financial projections – Dispatches From The Front

Most aspiring entrepreneurs understand that you can’t build a business if you won’t commit to delivering a product or service, but many are hesitant or refuse to commit to any financial forecasts. Yet every business requires revenue and volumes, as certainly as it requires a product to sell. Thus, financial projections for up to five years are a necessary element in every business plan.

External investors will demand a financial forecast, but it’s equally valuable to you, even if bootstrapping. How else will you be able to convince yourself and your team that your business is viable? You need these projections to set internal goals and milestones, and to measure your progress toward reasonable success objectives.

In the pursuit of multi-million dollar outsourcing contracts, the company I worked for required me to defend my financial projections. The auditor who usually ran these reviews, was one of the kindest yet toughest auditors I’ve ever worked with. He’d always start with the same question, ‘What are the eaches?’ He wanted to know how many hours, square feet or cubic yards of something we had to sell to reach a specific revenue or profit goal. This experience taught me that looking at a business in terms of units made or sold provides critical clues about the viability of it.

Many projections and budgets lack any real precision. Typically, a desired revenue number is plucked from the air, or other suitable location, as a starting point. Some ‘standard’ percentage is applied to this number for cost of goods to arrive at gross profit, which then has some ‘standard’ expense number applied to it to determine at operating revenue and so on, all the way to the bottom line. If the profit number isn’t satisfying then lather, rinse, repeat.

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Count Your Eaches | Peter Mehit