ChatGPT: The Entrepreneur's Coach in Crafting Financial Projections

Embarking on the journey of securing an SBA 7a loan can be a pivotal moment for any aspiring business owner. It's a path filled with paperwork, planning, and projections. At the heart of this process is the need for a robust 24-month financial forecast—a critical document that demonstrates to lenders your business’s potential for success and stability.

The Small Business Administration (SBA) 7a loan stands out as a beacon of hope for many, offering a lifeline to funding that might otherwise be out of reach. However, the application process demands accuracy, foresight, and a deep understanding of your business model. It's not merely about predicting the future but about painting a credible picture of financial sustainability through detailed projections.

This article aims to demystify the complexities of creating 24-month projections, making this daunting task more approachable. Whether you're a seasoned entrepreneur or stepping into the business arena for the first time, the requirements of an SBA 7a loan should not be a deterrent. Instead, they can be a well-structured plan laying the foundation for your business's success.

Enter ChatGPT—your digital financial analyst. This advanced AI can help simplify the creation of your financial projections. By guiding you through the labyrinth of revenue forecasting, expense budgeting, and assumption building, ChatGPT can transform a pile of historical data and business insights into a coherent, lender-friendly financial forecast.

In this guide, we’ll walk you through the step-by-step process of leveraging ChatGPT to build your 24-month projections. From understanding the basics of financial terminology to crafting the final document, you’ll learn how to:

• Gather and analyze historical financial data.
• Develop reasonable assumptions based on industry standards and market conditions.
• Create revenue and expense projections that reflect your business strategy.
• Assemble all this information into a professional and persuasive financial forecast.

By the end of this article, you will not only be ready to present a compelling case to your SBA lender but also gain a clearer vision of your business's financial trajectory. Let's simplify the process of building your 24-month projections, turn uncertainty into strategy, and approach your SBA 7a loan application with confidence.

Section 1: Understanding the Basics

I want to ensure you grasp the foundational elements of financial projections. These projections are not just numbers; they represent the heartbeat of your business strategy. To lenders, they demonstrate your understanding of the business you're venturing into and your capacity to manage financial resources effectively.

Why Projections Matter to Your Lender: Lenders scrutinize your projections to assess risk. They want to see that you understand your future business thoroughly and have a realistic plan to generate profit. Your revenue forecasts, expense estimates, and growth assumptions all paint a picture of your ability to run the business your are trying to by. Don’t skirt the details.

Creating Projections with ChatGPT: To use ChatGPT effectively, begin with understanding key terms like 'revenue', which is the income from sales before expenses are deducted, and 'expenses', which are the costs incurred in the operation of your business. Both fixed and variable expenses must be considered. 'Assumptions' are the foundation of your projections; they are educated guesses about future conditions affecting your business.

Example ChatGPT Prompt: "ChatGPT, I need to create a financial projection for an SBA 7a loan. Can you explain how to categorize expenses into fixed and variable for a retail business?"

By engaging with ChatGPT in this manner, you’ll gain insights into the nuances of financial planning and learn to articulate your business plan in financial terms. Ask ChatGPT to explain these elements in a way that you can understand them, if they are foreign to you. ChatGPT isn’t a judge. I often have it explain things to me like I am a 10 year old. Give it a shot and watch how simple it can make it.

Section 2: Understanding Historical Financial Data

Nest, my goal is to guide you through the process of understanding the historical financial data of the seller’s business that you are buying, which is a crucial step in your journey to acquire that business. The lender's interest in your capability to interpret this data is not merely academic; it's about ensuring that you are making an informed investment decision for yourself and that you aren’t throwing your investment onto the sellers sinking ship while he is trying to paddle away on a life boat.

Documentation Required by Lenders: Here are the basic documents that a bank will ask for from a seller for the SBA loan:

·???????? Last 3 years business tax returns

·???????? Most recent year Profit and Loss and Balance Sheet, ending within the last 30 days, month end.

These documents serve as a strong indicator of the business's historical earnings and tax compliance, providing a reliable data set for assessing trends in profitability and revenue.

These tax returns are invaluable. They allow you to verify the seller's claims about the profitability of the business. You can identify patterns in earnings, cost management, and revenue generation, which are pivotal in understanding the business's operations.

The interim profit and loss statement offers an immediate look at the business's current financial performance. It's essential for you to examine this closely, as it will give you insights into the company's revenue streams and operational costs.

