Part 3 of the “Things we wish we knew” Blog series
By: Tina Oddleifson, Business Advisor
We get it, you’re an artist, a baker, or love working on cars. You’ve decided to start a business doing what you love, and you plan to let someone else worry about the financial details later.
But when we asked Maine SBDC Business Advisors about the biggest mistakes they’ve seen business owners make,“finance” came up — a lot.
There’s much to talk about when it comes to small business finance and the common mistakes we see business owners make. So, in this post we’ll start at the beginning with financial projections.
Financial Projections
Whether you’re applying for a loan, pitching to investors or paying for your business startup or expansion yourself — you need to know what the financial picture for your business might look like over the next several months and years. Without them, you’ll be flying blind.
Developing financial projections is basically a budgeting exercise that helps you forecast your month by month revenue and expenses over a period of time. Projections will show if you risk running out of cash to pay your bills or loans at certain times of year, what your breakeven point will be, and whether you’ll make enough profit to make your venture even worth it.
As one SBDC Advisor said, “Seeing numbers on paper makes it tangible and real. For many people it’s an “aha moment” that makes them change course or adjust their business model entirely.”
Common Mistakes in Financial Projections
While nobody can predict exactly what will happen in a business, your projections need to be as realistic as possible to make them useful. Here are the things you’ll want to know.
Avoid overly optimistic sales projections
It’s easy to get a little ahead of yourself on this one, but it’s much better to be on the conservative side when it comes to predicting your sales so you can be pleasantly surprised if things turn out better than expected. You should also run several different scenarios ranging from conservative to optimistic to see how it impacts your business.
Realistic sales projections must also be tied to a well defined marketing strategy. The SBDC has financial projection webinars to help our clients understand how to create sales projections. Sign up for our newsletter to find out about upcoming webinars.
Using Market Research
Another common mistake is not thoroughly researching your market to back up your assumptions. There’s a lot you need to know before you can project your revenue and expenses and market research is your best way to do this. Your research should examine topics like:
- Who is your target market and how many of them are in your geographic or online reach? What is the size of this market and how much are you likely to capture?
- What prices will your target market expect for your product or service?
- Who are your competitors and how will you be different?
- Have your target customers expressed interest in your product or service?
- What trends are happening in your industry and how might this affect sales growth?
- What are typical gross and net profit margins in your industry?
Projecting startup and seasonal trends
Nobody starts at full capacity when they first open up. Make sure your projections reflect this reality and show a buildup of sales over time that are based on your marketing strategy.
Most businesses tend to have seasonal fluctuations. Make sure you understand how your industry works and what drives the ups and downs of sales revenue during the year as this can have a big impact on cash flow.
Projecting Expenses
New business owners are often unfamiliar with everything they’ll end up paying for in their business. Investigate common expense categories for your type of business and how much they typically cost in your geographic area. This includes things like commercial rent and utility costs, repair and maintenance costs, average wages and benefits expectation for your industry and area, cost of goods sold, average advertising amounts for your industry and more. An SBDC advisor can help you understand these costs and can also help you investigate the types and amounts of expenses that are common in your industry.
Even our best attempts to estimate costs can fall short. It’s best to build in a contingency expense line that is 1-3% of your sales revenue to capture the things you don’t yet know about.
Next Steps
While there are always surprises in starting a new business, a realistic set of financial projections is key to your success. Get started by talking to an SBDC business advisor or Visit our YouTube Channel to watch pre-recorded webinars on all kinds of topics related to starting your own business, including our “Are You Ready Series” and several videos on creating Financial Projections.
Want to know how other small businesses got their start? Check out our client success stories!