How do you produce an accurate financial forecast if you have no operating history?
Our company has been asked to produce a financial forecast. Normally you would use data from similar businesses in the same industry. But, how can we do this when our business model is different from our competitors' business models?
How can a business produce an accurate financial forecast for a startup? Where is the reference point? Since it's a startup, you're not going to know your growth rate from year to year.
Finance Planning Business Plan
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Generally you cannot, you just made it up, or let's call it as an "educated guess". Sad but true. – The Dictator 13 years ago
2 Answers
The formulas I use for my personal site are:
- Before launch, look at the market. Find the smallest yet reasonable player that has the most comparable service to what you have (if you are building office softawre dont compare yourself to MSFT rather someone some on download.com). Determine your pricing. Divide your pricing by 2 to account for costs. Then take 1-2% of what your competitor does per month, multiply it by your 50% price and you have an idea of the potential. Its very conservative, but teaches you not to go after small apples, and not to have your head up your ass daydreaming about how much money you could make.
- Once your product is launched, you can look at its track record. We look at how much we have made over the past months, multiplied by how much we can invest in marketing, and how much market share we estimate is left.
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+1 @Frank: Nice approach. The toughest number to come up with is sales. Rent, utilities, advertising and so on can either be determined by research or extrapolation. But a startup is an experiment. Until you get some experimental data back on market adoption of your product, you need to use your best educated guess. – Jack Rodenhi 13 years ago
Projections are not necessarily expected to be accurate, but they should clearly set out the assumptions used to calculate the numbers. For revenue especially, is can be very useful to set out the price(s) and number of units expected to be sold per period, since that will make you plan how that can be achieved. That in turn will help you calculate the marketing, sales and G&A costs will have to be covered before the revenue comes in. That tells you about how much working capital you will need. Making your revenue assumptions clear will also help you adjust your forecasts as you go along, which is a great management process.