Preparing for Projections: When preparing financial projections, these historical documents are your baseline to work off of. By analyzing the profit and loss statements, you can grasp the business's revenue consistency and its gross profit margins. Trends in these areas are often predictive of future performance, making them a central piece in your projections puzzle.

Utilizing ChatGPT for Historical Data Analysis: ChatGPT can be a strategic tool for dissecting historical financial data. It can help you frame questions and understand complex financial terminology found in tax documents.

Example ChatGPT Prompt: "ChatGPT, I have the past three years of business tax returns from a company I'm considering purchasing. Could you guide me on what revenue and profit trends I should look for to assess the financial health of the business?"

Through understanding the historical data with the assistance of ChatGPT, you'll gain insights that are crucial for projecting future performance. With a firm grasp on the past, you are better positioned to predict and plan for the future, which is a key component in securing an SBA loan. Let's ensure you feel confident with these insights before we move forward to the next stage of crafting financial projections.

Section 3: Analyzing the Seller's Historical Numbers

When you're looking into buying a business, it's like looking under the hood of a car—you want to see if everything is running smoothly. The seller’s past financial records are your best clues to how the business might do in the future.

Why Look at Old Numbers? The bank wants to make sure the business has a good track record. If it made money before, it’s likely it will continue to make money when you take over. You’re looking for things like:

• How much did the business make each year? (That's the growth rate.)
• After paying for everything it needed to run, how much money was left over? (That's the profit margin.)
• How much did it spend to make that money? (Those are the expenses.)

How to Use ChatGPT to Understand These Numbers: You don’t have to be a math whiz. You can ask ChatGPT to do the number crunching. For example, you can say:

Example ChatGPT Prompt: "Hi ChatGPT, can you show me how much the business grew each year? Here's the income for the last three years: [insert income numbers]. And what’s the profit after all the expenses? Thanks!"

What If the Numbers Jump Up or Down a Lot? Sometimes businesses have a really good or bad year. It's important to know why. If the seller had a big contract that won’t continue, you can’t count on that money in the future. ChatGPT can help you spot these unusual changes. You could ask it like this:

Example ChatGPT Prompt: "Hello ChatGPT, I see there was a big jump in money made in year two. Can you help me figure out why that might have happened? Here are the numbers: [insert financial data]."

Bringing It All Together: Understanding the past money story of the business helps you guess how it’ll do when you’re in charge. This isn’t just about numbers—it’s about seeing if the business has been run well and if you can keep it up or do even better.

In the next part, we'll take what you've learned from these old numbers and use them to make your plans for the future. This way, the bank can see you’ve done your homework and you're ready to make the business successful.

Section 4: Crafting Assumptions with ChatGPT as a coach

Alright, now we're getting to the part where we make educated guesses about the future of the business you want to buy. It’s like a weather forecast; we use what we know about the past and what’s happening around us to predict what’s coming up.

Why Are Assumptions Important? Think of assumptions like the seeds you plant in a garden. They need to be good quality because your financial projections will grow from them. The bank will look at these to decide if your plans are solid.

How to Partner with ChatGPT for Assumptions: You're not alone in this. You can work with ChatGPT to build these assumptions. Here’s what you can consider:

• What's normal for the industry? (Like, what’s an average year look like?)
• What's happening with prices overall? (That's inflation.)
• What time of year do you sell more or less? (That’s seasonality.)

You can ask ChatGPT to help with this. For example:

Example ChatGPT Prompt: "Hi ChatGPT, for a retail store, what growth rate should I expect when I think about things like inflation and what’s going on in the market?"

From Guesses to Numbers: It’s not just about what you think will happen; you need to explain why. If you plan to spend more on ads, how will that translate to sales? You want to turn those ideas into numbers. You might say:

Example ChatGPT Prompt: "ChatGPT, if I spend more on marketing for my service business, how much can I expect sales to go up?"

Showing Your Work: Just like in school, you need to show how you got your answer. If you decide to up your marketing budget by 20%, how did you decide that would bring in more sales? ChatGPT can help you do the math. Ask it like this:

Example ChatGPT Prompt: "I'm planning to increase my marketing budget by 20%. Can you help me figure out how that might boost my sales, using what we know about what usually happens?"

Tying It All Together: Your assumptions are the foundation for your projections. They show the bank you’re not just dreaming—you’ve got a plan that makes sense. In the next section, we’ll take these assumptions and show how they’ll help your business grow under your leadership.

Section 5: Creating Revenue Projections

Let's talk about painting a picture of your future sales. It’s a bit like a weather forecast, but for your business's money. We use past sales, a bit of what we see around us, and your business plans to guess your sales for the future.

