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The Startup Art and Science of Financial Projections

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Developing financial projections for your ed-tech startup as part of writing your business plan or participating in a business plan competition can be nerve-wracking. I mean, how are you supposed to know what your business will look like a year from now, much less five years from now? How does anyone really know?

But that's okay! What I've learned about financial projections is that the actual numbers aren't as important as the underlying assumptions in your projections. That's because financial projections, as an advisor once explained, are a roadmap, not a destination. The purpose of the whole financial projections process is to help you more thoroughly understand the key metrics that will either drive or limit your success, so that you know what to focus on as your startup grows.

Here are three things that I've learned about doing financial projections:

PW-43-1.jpg1. Focus on the assumptions behind the numbers.

Your financial projections essentially become a numerical breakdown of the assumptions you have around your startup. Let's take a simple revenue projection as an example: if I can attract 100,000 people to my site this year, and if I can convert 5 percent of them to sign up for my service, and if I can charge $50/person → my estimated revenues for the year will be 100,000 x 5% x $50 = $250,000.

The important thing isn't so much the final number ($250,000) but rather that you've broken out and identified the key assumptions that drive your revenues, i.e., visitors to site, conversion rate, revenue per user, because now you know what assumptions you'll need to test.

2. Create dynamic projections, not static ones.

Your financial projections should be dynamic, in the sense that you can easily modify your assumptions as you learn more about the market and about your business. For example, you may discover after some more market research that $50 is too high of a price and that you should charge $40 instead, or maybe your preliminary results show that your conversion rate is actually hovering at 6 percent. You should build your projections in such a way that you can easily adjust your assumptions as you learn more information, and immediately be able to see the impact on your projected revenues.

PW-43-2.jpg3. Be optimistic, but don't project miracles

This is something I've always struggled with. We all know that we should avoid the all-too-common startup hockey stick projection, but how optimistic should we be in our projections? What we've been advised to do is to come in at an 8.5 in optimism on a scale of 1-10 of pessimism to optimism. In other words, don't be scared to project the success that you want to happen, but it shouldn't require the sun, moon, and stars to all align perfectly for you to be able to achieve that success. Your projections should represent your best-case scenario, but not a miraculous scenario.

Thoughts? What challenges do you wrestle with? Let me know @professorword!

Until next time,

PW-0-Signature.png


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Photo Credit: Flickr user Teegardin and OpenSourceWay

 

 

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