Are you wondering what are the reasons why entrepreneurs need financial projections?
Some entrepreneurs love math and juggling numbers to create new business plans. Others are far more passionate about the product, sales and just doing the business. Whatever your strengths and interests, it is vital to layout financial projections in advance.
Here are just some of the reasons you need them, and how they can help.
Validate this is actually a viable business
Unless you’ve run financial projections you really don’t know if this is a viable business idea.
You need a financial model to layout profit margins, and see if they are sustainable. You need to analyze fixed versus variable costs, and what that means for viability which is one of the big reasons why entrepreneurs need financial projections.
You want to know if it even has the potential to deliver enough reward for your effort. As well as warrant the participation of anyone else you may need on board to make this happen.
Assess pricing models and strategies
You can have a lot of fluffy ideals and assumptions when you begin incubating a new business idea. The financial projections are where you really hone this idea as a true business.
A part of building these projections is establishing potential pricing. A lot can be revealed in this process. Such as where you really need to be in order to make a profit, reach scale, and hit a point of sustainability.
This will show you the impacts and likely outcomes of freemium style pricing models, or at the other end of the spectrum, focusing only on high-end niche clients.
Calculate how big this business can be
Keep in mind when wondering about the reasons why entrepreneurs need financial projections, that this process of financial forecasts will help clarify how big this business can really become.
You may be focusing on the next 12 to 60 months in initial projections. Yet, you’ll also be doing the research and math on the size of the market, addressable market and market share.
Being an entrepreneur can be a lot of work, as is any job. If you are going to put in the work, you might as well make sure you are getting really big rewards for it. For the same amount of hours in a day you can build a $100k career or a $1B plus startup. Which results would you prefer?
A lot of your other plans are going to depend on how big this business can be too. It will impact the overhead you can take on, the marketing budget you can have, who you can afford to recruit, and whether you can raise VC money or not.
Identify cash flow gaps
One of the biggest threats to startups is the cash-flow gap.
You can have huge potential. You might even be able to get started with a very lean, bootstrapped startup approach. However, your best month can often become your hardest month, with the most risk of going bankrupt.
There is often going to be a point where you run out of your seed capital, and have a huge amount of orders. Yet, you need to be able to cover the cash flow needs between this gap to make it through.
See How I Can Help You With Your Fundraising Efforts
- Fundraising Process : get guidance from A to Z.
- Materials : our team creates epic pitch decks and financial models
- Investor Access : connect with the right investors for your business and close them