By Adam Hoeksema
One of the most important aspects of your financial projections are your assumptions. Most entrepreneurs and small business owners fail to include written assumptions with their financial projections. This is a huge problem. Why? Typically you create financial forecasts in order to secure a loan or investment. That means someone else is going to be reviewing your projections. How are they supposed to know how you came up with your projections unless you tell them? There are 2 very important reasons to include a tab in your spreadsheet file with a set of assumptions used to build your projections.
1. Ability to Quickly Change Assumptions – You need to set up your assumptions on a spreadsheet tab in such a way that you can quickly change the numbers and the results will flow through to your projected financial statements. For example, you might assume $4 gas prices, $8 minimum wage, and a 7% sales tax rate. Your audience will want to be able to see how $3 gas prices and $5 gas prices impact your bottom line.
Maybe your business hires a number of minimum wage workers, and there is legislation proposing a significant increase in the minimum wage. If this is the case you need to build your financial model in such a way that you can quickly change the minimum wage in just one cell, and it will automatically flow through to the rest of the statements.
2. Demonstrate your Understanding of Your Business – A banker or potential investor is going to look at your assumptions and make a judgment about you and your understanding of your business. If your assumptions are data driven and logical, you will likely instill confidence in your audience.
On the other hand if your assumptions look something like this you are probably in trouble:
Assumption 1 – Our industry is a billion dollar market
Assumption 2 – We believe we can get 1% of that market
These kind of top-down assumptions show that you don’t truly understand your market or what it is going to take to generate that level of sales and distribution.
Your assumptions make or break your financial forecast. Without an easy way for your audience to quickly change your assumptions and review various scenarios your financial projections will be essentially worthless.
You can get started creating your cash flow and profit and loss projection right now with ProjectionHub.