Use Quickbooks to Create Future Financial Projections

July 6, 2012 by Adam Hoeksema Leave a Comment

If your bank has asked you to create a set of financial projections for your loan application, and you are hoping to use your Quickbooks data to help project your future financials, I have 2 things to say:

You are out of luck
You are not alone

Unfortunately Quickbooks does not have a decent solution for business owners attempting to create financial projections based on past accounting data. In the screenshot below of the Intuit Community you can see that Quickbooks users have been asking question after question to figure out how to create a set of financial projections. There are 798 results for “financial projections.”

So what are your other options right now?

Basically, the only option you have is to use the Quickbooks budget tool which is fairly limited in functionality, OR you can create your own financial projections from scratch. Typically you end up finding and using a Excel spreadsheet template that someone has published on the internet. The problem is that the average business owner doesn’t have a PhD in spreadsheet modeling, and really has no idea if their forecasts are realistic or accurate.

Doesn’t it seem like there has to be a better way? Intuit is also the maker of TurboTax which takes a complicated subject like taxes and makes it simple through software. Why isn’t there a TurboTax for financial projections?

We are working on it!

We thought that there has to be a better way, so we are building a better way.

ProjectionHub is a web application that helps entrepreneurs create financial projections without the need to have a PhD in spreadsheet modeling.

Right now the tool is fairly basic, it walks you through the process of creating up to a:

3 year Cash Flow Forecast
3 year P&L Forecast

But we have big time ambitions! We believe that data can truly change the way business owners project the future success or failure of their company, and that data can help banks better analyze the creditworthiness of a business.

So what exactly does this mean practically?

Imagine that you can connect your own Quickbooks data to ProjectionHub. ProjectionHub then looks at the past couple years of data and notices trends in both sales and expenses. ProjectionHub then automatically forecasts what your financial statements would look like if those trends were to continue.

Pretty cool, but that is only the start!

Quickbooks Aggregate Data

Now this could get really interesting when ProjectionHub pulls in aggregate data from the millions of businesses around the world that use Quickbooks. The app could look at trends by Country, State, and City. We could find trends by industry. Or let’s say you open a cafe and you have been in business for 2 years. The application would be able to look at financial data from other cafes in their second year of business, and then look what they did over the next 3 years. If the average 2 year old cafe grew 20% per year for the next 3 years, that would make a strong case for your projected growth.

On the other hand, the application might be able to see that 50% of 2 year old cafes fail within the next 3 years.

As you create your own financial projections the tool should be able to tell you when you get out of line. Let’s say that only the top .01% of businesses grow as fast as you are predicting. That should be a warning sign to you and your banker that you are being unrealistic with your financial projections.

At ProjectionHub we truly believe the possibilities are endless when it comes to utilizing data to help entrepreneurs better predict the future success or failure of their company.

What do you think? How can we improve the financial projection process to make it easier and more accurate for you and your company?

Is your Startup 98.82% Likely to Succeed? If Not, No Loan for You

July 5, 2012 by Adam Hoeksema Leave a Comment

recently reported that delinquencies for business loans are now down to 1.18%. In my opinion, this is truly incredible! Only 1% of businesses with loans from banks fail to make their loan payments on time. This means that you must convince your lender that you are 99% likely to make your loan payments.

Based on this data, it is no surprise that startups and early stage businesses have a nearly impossible time securing loans from banks. When you look at the data for small businesses, you will find that there is a significant percentage of businesses that will cease to exist in 5 years. Let’s say 25% of the small businesses with less than $1 million in annual sales will be out of business in 5 years. That means that banks are going to be incredibly unlikely to lend to these small businesses because they need to feel 99% confident that you will still be around in 5 years.

That rules out startups and early stage small businesses in technology industries like software, mobile computing, alternative energy etc because technology moves so incredibly fast that 5 years is a lifetime.

Unfortunately for small business owners banks can be selective. There are still plenty of credit-worthy, established businesses that will take loans. The banks don’t need to lend to small businesses in order to make a profit right now. In fact, the top 10 banks in the United States only approve approximately 10% of loan applications.

If you are a startup, what do you do?

I believe there are still some great options. There are 3 places I encourage you to look for a loan:

Lendio – Matches you with lenders that best fit your needs and stage of business
On Deck Capital – Unique way of lending to “Main Street” businesses. Lends even if your credit score is low
Prosper – A peer-to-peer lender where you may be able to build up to a loan capacity of $25,000.

