Introduction
A financial projection is an essential tool for any startup. It is a long-term prediction of how a business’s operations and finances will develop over time. This includes projecting their income and expenses, profits, and cash flow.
Using a financial projection can be beneficial for startups in a number of ways. It can help them plan for the future and make data-driven decisions based on their projected finances. Here is a look at how to use your startup financial projection to make data-driven decisions.
Key Takeaways:
- Understand the importance of a financial projection
- Learn how to use your financial projection to make data-driven decisions
- Discover how to plan for the future with a financial projection
Preparing the Financial Projection
As an entrepreneur, making financially sound decisions is a key factor in the success of your startup. A financial projection can serve as an essential tool to help you make data-driven decisions. By preparing a well-structured financial projection, you’ll be able to more accurately forecast your company’s cash flow and financial stability over the next one to three years.
Know what metrics to include in the projection
Before you start to compile a financial projection, it’s important to know which metrics you’ll include in the document. The metrics you include should give an accurate picture of the financial activity in your startup. Some of the most commonly used metrics to include in a financial projection are revenue, expenses, investments, interest incurred, cash flow, and net income. You should also consider including any one-time expenses, capital requirements, debt payments, and capital gains.
Collect the data necessary to fill in the metrics
For a financial projection to be truly useful, it’s essential to accurately fill in all the metrics with the necessary data. Start by gathering information from your existing financial records and statements. Consider also collecting data from outside sources, such as industry data, government data, and market reports to help frame your projections. Once you have all the data, you can begin arranging it into a financial projection template.
It’s also a good idea to run sensitivity analysis to create a range of potential outcomes based on various assumptions. This can help you understand the effect that varying market forces or decisions could have on your startup. With all the data gathered and arranged accordingly, you’ll be able to create a more objective and accurate financial projection.
Use Financial Projection to Define Goals
Having accurate financial projections for your startup is essential for data-driven decision making. A key uses of your startup financial projection is to define goals. This involves a comprehensive analysis of your current financial state, and establishing both short-term and long-term goals.
Analyze Current Financial State
The first step in using financial projections to define goals is to analyze your current financial state. This can include important metrics such as total revenue and expenses, sales, marketing, costs, and payroll. It can also include an analysis of the financial trends in your industry, and a comparison of those trends to your startup's performance.
Establish Short-term and Long-term Goals
The next step is to use this financial data to establish short-term and long-term goals. Short-term goals should focus on achievable objectives in the near future, such as boosting sales or cutting expenses. Long-term goals should focus on the big picture, such as increasing revenue growth or expanding into new markets. Make sure that these goals are realistic, considering the current financial state of your startup.
Creating SMART goals—specific, measurable, attainable, relevant, and time-bound—is key for ensuring that these goals are realistic and achievable. Additionally, break these goals down into more granular objectives to make them easier to achieve. Once you have established your goals, you can use your financial projections to track your progress and assess how close you are to reaching them.
How to Use Your Startup Financial Projection to Make Data-Driven Decisions
4. Keep Track of Actuals vs Projections
A startup financial projection is an invaluable tool, providing an insight into the future of your startup. However, when it comes to making data-driven decisions, it is important to not only understand your projection but also the actual results. By closely monitoring and comparing actual results against the projection, it is possible to get a better understanding of any potential discrepancies and make the adjustments needed in order to continually improve success.
A. Measure Performance Against the Projection
It is essential to track actuals against the projection on an ongoing basis. This should be done for each element of the financial projection, such as revenue forecasts, operating costs, and capital expenditures, in order to gain a more accurate picture of the financial and operational performance. When analyzing the results, attention should be paid to any discrepancies between actual performance and the projection, as these can provide an indication of potential issues or opportunities.
B. Focus on Key Performance Indicators (KPIs)
In addition to tracking performance against the projection, it is also important to focus on key performance indicators (KPIs) that are critical to the success of the startup. For example, if sales performance is a key measure of success, then tracking the volume of sales and the conversion rate along with any other related KPIs will help to determine how well the startup is doing compared to the projection. This will then provide an indication of how adjustments may need to be made in order to meet the expectations outlined in the projection.
- Gather actual performance results from each element of the financial projection
- Compare actual performance against the projection on an ongoing basis
- Focus on KPIs that are crucial to the performance of the startup
- Make any necessary adjustments to ensure success against the financial projection
Analyze Discrepancies
Entrepreneurs use detailed financial projections to identify potential deviations from their forecasts. Once these potential discrepancies are determined, they use variance analysis to assess the differences between actual financial results and the expected ones.
Utilize Variance Analysis
Applicable to both a company’s revenue and expenses, variance analysis provides entrepreneurs with invaluable insight into the accuracy of their financial projections. This analysis is designed to identify any negative or positive differences between past and projected figures, as well as to specify the reasons behind these discrepancies.
Identify Corrective Action
Once the entrepreneur has identified discrepancies between the actual and expected figures, they are able to take corrective action in order to guide their business towards profitability. One way they can do so is by taking the following steps:
- Comparing financial results to industry standards and previous performance
- Identifying areas of improvement
- Monitoring and managing cash flow
- Making any necessary changes to improve financial performance
By analyzing the discrepancies between actual and expected financial performance, entrepreneurs can make data-driven decisions to ensure the success of their business.
6. Use Projection to Plan for the Future
Your startup financial projection provides you with the insight to develop a plan for the future. With a financial projection in hand, you can determine what needs to be done to reach the targets you have set for your business. Additionally, you can use a financial projection to forecast various scenarios, giving you the information you need to plan ahead.
A. Determine What Needs To Be Done To Reach Targets
By creating a financial projection for your startup, you can easily identify areas in which you are investing too heavily or not enough. Your projections help you to predict cash flows and to identify any potential cash flow issues or problems in the future. Once you have identified any potential issues, you can then choose to adjust your investment strategy and determine what needs to be done to reach the targets you have set.
B. Forecast Scenarios
Using a financial projection, you can forecast different scenarios in order to develop a specific plan that best suits your business' objectives. By assessing the impact of different strategies and investment decisions, you can make educated decisions around which strategies to implement based on the data rather than a hunch. This ensures that you are making the most informed decisions for the future of your startup.
Conclusion
Staying on top of your startup’s finances is essential for your business’s success. Financial projections can help you make sound, data-driven decisions. Here is a recap of the steps involved in utilizing financial projection to guide data-driven decision making:
- Gather your startup’s financial data.
- Forecast future expenses, revenue, budget, and cash flow.
- Analyze trends and create a financial projection.
- Check the accuracy of your financial projection.
- Manage your budget and decide when and how to adjust your strategy.
Utilizing financial projection to create data-driven decisions offers a variety of benefits. You can anticipate and respond to changes in the market, make accurate budgeting decisions, track your performance, and make projections in advance. With smart financial management and data-driven decisions, you can ensure that your startup remains on the right track.