Are your Financial Projections Just a “Gut” Feeling?

free_169902Investors, lenders, and even friends and family are going to want to see your financial projections before they put a dime into your startup.  Creating realistic, data based financial projections for a startup can be difficult, especially when your idea is new, with little history of success to build your projections.  There are 3 basic steps to create financial projections that are more than just your “gut” feeling.

1.  Supply and Demand Research – The first step in creating realistic financial projections is to understand your market.  Does anyone actually want your product or service?  Then, can you compete with those who already offer your product or service?  A great tool to conduct basic market research is the Google Keyword Planner.  This tool allows you to type in a keyword phrase and find the monthly search volume on Google for that keyword.  For example, let’s say you have an amazing new dandelion plucker tool that allows you to pluck dandelions from your yard without killing your back, using the Google Keyword Planner you can find that there are only 140 monthly searches in the US for “dandelion tool” and 70 monthly searches for “dandelion picker.”  This research tells you a couple of things.  First, there are not millions of people looking for a tool like this already, or at least they are not looking for the tool online.  Secondly, it tells you that online sales of a product like this may be limited.  You may need to build projections based on getting into retail stores with your product.

Finally, you should look at the other tools on the market.  What is their price point?  Can you compete?  Or is your tool so much more innovative that you can charge a higher price than your competitors?

2.  Building Assumptions – The next step is to use the data you gathered in the research phase to build a set of sales, pricing, and expense assumptions for your product or service.  For our dandelion tool example, here are several assumptions that you would need to develop and work into your projections:

  • Retail price
  • Wholesale price
  • Monthly sales volume
  • Growth rate
  • Quantity discounts
  • Manufacturing costs
  • Sales commission costs

You will need to develop all of these assumptions and more to build your model.  You want to use assumptions so that you can quickly and easily change one input like price and have the entire projection immediately reflect that change.

3.  Financial Statement Creation – Now that you have built a number of assumptions, you need to take those assumptions and use them to build a full set of financial projections.  You don’t need to have a PhD in spreadsheet modeling, but your income statement should be properly formatted (revenue on top, expenses on the bottom), your cash flow statement should accurately show the difference between profits and cash flow, and your balance sheet should actually balance!  Getting your projection information into a standard format can be a challenge.  There are a couple tools to help you including ProjectionHub which is a web app that helps entrepreneurs create financial projections, and there are also a number of free Excel templates that can be useful as well.  Creating financial statements that all tie together, and that can be easily manipulated by changing assumptions can be difficult to build on  your own, but most lenders and investors will demand such a model.

Although Mom and Dad may fund your dream on a gut feeling, sophisticated lenders and investors will not.  You need to develop your projections based on research, reasonable assumptions, and the projected financial statements should actually look like… financial statements!  If you can follow these three steps you will be well on your way toward realistic projections and a successful startup.

Image Credit:  © Piotr Majka | Dreamstime Stock Photos

Questions & Answers at Your Library

3307744031_9718b3da96_zDoes Your Community Have a Business Librarian?

The answer is yes, most likely, your community does have a librarian dedicated to helping entrepreneurs and established business owners with their many challenging questions. Have you ever considered calling your local librarian with a tough question?  FYI, the harder the question, the better. Tough research is like a drug for us, seriously.

Here are a few tough questions for you.

How will you decide which products and features your customers want?  How will you price those products optimally for competiveness and profit?  How will you reach those customers with your marketing message?  How many parking spaces or bathrooms will your business require?  Where is the best place to locate your business?  What are the average compensation and benefit costs for employers in that area?

Market research is critically important to every stage and area of business, from planning and product development to your launch and growth strategies.  

Let Us Do Your Research for Free

Well, maybe not all of your research, but we want to at least get you started and show you how to find the information on your own. What is the value of doing this type of in-depth research for your business? What type of research are we even talking about here?

Market Research: I can help you create contact lists of all of your competitors with in-depth information about their annual sales and expenditures, as well as help you get a feel for the overall health of your market through market profiles of your business’ location.

Demographics Research: I can show you how to research your customers: everything from how much they’re spending annually in your industry, to their annual income, education levels, age, gender, ethnicity, home values in local neighborhoods, the list goes on and on… this type of research is critical when writing your business plan and researching a business location, but is also invaluable for helping you determine your pricing strategy, your marketing strategy, and for helping you develop future projections for your business.

