Speaker 1: Developing the financial projections for your business may seem like a daunting task. After all, how can you know what type of revenue and costs your business will encounter in its first year of operation, let alone the first five years? Putting the projections in the plan and presenting it to funders also seems so final, as if saying you promise stand by these numbers. How can this be the case when you feel extremely uncertain about the projections? Today, in this video, we are going to share 10 tips on how to build a financial projection for your business. Number 1. Pricing Pricing is a science in its own right. Too high prices deter customers and too low prices decrease the profitability of the business. Pricing should therefore be competitive. Gross margins of a business are the direct result of pricing. Those profits are necessary to cover the financial obligations of a company and to allow for growth. Profitability of different products and services need to be analyzed and they should only be kept as part of the offering if they provide sufficient margins or if they are of strategic importance. Number 2. Future Project Costs It is also wise that future project costs are included in the calculation. This has something to do with the costs that will be incurred should the projects materialize. The downside of this is that some people may want to hinder the progress of the project once they see the associated costs. It should be well-defined what revenue the project would bring so this does not happen. Number 3. Creation of Expenses Budget There is always a need to understand how much it is going to cost you for actually making the sales you have forecasted. It is recommended to differentiate between fixed costs, like rent and payroll, and variable costs, like most advertising and promotional expenses. Lower fixed costs means lesser risks. There must be a proper estimation of interests and taxes. It is suggested to multiply estimated profits times your best-guessed tax percentage rate to estimate taxes, and then multiply your estimated debts balance times an estimated interest rate to estimate interest. These related to licenses, permits and equipment should be included in the short-term projections. Number 4. Business Concept The business concept is a crucial phase of the project that spans a period from the idea for the venture until an initial decision to go ahead and encompass a feasibility study. The idea owner is likely to be the entrepreneur who has an idea for a business that could be a passion, an income opportunity, filling a need, fixing a problem, among other drivers for the business. Number 5. Creating More Reasonable Projections You can move toward creating more reasonable projections by basing your numbers in documented research. Costs are often much easier to research than revenues. You can make calls, do online research, and speak to others in the industry about both the startup costs and operating costs of a business. Number 6. Profit and Loss Projection Every year prior to the end of your financial year, you should be putting together a profit and loss projection of what you want your business to be doing. This provides you with important what-if scenario planning. It's always better to know whether something is going to financially work before you embark on it. Number 7. Cashflow Statements Prepare a cashflow statement showing inflows and outflows of cash from month to month during the first year. Prepare a balance sheet reflecting the assets and liabilities of the project. Prepare an income statement showing the income, expense, and profitability of the project. A cashflow statement also reflects the flow of cash in and out of a business, thus indicating its liquidity. It shows how changes in balance sheet accounts and income affect cash and cash equivalents. Essentially, it breaks the analysis down to operating, investing, and financing activities. Number 8. Pending Costs and Revenues The financial report should also contain pending costs or debts that are supposed to be paid in the given periods. Many companies have debts that they need to pay monthly, and these numbers should be factored in a financial report to ensure accuracy. However, the total cost per annum should not be compounded. This means if the review for financial revenue is only for three months, the assets and liabilities should only include what is present and what is due for three months. Number 9. Examine Your Finished Financial Model in Detail It is not sufficient to review the model to see if it LOOKS correct. You must test it by proofreading it carefully and checking all the spreadsheet cell references and formulas. And Number 10. Projected Financial Statement The pro forma financial statements will include estimated future sales, expenses, and profits. These items need to be broken down in order to be meaningful. The sales estimates should state which salesperson, which department, or which region will generate the sales. The estimated expenses must be broken down into General and Administrative, Operating Expenses, Depreciation, and Taxes. Financial projections are a key part of your business and must hold water. They include pro forma profit and loss or income statements, cash flow statements, and balance sheet. Base your projections on realistic assumptions and state what they are. Do not overestimate revenues or underestimate costs. Be able to show profitability, either from day one or within a reasonable time frame. For a business that is already up and running, include actual financial statements for the recent past as well as future projections. If your business has not been profitable, explain why or how you expect to be profitable in future. If you found this video helpful, then do like, share, and subscribe our Young Entrepreneur's Forum channel to get future videos. Thanks for watching this video.