School of Forestry & Environmental Studies
Doing Financial Projections
What You Need
Clear ideas about the purpose and audience for your projections. Understanding of the key drivers of financial results for the business. Some knowledge of accounting & financial statement analysis: Skill in using spreadsheet software -- such as Excel Creativity, attention to detail, and good judgment. A lot of time.
Most people starting new businesses are much too optimistic
about thefuture financial results of their business. Their energy and enthusiasm cloudtheir judgment. They
underestimate the time it takes to get things done,and how much things will cost.
Over-optimistic expectations often lead tounderestimating how much money they need to finance initial losses.
Once a business really gets going (in Year 2 or 3),
doubling the size of thebusiness each year is about the maximum a good CEO really canachieve.
Even growth that fast (double every year) is extremely difficult tomanage. Most successful businesses do not grow
than 100% per year,nor do they need to.
Financial projections should include the following kinds of final “output”:
Sources and Uses of Cash Statements (Cash Flow Statements)
The invention of spreadsheet software has made financial statement modelseasy to create and even easier to play with. Follow this link for a simpleprojection model template.
In practice, though, you will likely have to build your own income statementmodel. The key drivers often are unique to the particular situation. You canuse the template model, however, to help calculate Balance Sheets, Sourcesand Uses of Cash, plus do some Statement Analysis – just by inputting your custom income statement, and making some simple assumptions.
It is usually best to do monthly projections for the first two years, thenquarterly after that. Add the periods up, and present the annual summaries topotential financing sources.