Alongside accounting basics, understanding how to create financial projections for your startup ’s business plan is absolutely essential.
Neither is particularly exciting—especially when you compare it to the idea at the core of your business. Yet to grow and scale, you’ll need capital. In fact, 36% of people who plan to start a business in the next year identified “getting funding” as one of their top financial priorities, according to a recent QuickBooks survey.
For external funding, financial projections help convince lenders and investors that your business will not only be profitable, but also offer them a return on investment. For internal purposes, accurate forecasting enables you to budget for your new business as well as benchmark your milestones.
Comparing your actual financial statements to your projections is referred to as variance analysis . With this analysis, you’ll be able to see if your business is consistently falling short of your projections or surpassing them.
If your projections are falling behind, then you’ll need to make some changes by raising prices , cutting costs or rethinking your business model. Conversely, if your immediate revenue exceeds your pro forma income, then you may need to hire employees, expand your facility or seek financing sooner than you expected.