Nuts-n-Bolts Research: This type of research helps you figure out the actual process of establishing and growing your business, meaning the step-by-step instructions you need to follow. For instance, you want to register as a women-owned business with the federal government, or you want to become an LLC, or you want to figure out the zoning restrictions of your township so you can build a patio at your restaurant; these are all nuts-n-bolts questions librarians get asked every day by business owners.

This is just the tip of the iceberg too! There is so much more we can help you discover about your community and your market to strengthen your business- all you have to do is ask! You’re paying for these library resources with your taxes anyway, why not use them?

Image Credit:  Dominion Physical Laboratory Library – AAQT 6539 A1394

BizGrid on the Michigan Business Network Radio Show

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Michael Rogers, Vice President of Communications for the Small Business Association of Michigan talks to Bonnie Fahoome about the Detroit BizGrid in 3 segments of the Michigan Business Network radio show.  In case you missed it on the radio, you can listen here:  Segment One:  SBAMS1; Segment Two:  SBAMS2; Segment Three:  SBAMS3.

Weekly Resource #13 – Financial Planning Guide

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In May, InsYght posted “Money, It’s a Gas,” an article about small business financing, in which we promised to follow up later with some tips on how to prepare a loan application or request for investment.  Detailed and accurate financial projections for your small business, in addition to being valuable business planning tools, are critical to the funding acquisition process.  After all, lenders and investors want to be confident they’re going to get paid back or realize a healthy return on their investment.  To get the money, you need to show it’s possible.

In addition to free, lifetime small business mentoring and a variety of workshops, SCORE, a nonprofit association supported by the U.S. Small Business Administration (SBA), offers several tools to help you prepare your financial projections.  The newest of those is a multi-page Financial Projections Template to assist SCORE mentors and their clients in developing 3 year pro-forma financial projections for their startup or existing small business.

This tool breaks a complicated and sometimes overwhelming task into manageable steps, making it easier for you and others to evaluate the financial feasibility of your idea or business; information critical to your essential planning, budgeting, and financial modeling process.  To help you maximize it’s benefit, SCORE provides guidelines in both English and Spanish and includes a complete example.  If you’re new to finance, however, it’s still recommended you use these Financial Planning Templates in conjunction with SCORE’s free financial advice via a volunteer counselor or mentor.

Other SCORE programs for small businesses include, but aren’t limited to, Simple Steps for Starting Your Business and Simple Steps for Growing Your Business.  To find a SCORE office near you, click here.

Weekly Resource #12 – FASTconnect

bbc logoIf you are part of an early-stage technology company, the government’s Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) Programs can be an important source of funding for your project.

Through the SBIR/STTR programs, 11 federal agencies award over $2.3 billion in non-dilutive grants and contracts annually through a competitive awards-based process. The programs encourage technology-based businesses to explore ideas and profit from their commercialization. They are a great way for technology-based companies to raise money without giving up equity.

Historically, women- and minority-owned businesses have been underrepresented in the SBIR/STTR programs, although there is renewed emphasis on improving outreach to these groups.

FASTconnect, a Michigan-based program to assist the state’s SBIR awardees in their product commercialization efforts, is also working to increase SBIR/STTR participation among women and minorities. In collaboration with TechTownWayne State UniversityInforum Michigan, and the Michigan Minority Supplier Development Council (MMSDC), a FASTconnect pilot program seeks to educate women and minorities in Southeast Michigan about these funding opportunities and help them through the application process.  Further support for participants is provided by the Michigan SBIR/STTR Assistance Program, which makes one-on-one SBIR/ STTR proposal preparation assistance available to qualified companies with costs covered in whole or in part by the state.

FASTconnect has been made possible by grants from the U.S. Small Business Administration (SBA) and theMichigan Economic Development Corporation (MEDC). Both FASTconnect and the Michigan SBIR/STTR Assistance Program are managed by BBC Entrepreneurial Training and Consulting. BBCetc specializes in helping emerging companies win SBIR/STTR funding and using it strategically to propel growth. For more information about both programs and BBCetc, visit www.bbcetc.com or contact Kristin Burgard, Principal Consultant, at kristin@bbcetc.com or 734-930-9741.

Weekly Resource #11 MI-SBTDC Business Counseling

MI-SBTDC LogoWhen starting or operating a small business, entrepreneurs must wear many hats. They must serve the role of the accountant, the human resource manager, and the buyer,  as well as dealing with many other issues that arise in normal (and abnormal) business. In order to help out with the daunting task of running a business, the Michigan Small Business and Technology Development Center offers free counseling that is accessible to all entrepreneurs.

