Building Financial Projections

The Basic Documents Income Statement: The income statement shows how much money the business will generate by projecting revenues (or income) and expenses, such as sales, cost of goods sold, salaries, and all other expenses.

The Basic Documents Cash Flow Statement: The cash flow statement details the timing of the flow of money into and out of your business. For example, you may sell a product in month one but collect the money in month two. The cash flow statement focuses on the time of receipts for sales and payment of expenses.

The Basic Documents Balance Sheet: The balance sheet shows the business’s overall finances including assets (what you own), liabilities (what you owe), and equity (or the amount invested into your business).

General Rules For your first year of the projections, you’ll want to create a monthly income statement and monthly cash flow statement. Beyond the first year, quarterly or annual statements should suffice. For the balance sheet, an annual statement should be fine for all years in your forecast period.

Building Financial Projections In general, financial projections for a start up should go three (3) years into the future It’s hard to project further than three years without some historical data to use. To get started (and what you need for tomorrow’s pitch), you need to create: A sales forecast An expense budget

Sales Forecast Project your sales out for at least three (3) years How many customers can you expect? How many units will be sold? How will you price your products?

Key Data Points You Will Need Price – How much you charge for your product or service. Are there comparative products in the market to use as a reference? Should your product sell at a premium or a discount? Volume – The number of products, subscribers, units you expect to sell.

Expense Budget Include both fixed costs (e.g. rent for your location) and variable costs (e.g. marketing expenses). You don’t need to do an incredibly detailed breakdown, such as listing the cost of every chair you plan to purchase, but you do need general figures.

Key Data Points You Will Need Cost of Goods Sold – The cost of materials required to build each unit, shipping, payment processing, etc. People – The number of people you need, their expected salaries and other related costs. Selling Expenses – Advertising, promotion, tradeshows, travel, and all other marketing materials and costs.

Key Data Points You Will Need General & Administrative Expenses – Rent, utilities, insurance, accounting, legal, patents, telephone, web hosting, cloud storage, etc. Equipment and Fixed Assets – Laptops, devices, tools, machines, etc.

An Example

Another Example

How Much Money Do You Need After compiling the data points into an Income Statement and/or Cash Flow Statement, you should now have a good idea the amount of money you need. A general rule of thumb is that you have under estimated the amount of money by 2x… And, have under estimated the time it will take to get to market by 2x.

Where Do I Source Funding Founders Capital – How much free time and cash are you putting into the business? Dilutive Capital – Angel investors, venture capital, regional development funds (e.g. Thunder Bay Ventures) Non-Dilutive Capital – The federal and provincial government offer a number of programs – OCE/I3, IRAP, FedNor, NOHFC, etc.

An Example AMOUNT USE OF FUNDS $70,000 Production Equipment $20,000 Product Certification $20,000 Sales & Marketing $10,000 Working Capital $110,000 INVESTMENT RAISED AMOUNT Founder’s Capital $20,000 Government Grant $45,000 Required Investment