Financial projections: the importance of realism

When composing a business plan, and in several future business activities when you’re operational, you’ll need to create financial statements and future projections. The main models which will be needed at some stage of your business will be:

  • Balance sheet: this assesses everything in terms of assets (what you own) and liabilities (what you owe), to give a financial snap shot at a particular point, normally the end of your financial year.
  • Cash flow statement: literally how receipts (income) and payments (expenses) impact upon the cash you have in the company.
  • Profit and loss account: this gives a statement of your revenue against your costs to show your profit or loss at any given period of time.

Of the above, it is normal to prepare a profit and loss forecast for the next three years, and a cash flow statement for year one, when writing the business plan. This will give any investors or banks, an idea of what you are expecting to generate.

As you can imagine, trying to estimate what will happen in a month, let alone in three years’ time, is a huge challenge (unless you have a very accurate crystal ball).

There’s a huge temptation to put down very optimistic figures showing that the company will generate millions of pounds of profits after year one. But unless these are very accurate, chances are, banks and investors won’t take you seriously.

I showed my financial projections to a business specialist, a financial accountant and a bank manager and all said that they were happy as I had given a realistic view of where the company would be in three years’ time, and I gained credibility as a result. I am definitely not saying don’t have ambitions to become the new ‘Facebook’, but you can always amend your figures at a later date, and I can guarantee that underestimating your profits will put you in far better stead than vastly overestimating, when faced with investors.

My own financial documents have changed massively since their conception. This was mainly due to the fact that the nature of the business changed. It started off as a social enterprise, so accessing grants would be a big revenue stream, however as the ideas evolved, so has the type of business we’re creating, making all previous figures irrelevant.

As I said, there is no problem with that, and evolution is all part of business and entrepreneurialism, as is ambition, after all as W. Clement Stone once said, “aim for the moon. If you miss, you may hit a star”, but in order to gain credibility ensure realism is reflected in your financial projections.

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