If you are stuck writing your Financial Projections, fear not. There are a few crucial steps to take to make the whole process less daunting and a bit more palatable. So there are a few things to consider in order to make the best possible financial forecasts to include in your information memorandum.
Step 1: Gather all of your data
No matter the purpose for your financial projections, the first step is always the same. Collect all of your numbers, your history in sales and your business’s costs and expenses. This can include things like your rent/mortgage, utilities, payroll, etc.
Step 2: Consider doing market research
Market research can be a great source of information that can benefit your business and help you create the most accurate financial forecasts. It looks into consumer trends and relies on direct customer feedback that can determine how much potential customers value your product, and help you set the price for your products accordingly.
It will show your buyers that your business can compete in the market, have steady revenue and room for growth, which is what the buyers expect to see in an Information Memorandum.
Step 3: Crunching numbers
After you collected all the information and data you need, it is time to proceed with making your financial projections by putting all of your numbers into an Excel spreadsheet. There are three forms to consider making when making your financial forecasts.
- Income statement
- Cash flow statement
- Balance sheet
Income statements show how much revenue your business makes after all of it’s costs and/or losses. Cash flow statements show how much money you have on hand for a specific period. And balance sheets show your business’s assets, liabilities and owner’s equity.
While all of these documents can present potential buyers your company's previous financial statements, they can also be used for showing its financial future as well. This way the buyers will be able to see where your business is going and if it has potential for success.
Step 4: Short term vs. long term projections
Depending on your needs, Financial Projections can be based on yearly or quarterly time periods. However, sometimes monthly forecasts are made for startups or for internal business operations and planning.
But if you wish to sell your business, the potential buyers will be interested in seeing longer projections, spanning up to 5 years. Therefore, it is better to include longer financial forecasts in your information memorandum.
Step 5: Hope for the best, plan for the worst
Because a big part of financial forecasts is making assumptions about your business’s future performance, and the future is hard to predict, you will need to include multiple financial projections in your information memorandum.
That is why you will need to have the worst case, best case, and everything in between scenarios of your business’s potential finances. And you will have to present them all to potential buyers. You should be transparent and honest about your business’s shortcomings, especially because this can be a great opportunity to turn your weaknesses into your strengths.
Presenting possible problems, expenses and losses and including measures to overcome them will also show interested buyers that your business is taking everything into account and will have no future shortfalls.
The Steps Above are a Sure Path to Forecast Success
Financial projections may seem like a difficult task, but having a step by step approach to writing them makes for a better experience and produces better results. Breaking down your tasks to smaller objectives and goals ensures the most accurate financial predictions and a top notch Information Memorandum as well.
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