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Top Mistakes Newbie Entrepreneurs Make on Financial Projections (So You Can Avoid Them) - YouTube
Channel: Cate Costa
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Creating pro forma financial statements is
tough for new entrepreneurs for a couple of
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reasons: Firstly, most people aren�t used
to sitting around projecting revenue and ebitda
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5 years into the future.
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Secondly, if you�re building them for your
budding business you probably lack objectivity.
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Given both of these hurdles, it�s no wonder
that newbie entrepreneurs repeatedly make
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some costly mistakes on their pro formas.
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Here are some of the top bloopers so that
you can avoid them as you build your own pro
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formas.
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#1 is not listing your assumptions and/or
having assumptions that are not based on data.
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Everything you put in your financial statements
is based on a number of assumptions that you�ve
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made about a thousand different things in
the market, your marketing, your production,
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your operations, etc.
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You need to list those assumptions so that
everyone�s on the same page about where
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your numbers are coming from and how changes
in the environment might affect your numbers.
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Things like how prices will increase over
time or how many new customers you can get
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month over month are assumptions: if you think
office overhead will increase at 6% per year
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I need to know that and know why (i.e. because
overhead has increased at that rate for the
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last 10 years or because it was increasing
at a lower rate but you expect the prices
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of heating oil to jump up).
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If you think your online marketing efforts
will give you an X% revenue increase each
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month because they�ll drive you 100 new
customers each month I need to know why - what
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avenues are you using and what are the associated
conversion rates and costs - and of course
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remember then that those costs had better
also show up in the pro formas.
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Another issue that many newbie entrepreneurs
have is that they forget about an allowance
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for bad debts.
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Unless you collect 100% payment upfront - and
wait for it to clear - before providing any
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goods or services, for every client, every
time; you�re eventually going to run into
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some who won�t pay.
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You need to account for this in your projections
and assume - remember our convo about assumptions
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now - a certain % for bad debts that you�ll
never be paid on.
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If you�re the rare entrepreneur who can
collect 100% of every single penny ever owed
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to you and do so on time, forget whatever
business you originally planned to run and
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start selling that collections system to other
entrepreneurs.
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And while we�re on this list of easy items
that you may forget, here are some more that
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often just don�t make it into the pro formas
for some reason: taxes, depreciation, amortization,
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employee benefits, insurance...okay, I think
you get the point.
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Just remember to be careful to include anything
that represents money in or money out as you
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create your pro formas or you�ll have a
distorted view of your potential finances.
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I also recommend that you include a breakeven
analysis in your pro formas.
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Since it�s not one of the three official
financial statements - the income statement,
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statement of cash flows, and balance sheet
- many entrepreneurs don�t do it.
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But knowing how much you need to sell just
to get to zero is vital information as you
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plan.
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And finally, just a tip for you - all of your
pro formas should be built in such a way that
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the spreadsheets are dynamic.
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By this I mean that if I change one number
or one assumption in the spreadsheet, any
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other numbers that would be affected should
automatically change.
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This is just to save you from a horrible headache
and from embarrassment if someone asks you
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to adjust your assumed revenue growth rate
from 15% down to 11% - you don�t want to
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have to redo anything except going to the
little box for growth rate and changing the
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one number - then everything else should automatically
adjust itself.
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This list certainly doesn�t cover all of
the mistakes that entrepreneurs make in their
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pro formas but hopefully the quick list wil
give you a better idea of how to create solid
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pro formas.
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And if all of this talk of the common pitfalls
is stressing you out, I highly suggest you
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enlist the help of someone who has experience
in the area.
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www.CateCosta.com
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