What are the best practices for ensuring accurate financial projections in your business plan?

1 Start with your revenue model

Your revenue model is the way you generate income from your products or services, and it determines the key drivers of your financial projections. For example, your revenue model may be based on unit sales, subscriptions, commissions, fees, or advertising. You need to identify your revenue model and the factors that affect it, such as your target market, pricing strategy, sales channels, and customer acquisition costs. You also need to research the market size, demand, and trends for your industry and niche, and use credible sources and data to support your assumptions. Your revenue model should be realistic, clear, and consistent with your business concept and value proposition.

2 Estimate your expenses and costs

Your expenses and costs are the money you spend to operate and grow your business, and they impact your financial projections by reducing your profit margin and cash flow. You need to estimate your expenses and costs based on your business model, operations, and goals. For example, your expenses and costs may include rent, utilities, salaries, marketing, inventory, equipment, taxes, and interest. You also need to distinguish between fixed and variable costs, as they behave differently depending on your sales volume and activity level. Your expenses and costs should be realistic, detailed, and aligned with your revenue model and growth plan.

3 Project your cash flow and profitability

Your cash flow and profitability are the indicators of your business's financial health and performance, and they show the potential return on investment for your stakeholders. You need to project your cash flow and profitability based on your revenue model, expenses and costs, and capital requirements. For example, you may use a cash flow statement, an income statement, and a balance sheet to present your financial projections for the next three to five years. You also need to include some key financial ratios, such as gross margin, net margin, breakeven point, and return on equity, to measure and compare your efficiency and effectiveness. Your cash flow and profitability should be positive, sustainable, and attractive for your target market and investors.

5 Test different scenarios and sensitivities

Your scenarios and sensitivities are the alternative outcomes and impacts of your financial projections, based on different variables and uncertainties. You need to test different scenarios and sensitivities to assess the risks and opportunities of your business plan, and to prepare for possible changes and contingencies. For example, you may use a best-case, a base-case, and a worst-case scenario to show how your financial projections would change under different market conditions, customer behaviors, or competitor actions. You also may use a sensitivity analysis to show how your financial projections would change if one or more of your key assumptions or drivers change. Your scenarios and sensitivities should be realistic, relevant, and flexible for your business plan.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?