Why Revenue Projections Matter: Your revenue projection is like a scoreboard for the bank. It shows how you expect the business to perform. Banks love this stuff because it shows them you're thinking ahead.

Creating Projections with ChatGPT's Aid: You don’t need to be a psychic to predict future sales, ChatGPT can help simplify the process. Here’s how you can work it out:

• Look at your past sales. What’s been selling well? What hasn’t?
• Think about what you’re changing. Got new products? More ads?
• Adjust the old numbers with the new plans. It’s like updating your GPS for a new route.

For example, you can ask ChatGPT:

Example ChatGPT Prompt: "Given I'm adding new products and putting more money into advertising, how might I tweak my past sales growth to figure out future sales?"

Telling the Story Behind Your Numbers: It's not just about the figures; it’s the story they tell. How will adding new stuff to sell or advertising more boost your sales? This helps the bank get on board with your vision. Think of it like this:

Example ChatGPT Prompt: "I need to explain to my bank how launching new products and upping my marketing spend by 20% will help my sales. Can you draft a short narrative for this?"

Pulling It All Together: Your revenue projections are a crucial part of your business's financial story. They’re how you show the bank that you're not just making wild guesses—you have a solid plan for making more money. Next up, we’ll look at how to project your expenses because it’s not just about what you make, it’s also about what it costs to make it.

Section 6: Estimating Expenses

When it comes to expenses, think of it like packing for a trip. Some items you’ll need no matter what (like your toothbrush), and others depend on where you’re going (like a swimsuit or a ski jacket). In business, these are your fixed and variable expenses, respectively.

Fixed expenses are your toothbrushes. They don’t change much, like rent or insurance. Variable expenses are like your outfits, changing with your business activity, such as the cost of raw materials.

Adjusting Expenses with ChatGPT’s Guidance: Now, when you take over a business, think about what might change. Will you negotiate cheaper rent or cut down on utility bills? This is where you can use ChatGPT to make sense of what stays, what goes, and what changes.

Example ChatGPT Prompt: "Given these historical expenses from the business I want to buy, could you separate them into fixed and variable? Also, how would an increase in sales affect the variable ones?"

Planning for Management Changes: If you’re planning to switch things up - like using less energy or getting a better deal from suppliers - your expenses might drop. Let’s figure out how much you could be saving.

Example ChatGPT Prompt: "I’m looking at saving energy and haggling for better prices from suppliers. What's a realistic amount I could shave off my expenses, and how should that reflect in my forecasts?"

Tying It All Together: Grasping your future expenses is just as crucial as predicting sales. It shows you’re serious about not just making money, but also smart about spending it. By understanding and managing your costs, you'll be in a better position to convince the bank that you’re worth their investment. Coming up, we'll peek into the crystal ball of cash flow projections. It's where you’ll see how your sales and expenses dance together over time.

Top of Form

Section 7: Assembling the Projections

Now, we’re in the homestretch – putting together your projections. It’s like building a model airplane. You’ve got all the pieces: your revenue (the wings), your expenses (the body), and now you need to put them together to see if it’ll fly.

Month-by-Month Projections: We’re aiming for a detailed view of your business's monthly financial health for the next two years. This isn’t just for the lender; it’s your financial flight plan. Banks will require a 24 month, month by month, projection sheet to be developed.

ChatGPT will be your co-pilot here, helping you ensure that no detail is overlooked when calculating your monthly net profit. Remember, accuracy now means fewer surprises later.

Example ChatGPT Prompt: "Based on my projected sales and expenses, can you help me draft a monthly profit and loss statement for the next two years?"

Understanding the Formulas: Net profit is what you have left after all your expenses are paid. It’s your business’s take-home pay. We’ll use ChatGPT to get comfortable with the math behind this.

Example ChatGPT Prompt: "Could you walk me through how to calculate net profit each month from my sales and expenses?"

Your month-by-month projections are your business’s story in numbers. They show not just how you expect to earn and spend, but also how you plan to grow and handle the ups and downs of business life. And when you’re done, you’ll have a complete picture of your business's financial future – one that you and your lender can believe in. Next, we'll take a look at how all these numbers add up in your cash flow projections. It’s where the rubber meets the road, and you see your business operations in motion.

Section 8: Preparing the Projections Document - A Comprehensive Guide

When crafting your financial projections document for an SBA loan application, precision and professionalism are paramount. While you may not have a specific template from us, most spreadsheet software will have similar functionalities. Here’s how you can leverage ChatGPT alongside standard spreadsheet tools to prepare a compelling document.

