It is important to create clear, accurate financial forecasts during the startup stage.
Many business owners feel that creating accurate financial projections is time-consuming. This time could be spent planning and generating sales, rather than building them. Clear projections are a must if you want investors to invest in your business.
Proper financial projections are essential to create the staffing and operational plans necessary for your company’s success.
These are some ways that you can create financial projections for the business.
Get started with Expenses
Are you in the startup stage of your company? It’s much easier to forecast expenses than revenues if your company is in the start-up stage. Start by estimating the expenses for common items such as rent and utility bills, phone bills, legal costs, advertising, cost-of-goods sold, materials, and customer service.
Advertising and marketing costs can be doubled because they often rise beyond your expectations. Triple your legal and insurance costs because they are hard to predict.
Make sure your Projections Are Accurate by Using the Key Ratios
Even if you make aggressive revenue predictions, don’t forget to budget for expenses. Entrepreneurs tend to focus on revenue targets and assume that they can adjust expenses if revenues don’t materialize. While positive thinking can help increase sales, it won’t be enough to pay the bills.
You can reconcile your expense and revenue forecasts by using key ratios. These ratios can help you make an accurate forecast.
This is the ratio between total direct costs and total revenue over a given period. You should note that there are some assumptions that can increase your gross margin by 10-40%. If your sales and customer service expenses are low, they may rise in the future.
Operating profit margin is the amount of profit that a business makes for every dollar sold, after it has paid variable costs like wages and taxes, as well as interest and tax. This ratio should show positive results.
Your overhead costs should not exceed 10% of your total revenue. As your revenue increases, your operating profit margin should rise. Entrepreneurs make the mistake of estimating the break-even point too soon and assume that they don’t need financing to reach this point.
Total Headcount per Client
Do you plan to start your own business? This ratio is worth paying attention to.
Divide the number employees in your company (just one if everything is done by you) by the number of customers. Next, consider whether you will be able to manage all of those accounts in five more years as the company grows. If you don’t, then you should reevaluate your assumptions about revenue and payroll.
Every successful entrepreneur has made mistakes. It’s part of the learning process. While mistakes will always happen, there are ways to avoid them.