data of peer companies such as average gross margin, churn rate, etc.

3. Historical data - Your potential investors would like to see the historical financial data for at least 2-3 years, enabling them to understand how your business is performing. You can create your financial projections based on the historical financials that will convey what you have accomplished and set a foundation for business scalability in the future. Further, you can tell your growth story with historical data from revenue to net profit and increase your chances of getting funded.

4. Connect the dots - After creating an attractive growth story for your startup, the next step is to connect the dots by determining how funding can help you achieve your growth targets. It may include expansion of your sales team, investment in marketing initiatives, or hiring a product development team. It provides a sound understanding to the potential investors regarding how their investment will bring scalability to the business.

5. Demonstrate Milestones - Besides creating milestones for yourself, such as team expansion, your financial projections should demonstrate the milestones that meet investor expectations, such as developing a mobile app within six months, doubling revenue within a year, etc. You can use your financial projections to build confidence in your potential investors that their investment will significantly increase the business value and put you in a position to raise funding at your favorable terms.