When writing a business plan, your business plan financials will be used to gauge the viability of your plan and may determine your overall success. Your business plan financials are a roadmap to profits and are what lenders and investors want to see.
Most importantly, financials show whether you are on track to hitting your income targets going forward.
Many entrepreneurs I work with are apprehensive when it is time to build their business plan financials, so it is important to know that this is a common feeling. The fact is, developing financials is a big undertaking, especially before your company gets off the ground.
If you are feeling overwhelmed, know that you are not alone. Through my work, I have found that there are six common problems entrepreneurs face when constructing business plan financials.
These challenges come up so often that I have created a free checklist to get you started down the right path for your forecasts.
Here are six things to consider before you move forward with your business plan financials.
#1. The Intimidation Factor
First-time entrepreneurs tend to have trouble getting started, and that is natural. Business plan financials require you to move from concept to real numbers.
Your real numbers can be intimidating and hard to nail down, but the fact is, projections are important because they can be a useful tool for predicting the viability of your company.
One way to move past the intimidation factor is by relying heavily on researched answers. By arming yourself with information about the key components of putting together your business plan financials, it can take away some of the fear you may be feeling. Once you know “what” to include in your financials, you may run into another common challenge: not knowing where to start.
#2. Not Knowing Where to Start
Every successful business owner that has ever started a company had to do what you are doing right now: to seemingly pull numbers out of the air. Don’t waste time bemoaning the apparent impossibility of the task.
Before you actually put pen to paper, you should already have a firm understanding of the business, the products or services, the target audience, and your projected numbers. You have the information you need, you just need to organize it appropriately.
I always tell my clients to start at the beginning, at the most basic level. Tell the story, play it out in your head, and then get it down on paper.
For most entrepreneurs, the “beginning” is usually the Cash Flow Statement. To begin this, ask yourself if you have numbers running through your mind. Usually, these numbers are either costs, or revenues, or both. Start to write down all of the startup costs and operational costs you can think of, or all of the potential revenue your business may earn. By writing these out, you are already creating your cash flow.
#3. Confusing Projections with Accounting
If you are hesitant to commit a number to paper, you may be operating under the misconception that developing projections is the same as doing accounting. It makes sense that you might think that because accounting uses the same terminology; however, accounting looks backward. Forecasts are an informed guess about the future, not the concrete absolute numbers that are used when doing accounting.
In the financial section of your business plan, you are projecting forward to the next months and years of your business and it is actually much simpler to do forecasting than to do other accounting-type financials. While you should leverage research-based information, these numbers are not expected to be absolute.
Since your forecasts are a “best guess” of the future, it can be easy to fall into the next trap: trending toward extremes.
#4. Tending Toward Extremes
Avoid the common tendency to be overly optimistic or too pessimistic. Be careful not to either overreach or underestimate your projections as this can be problematic. If you overreach, investors may feel that it looks too good to be true. If you underestimate, your plan may end up not being successful because it does not look like a viable or appealing investment.
You should be putting forth your best realistic guess for the future without swinging too far in one direction or the other. To do this, consider using a competitor or similar company to baseline your own forecasts. Is your top competitor bringing in $100,000 per year according to zoominfo.com or manta.com? If so, your projections probably should be somewhere in the same ballpark. If they are not, double-check your assumptions, and make sure you are being realistic.
That being said, when you feel like your projections make logical sense, even if they are in a different ballpark than your competitor, let it be, and do not get stuck by overthinking.
#5. Overthinking It
When it comes to financial projections, anything you plan will certainly be faulty. This is about best-guessing it, not creating perfection.
The point is to have a plan.
Complete the research, and use your common sense to make reasonable projections. Draw on your experience as a business owner when determining what will or will not make sense to include. Perform an educated guess and then put a stamp on it.
As you show your projections to partners, bankers, or investors, they will give you feedback on whether your projections raise red flags. At that time, you can revisit your numbers.
As long as your current estimates are based on reality and research, feel confident and move on. Whatever you do, try not to overthink it.
#6. Feeling Ill-Equipped
Entrepreneurs who have never done business plan financials before may feel overwhelmed. You might feel like you are missing something or are uncertain with exactly what you are doing. If you need help or are not familiar with financial concepts, that is okay. Just be sure to consult with a professional OR download a good financials template to ease your stress and guide you through the steps.
To get started with the basics, consider using this checklist. It walks you through a few things to consider as you dive into your business plan financials; having a roadmap to follow will make you feel more in control and equipped to do the work.
Whether this is your first or tenth time writing business plan financials, like anything else in business, it comes down to having a structured process. By taking the six areas above into consideration, you are laying the groundwork to write a business plan that gets results.