When we talk about accounting for startup businesses, we’ve generally been discussing the steps that you need to take in order to obtain an accurate snapshot of where your company’s finances are today. But of course, that’s only part of the picture. It’s also important to assemble the information you need to be able to forecast your company’s financial future.
- Who’s got time for financial forecasts when you’re running a startup?
Well, it’s a valid question. When you’re in the startup phase, all your energies and resources are typically devoted to improving your revenue stream, and that means you’re going to spend a lot of time selling. It’s always tough to pull back from those efforts to do a planning exercise. It has been said that developing a forecast of your company’s financial future is more of an art than a science, especially for a startup. However, your all-important business plan is not really complete without a financial forecast. It’s going to be difficult, to say the least, to get investors to back you without a set of well-thought-out forecasts. And, perhaps even more importantly, you need these forecasts yourself to make critical decisions regarding staffing and other operational matters.
Let’s look at some of the elements of your financial forecast:
- Pro Forma Income Statement
The expression “pro forma” is actually Latin for “as a matter of form”. But in the financial world, it refers to a method used to calculate financial results - essentially, an estimate, or projection. It’s a vital part of the picture you need to create of your company’s financial future. A pro forma income statement looks at your income, expenses, and profit as you can expect to see them at some point ahead in time: one, two, three years, or more. If your business has been in operation for a while, you can draw on your past history, using your existing income statements as a starting point. If you haven’t yet established a track record, you’ll need to do some research, talking to people involved in similar businesses, gathering information you can find online, and so on.
- Estimated Balance Sheet
We’ve discussed balance sheets previously in this space. The estimated balance sheet is a slightly different animal, in that it doesn’t look at your actual numbers today. Instead, it’s based on, yep, you guessed it, estimates of what your assets and liabilities will be at specific points in your financial future. It’s going to take a lot of work, but it’s essential for proper planning. Even if you’re not entirely accurate in your projections, you’ll be laying the groundwork you can use to plan your course of action for the next few years. What you’ll need to do is try to estimate, based on the growth goals you’re setting for yourself, the amount of assets you’ll need to accomplish those goals. You’ll also need to consider what you’ll need to do in order to obtain those assets, including any debt you may need to take on, and what earnings you’ll be able to reinvest in the business.
- Projected Cash Flow
While this isn’t easy, and again, may seem like a distraction from more immediately critical efforts to generate income today, it’s important that you work up some projections of your cash flow. With the picture you develop through this projection, you’ll be able to better plan purchases of raw materials and equipment, and arrange whatever financing may be necessary. Break down your expected income by sources (e.g. sales through different channels, investment income, etc.) and do the same for the various types of expenses you can expect. In short, this will help you anticipate your cash needs ahead of time and put you in a better position to meet those obligations when they do arise.