No matter the industry, these professionals are here to help with many different problems you may encounter. They can assist with topics ranging from preparing a loan and analyzing a company’s financials to creating a strategic plan for operating a business.

Requesting the free counseling is as easy as following the 5 steps listed here.

 

Celebrating National Small Business Week

shutterstock_135792635This past week in St. Louis, I joined other economic developers, business executives, elected officials and members of both regional and federal SBA teams to celebrate the 50th anniversary of National Small Business Week.  Registration and attendance for the St. Louis event exceeded 700 individuals. While panel discussions, breakout sessions and networking opportunities filled most of the day, SBA Administrator, Karen Mills’ on stage interview with St. Louis business executive David Stewart was clearly the highlight.  Stewart, founder and CEO of World Wide Technology, is today a $3.4B global giant.  Stewart started his business with a SBA loan, and provided great advice, feedback and council to the audience during the Q&A.

I was very privileged to join a panel of economic development specialists exchanging views on today’s ecosystem for emerging entrepreneurs.  Speaking from the perspective from my past life in news media, I encouraged the audience of small business owners to work as hard as they can to align themselves with great coaches, appropriate resources and forward  thinking communities.  I made a strong statement in support of the role start – ups and entrepreneurs will play as the USA rebuilds its national economy.

There was a tremendous spirit and loads of energy across all the breakout rooms and auditorium at historic Harris Stowe college that day.  Ideas, passion, hard work and critical thinking carried the day!

Image Credit:  http://www.publicdomainpictures.net/view-image.php?picture=missouri-clouds&image=3339&large=1

Weekly Resource #7 – National Small Business Week

topright-headerSince 1963, Entrepreneurs and Small businesses have been honored with a week dedicated to their success and critical contributions to America’s economy. The Small Business Association (SBA) celebrates this week by offering a collection of educational presentations, networking events, and business workshops in five different cities around the country. Don’t fret if you do not live near one of the five cities! SBA is also offering multiple Google+ hangouts that will be streamed at their website and on YouTube as the week progresses.

Starting June 17th in Seattle, Dallas on the 18th, St. Louis on the 19th, Pittsburgh on the 20th, and ending in D.C. on the 21st, these five days of seminars and workshops will cover topics ranging from exporting to social media marketing. The SBA has packed the week with all things small business and will be bringing many prominent speakers to the stage to spread their expertise and to answer questions.

Check out the Schedule for a detailed breakdown of events in each city and don’t forget to Register for your respective city.

Entrepreneur Video Spotlight: Detroit Surf Co.

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Dave Tuzinowski tells his story of how the idea for a Detroit based surf company was formed and what he did to make it into the business it is today.

Be sure to visit Detroit Surf Co. at their website to check out their gear!

Weekly Resource #6 – Inner City Capital Connections

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Is your small business in an economically distressed city?

Inner City Capital Connections (ICCC) is a free, national program designed to help you access the capital necessary to achieve sustainable growth & provide employment opportunities for residents.

Brought to you by the Initiative for a Competitive Inner City (ICIC), ICCC provides financial education and peer-to-peer mentoring for investment-ready companies and facilitates relationships with debt & equity providers and business strategy experts.  Participants gain practice and a thorough understanding of how to successfully pitch their business to capital investors.

Companies in 133 cities and 35 states have already leveraged this training with successful results.  Eighty-nine percent of them raised capital within 2 years of participation and 55% did so within a year.  Could you be next?  ICIC is now accepting applications for upcoming executive education seminars in the following cities:

Cleveland     –     Detroit

Designed for company owners and taught by respected experts, this interactive program explores  a variety of business finance options and teaches the importance of building your capacity to successful prepare for and manage the subsequent growth.  Select participants will earn the opportunity to showcase their learning and market their companies at the ICCC Conference at Fortune Magazine in New York City.  Past participants have been featured in such esteemed publications as:  The Wall Street JournalReutersInc.PortfolioPE HubMSN Money, and Small Business Television.

Successful applicants have represented diverse industries & backgrounds, but all are of sufficient size and strength to attract the growth capital needed to increase revenues and jobs in their inner cities.  If this sounds like you, click here for application information:  ClevelandDetroit.