How many years should my financial projections cover for a new business?
Writing a Business Plan mentor Rhonda Abrams responds:
Let's face it, for a new business, financial projections are a lot like astrology -- they use a few facts (stars really do exist, after all) to predict an unpredictable future. Their relation to reality is tenuous at best.
I'm not advocating fraud -- far from it. You want your numbers to be based on your honest best estimates. But how far in the future can you foresee with any degree of reliability? Markets, competition, technology, even economies change too quickly to provide any meaningful structure for numbers projected further than a year or two. Sophisticated investors understand that. They're looking at your projections to see that you're being honest, understand the general scope of your expenses and income, and that you know how to put together financial documents. Most of all, they want to see how much money you need and when you're going to start making money.
So don't fret too much over numbers that go further than the first two years. The one exception is cash flow. In any business, but especially a new business, cash is king. It doesn't matter if you're going to be profitable in the first year if you don't break even until October. You'll still need funding for 10 months.
Here are some guidelines on what to include for a new business:
- Monthly cash-flow projections for the first two years or until you achieve profitability (whichever is longer)
- Profit and loss projections for the first 3-5 years
- Balance sheet projections for the first 3-5 years
Answer Copyright © 2000 Rhonda Abrams
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