Predicting the future is hard. But when you're making financial projections, that's exactly what you need to do. You can avoid some of the most common mistakes by following this list of dos and don'ts.
Predicting the future is never easy. But by following these dos and don'ts for financial projections, you can avoid some common mistakes
It doesn't matter whether you're applying for your first bank loan or your fifth, or whether you're seeking venture capital or debt financing. Sooner or later, you'll have to prepare a set of financial projections. Lenders will look for a strong likelihood of repayment; investors will calculate what they think is the value of your company.
In my past 10 years both as a banker and as a financial consultant, I've seen many entrepreneurs -- despite the best intentions -- make mistakes on their projections. The good news is that the most common mistakes are easily preventable if you know what to look for. Here are my top dos and don'ts:
With assets, focus on cash and investments, accounts receivable, inventory, the major categories of fixed assets (including capital-lease assets), and any amounts due from shareholders or affiliated companies. Also, be sure to include any other assets that you consider material, such as patents or licenses.
Identifying liabilities is straightforward. You should have one line item for all accrued expenses and a line item for each of the following: accounts payable, a revolving line of credit, term loans, capital leases, amounts due to related parties, dividends payable, and income taxes payable. Finally, if your business has deferred revenue (meaning that you collect cash from your customers before having actually earned it), add a line for it in liabilities as well.
Paul A. Broni is a managing director of Mercury Partners, a finance and business consulting firm in Rockville, Md.
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