Business Plan - Financial Projections

Your business plan would not be complete without an "educated guess-timate" of the level of sales you can expect and the amount of cash those sales will bring into your business. These are officially called, "pro forma projections", and in a formal business plan you would be creating several pages of Cash Flow statements, Income Statements and Balance Sheets. I'm going to operate on the assumption that you are working on a small home base business idea, or maybe even a part-time venture. If that's the case, here is the core of all that work.

Cash Flow Projections

A Cash Flow projection, simply, uses the research you have done in the other sections of your business plan to predict sales and income. If you are familiar with spreadsheet software this gets a lot easier, but you can do it with a legal pad and a calculator if your business idea is simple enough.

Lay out thirteen columns across the top of the page, one for your income and expense categories and twelve for the months of the year. The first line under income should be sales. The next line the cash-in, or owner's investment, you use to start your business account. You can add other lines if you have other sources of income. Add a line that holds a total of the income for each month.

Under the expense heading, list everything you will spend each month to operate your business. What you pay for the items you sell (called Cost of Goods Sold, or COGS) your cell phone, travel expenses, any shipping costs, utilities, website, office supplies, anything and everything you will need to operate on a day to day basis. Do this for each month, then add a line that holds the total expenses for each month.

Add a line below your total expenses called monthly gross profit. Subtract your total expenses from your total income and enter that number here. If you are using a spread sheet, entering the correct formulas in the cell will make the calculation for you automatically.

A final line across the very bottom will keep a running total - like the balance in your checking account. By subtracting or adding each month's gross profit, or loss, to the previous month's cash on hand you will have a projection of your cash on hand for the year.

How do you project sales figures for a new company?

Remember your research. You already determined your market share, the market price, and the size of your target market while working through the other sections of your business plan (now you see why they were important, right?). Use that knowlege to refine your projections. Remove as much risk as possible. Entrepreneurs take calculated risks that are well thought through and based on sound, careful research. They don't just jump - they make sure the parachute was properly packed. To do anything less isn't taking risk, it's being reckless, and no successful entrepreneur was ever reckless.

Mistakes often made when Creating Financial Projections

1. Expecting an unrealistic market share. The Pareto Principle - or what is commonly called the 80-20 rule - is important here. It says 80% of sales, or problems, or repeat business - 80% of anything - comes from 20% of your customers, or products. Market share divides itself up that way as well. In every business, in every town, 20% of the businesses are getting 80% of the sales and 80% of the businesses are sharing the remaining 20%. When you first open up, guess which side of the 80-20 rule you'll be on? That's right, the 80% of businesses sharing 20% of the market. Take this into consideration when you project your first year's sales.

2. Expecting rapid growth. You might grow quickly. Most work from home businesses don't. If you work smart and diligently, you'll grow from 0 to several sales a month in the first year - but don't expect to be replacing your salary in 3 months. If you do - good on you - but the reality of the business world, the level of competition in most businesses, and the cost of getting things off the ground means you will be lucky to break even in the first year.

3. Leaving out expenses. This is just being careless, or unrealistic, or both. Make sure you think about everything you will be spending to operate your business. If putting everything in suggests you'll lose money, rather than make it, for a while that's not only OK, its normal.

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