Financial projections can be difficult and time consuming to put together at any stage, but for a startup business with no historical information to fall back on, errors can occur. To make the job of reviewing financial projections easier we have produced the following startup financial projections checklist to make sure your business has not made some of the more common mistakes.
The startup financial projections checklist is in no particular order.
56 Point Startup Financial Projections Checklist
- Include 3 financial statements, balance sheet, income statement, and cash flow statement.
- Show the key assumptions used to prepare the financial projections.
- Make sure the assumptions agree to the words in the business plan.
- Show monthly data for the first year, and annual data for at least two more years.
- Produce financial projections for two scenarios, base scenario and break even scenario
- Ensure all three financial statements reconcile to each other.
- Check closing balances from one period become opening balances for the next.
- Balance sheets should balance. Assets = Liabilities + Equity.
- Cash flow statement opening and closing balances should agree to the balance sheet.
- Net income from the income statement is part of retained earnings in the balance sheet.
- Net income from the income statement should be the start of the cash flow statement.
- Net income can be negative (a loss), but the cash balance must always be positive.
- Allow for seasonal variations in expenses.
- Allow for seasonal variations in revenue.
- Don’t forget to include all operating expenses.
- The sales forecast should be completed bottom up, and checked top down.
- As the business grows so should working capital and funding.
- Make sure the statements add up.
- Make sure formulas used are correct.
- Only include relevant ratios. Relevant to the lender, investor, or yourself
- Always show the break even revenue.
- The gross margin percentage should stabilize over time.
- The operating margin should fall over time.
- Don’t show losses for too long.
- The revenue forecast should be optimistic but realistic.
- Avoid hockey stick revenue projections.
- Capacity. If you only have capacity to produce 1,000 widgets, don’t show sales of 1,200.
- Allow for price increases for major expense items.
- Show the burn rate.
- Check staffing levels are adequate to deal with the projected growth.
- Comply with normal accounting principles, conventions, and standards.
- Make cash not profit the first priority.
- As the business grows don’t assume economies of scale, unless they can be justified
- Fixed operating expenses grow in steps not at a steady rate, plan quick growth after a step.
- Don’t use the word conservative.
- Things always take longer than you expect them to take.
- Costs are always higher, and revenues are always lower than you expect them to be.
- Don’t forget to include financing to show how the business will be funded.
- Include an interest expense based on required funding.
- Include a depreciation expense based on expenditure on long term assets.
- Include a tax expense based on net income, its a major expense item.
- Don’t over analyze operating expenses, 3 or 4 categories is enough.
- Show owners compensation separately
- Make sure the financial projections tell the same story as the words in the business plan.
- You will have bad debts, include an allowance for bad debts.
- Don’t forget to include staff on-costs and benefits as well as base wage costs.
- Use dynamic not static spreadsheets, so that assumption changes can be made.
- Know your gross margin percentage and your cost of goods sold percentage.
- Keep investor returns in line with the industry standards.
- Base key assumptions on fact.
- Lenders want their money back, don’t forget to show loan repayments.
- Show how much you have invested financially in the business.
- Keep start up expenses low
- Understand how the financial projections reflect your business model.
- Understand the financial projections.
- And finally, when complete do the financial projections make sense.
The startup financial projections checklist above is not intended to be exhaustive, if you can think of any others let us know and we’ll add to it.
Startup Financial Projections Checklist Download
The startup financial projections checklist is available for download in PDF format by following the link below.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.