Starting with Your Spreadsheet: Begin by opening a new spreadsheet in your preferred program. You'll create a structured document that includes your revenue, expenses, and net profit for the next 24 months. If at any time you need an explanation, ChatGPT or the Excel “Help” tool can help teach you. It would be wise to become more familiar with spreadsheets for this walkthrough to be the most effective.

Laying the Foundation:

1. Set up the first column with the months listed from 1 to 24.
2. Next, create a header row at the top with the following rows: 'Revenue', 'Fixed Expenses', 'Variable Expenses', and 'Net Profit'. This should look like the traditional profit and loss statements that the seller provided you with.

Drafting Revenue Projections with ChatGPT:

• Ask ChatGPT to explain how to apply a growth rate to your historical revenue figures and how to adjust for seasonality. For instance: Example Prompt: “Explain how to calculate a 10% growth rate on my historical revenue and adjust for higher sales in June and December.”
• ChatGPT will guide you through applying a growth rate uniformly and then tweaking it to reflect seasonal sales increases.

Categorizing Expenses with ChatGPT:

• You can request ChatGPT to help identify which expenses are fixed and variable based on your historical data. Example Prompt: “Which expenses are typically fixed and which are variable in a retail business?”

Implementing Expense Projections:

• For fixed expenses, input the monthly amounts which will remain constant.
• For variable expenses, set up formulas that calculate them as a percentage of your projected monthly revenue. These percentages can be estimated based on historical data or industry standards. Again, a simple formula, like “percent of sales” or other methods help to keep the match basic and conservative.

Using ChatGPT for Assumption Narratives:

• Draft narratives for each assumption behind your projections. ChatGPT can assist you in articulating the expected impact of new strategies and changes. Example Prompt: “Draft a narrative explaining how renegotiating with suppliers can affect my expense projections. Then explain the math of how I can apply this to my expense projections over the next 24 months.”

Formatting for Impact:

• Ensure the spreadsheet is easy to read with clear labeling, consistent fonts, and alignment.
• Use color-coding or conditional formatting to highlight important figures or trends.

Final Touches:

• At the bottom or in an appendix, detail your assumptions. Make sure these are clear, concise, and justify the figures presented above.
• Double-check all formulas for accuracy and test different scenarios to ensure the robustness of your projections. You want a story that explains “why” for any of the numbers you adjust. The bank may ask questions if the math doesn’t add up.

ChatGPT Assisted Review:

• Use ChatGPT to cross check the logic of your financial story. Ask it to validate the coherence of your projections with your narrative Example Prompt: “Review the logic of projecting a 30% increase in revenue due to doubling my advertising budget.”

Your financial projections document is a vital part of your loan application. It should clearly communicate the projected financial trajectory of the business under your leadership. By combining your spreadsheet skills with the analytical capabilities of ChatGPT, you can create a document that stands up to the scrutiny of SBA lenders and supports the potential of your business plan.

Section 9: Finalizing Assumptions - Crafting a Convincing Financial Narrative

The assumptions in your financial projections are the bedrock of your SBA loan application. They serve as the narrative that explains the story behind the numbers. Here's how you can utilize ChatGPT to refine and articulate these assumptions clearly and convincingly.

Detailing Revenue Assumptions:

1. Market Trends: Evaluate the industry reports and market analyses you've gathered. You'll want to identify growth rates, customer behavior changes, and emerging market segments. Example Prompt for ChatGPT: “Given the current market trend data, how would you phrase the expected impact on my business’s revenue growth?”
2. New Product Launches: Consider the timeline, target market, and sales projections for any new products or services you plan to introduce. Example Prompt for ChatGPT: “I’m launching a new product line in Q2. How should I factor this into my revenue projections and articulate it for my lender?”
3. Marketing Efforts: Outline past marketing efforts and their results. Predict future initiatives’ impact based on these outcomes. Example Prompt for ChatGPT: “What is a reasonable growth assumption based on doubling my digital marketing budget?”

Detailing Expense Assumptions:

1. Operational Efficiencies: Identify specific areas where you expect to implement efficiency improvements, such as energy savings, process automation, or staff training. Example Prompt for ChatGPT: “How can I quantify the impact of operational efficiencies on my expenses and present it to my lender?”
2. Supply Chain Adjustments: If renegotiating supplier contracts, detail the expected percentage reduction in costs. Example Prompt for ChatGPT: “How do I articulate the financial impact of renegotiating supply contracts for my lender?”
3. Overhead Costs: If you anticipate changes in overhead due to scaling operations or other factors, these should be reflected. Example Prompt for ChatGPT: “Explain how scaling my business operations may affect overhead costs.”

Creating a Compelling Narrative:

• Use ChatGPT to help you craft a narrative that ties together these assumptions. The aim is to make them compelling and logical to someone outside of the business.
• Example Prompt for ChatGPT: “Draft a summary that ties together my revenue and expense assumptions for my SBA loan application.”

Finalizing Your Document:

• Once you’ve detailed each assumption, use ChatGPT to review your explanations for clarity and persuasiveness. You don’t have to use these projections to “sell” the business concept to the lender. They just want to ensure that you have thought through the operations of the business and have a plan to take over.
• Example Prompt for ChatGPT: “Review my financial assumptions for clarity and suggest improvements.”

Your final assumptions should not only be a collection of projected numbers but also a coherent story that logically explains why your business is a good investment. By following the detailed guidance in this section and utilizing ChatGPT’s capabilities, you can ensure that your assumptions are robust, realistic, and ready to withstand lender scrutiny.

10: Review and Edit - Expanded Guidance for Practical Use

Thoroughly checking your financial projections is like making sure all the pieces of a puzzle fit perfectly before presenting it. You wouldn't want any piece out of place. This section will guide you on how to collaborate with ChatGPT effectively to ensure your financial puzzle is complete and accurate.

Expanded Simple Explanation:

Imagine your financial projections are like building a tower with blocks. If one block is out of place, the tower might wobble or even topple over. We want to ensure each block—each number in your projection—is correctly placed. ChatGPT can act like your construction buddy, looking over your shoulder to make sure everything is steady and strong.

When you’re ready to review, take sections of your financial projections—such as your revenue, expenses, and final net profit for a particular month—and paste them into the ChatGPT interface. Here’s how you might structure it:

• "ChatGPT, here's my revenue for January: [insert revenue numbers]. Following are the expenses: [insert expense numbers]. The net profit calculated is [insert net profit]. Does this look correct to you?"

As you put together your financial projections, keep your tables and summaries clear and straightforward. Use headings like 'Revenue', 'Expenses', and 'Net Profit' for each month. It's also a good idea to highlight or bold any totals so they stand out. This makes it easier for both ChatGPT and the lender to follow.

Ongoing Updates and Edits:

Your financial projections are a living document. They may change if new information comes to light or if circumstances change. Keep a version history of your document each time you make significant changes. When you update a number, go back to ChatGPT with the updated section to ensure the changes make sense and that the overall picture is still accurate.

Cut and Paste Example for Updates:

"ChatGPT, I've updated my March projections due to an unexpected change in supplier costs. Here are the new numbers: [insert updated numbers]. Can you check if the net profit calculation for March still adds up correctly?"

Remember, the clearer and more accurate your document is, the more confidence a lender will have in your business plan. Use ChatGPT to help refine and polish your projections so that they not only shine on paper but also reflect a true and practical roadmap for your business's future. Keep ChatGPT in the loop with each revision, and you’ll have a solid, dependable financial plan ready for review by your SBA lender.

Section 11: Beyond the Projections - Expanded Guidance for Real-World Application

Imagine you've drawn a treasure map, where X marks the spot for the next two years. Getting the loan is just the beginning, like finding the first clue. Now, you've got to follow the map you drew. Your projections are your money plan, like the dashes that lead to the X.

Think of your projections & business plan like a diary that tells the story of your business adventure. It shows what you expect to happen every month. If things go off track—maybe you're not making as many sales as you thought—the diary helps you find your way back to the path you wanted to be on. Your journey's not just about getting the loan; it's about keeping your business sailing smooth after that.

Final Notes:

These projections will act as a map for your business's future money journey. They should be clear and make sense, showing step by step how you expect to earn and spend money. They can be also be a way to show the lender that you have truly thought this through and have the acumen to run the business successfully. Use ChatGPT as a friendly guide to help check your map, making sure the paths to profit look good and the numbers add up right.

But, don't forget to team up with a good money coach—like a financial advisor—who can help you turn your map into reality. They're like the experienced travelers who know the tricks to a successful trip. With ChatGPT and a financial pro by your side, you're better prepared to steer your business to where you want it to go, ready to handle twists and turns along the way.

Good luck on your ventures with the new business, and a shiny new relationship with your new best friend and business partner, ChatGPT!