Of course these options will have higher interest rates than your traditional bank, but if you are able to utilize other funding sources during the early stages of your business, you may be able to reach a point in time where you can actually convince your local banker that you are 98.82% likely to pay them back, and pay them on time.

Have you been successful finding other sources of funding since the banks don’t lend? If so, leave us a comment, and share with other entrepreneurs who are looking to grow and expand.

Software Development Loans – Impossible to Find?

July 3, 2012 by Adam Hoeksema Leave a Comment

Red No Circle Clip Art Banks don’t give loans for software development, it is simply too speculative. If the software has not been developed yet how do you know whether anyone will be willing to pay for your product? How do you know what a potential customer is willing to pay? How does the lender even know if you actually know how to program? There are so many hard questions to answer that most banks will simply avoid providing loans for software development altogether.

If you are determined to get a loan to develop software there are a few ways you might be able to convince a bank to lend to you.

1. Get a Signed Contract – If you have a signed contract from a customer this will answer a couple key questions. Now the lender knows that someone is willing to a buy a product, and they know how much they are willing to pay for it. There is still a major question though. How can you prove to the lender that you and your team can successfully overcome the technical challenges and fulfill the contract?

2. Demonstrate a Track Record of Success – Have you completed other software projects? Have you worked with this specific client before? If you can demonstrate that you have been doing this kind of work for 10 years and you have worked with this client on several similar projects, then you might be able to convince the lender that your past success will guarantee your future success on this project.

3. Generate Sufficient Cash Flow from Current Business – If your business is currently profitable and providing sufficient cash flow to cover your loan payments you can probably secure a loan to expand your current business. The bank will want you to use the loan to expand your current, stable business, but if you can use the loan to increase cash flow from your current business, you can then take that excess cash and invest it into your software development project.

If you can get a signed contract from a client you have worked with in the past, or you can generate sufficient cash flow from your current business, you might actually be able to secure a loan for software development. If not, then you should probably start looking for investors who have an appetite for risk.

About the Author: Adam Hoeksema is the Co-Founder of ProjectionHub. ProjectionHub is a web application that helps entrepreneurs create financial projections without the need for a PhD in spreadsheet modeling.

Does Factoring Receivables Give Your Small Business a Bad Image?

June 29, 2012 by Adam Hoeksema Leave a Comment

By Adam Hoeksema

A very common problem for small businesses is managing cash flow when you extend credit to your customers. Here is a common scenario:

You land a huge job for your architecture firm as a subcontractor. The general contractor has hired your firm to design a new building. Unfortunately, you aren’t able to invoice the general contractor until you have completed 50% of the work, but your expenses don’t wait. While you spend 30 days to complete the first half of the design you have to pay your employees, your rent, utilities, internet and phone bills etc. Then you bill the contractor, but they won’t pay for an additional 45 days while you continue to pay more expenses.

This is a difficult situation from a cash flow perspective, so a number of subcontractors utilize lines of credit to stabilize the situation. In the 2008 banking mess, many banks reduced or eliminated lines of credit to small businesses, so many have been forced to factor their receivables.

According to Entrepreneur.com, “A financing method in which a business owner sells accounts receivable at a discount to a third-party funding source to raise capital.”

The problem is that there has been a negative connotation that goes along with factoring receivables. It may look like you are unstable as a business, and it may scare away your customer. Worse yet, the company that purchased your receivables may start calling and nagging your customer to pay up.

So the question is whether or not there is a way to factor receivables without sacrificing your customer relationships.

The answer is… It Depends.

Here are a couple of options that past clients of mine have used:

Interface Financial – This group is established and trusted, and can cater to smaller businesses more easily; however, they will contact your clients directly which may not work for you.

Receivables Exchange – This is a web based platform that is very powerful, but is currently only available for businesses that have rather large invoices.

Make sure to learn about each option yourself, but either one could solve your financing problems in a relatively efficient and elegant way.

How to Calculate Whether or Not a Loan is Worth It

June 27, 2012 by Adam Hoeksema Leave a Comment

By Adam Hoeksema

In order to determine whether or not you should apply for a loan and how much you should ask for, you need to run some numbers. The best way to test is by creating a cash flow projection. There are a number of tools and spreadsheet templates you can use to create financial projections including:

ProjectionHub – Web based tool that helps you create financial projections
LivePlan – Business plan software that includes financial projections tool
EZnumbers – Extensive spreadsheet tool to create financial projections

Once you have a baseline set of cash flow projections you can start playing with some what-if scenarios.

So let’s look at 2 scenarios to determine whether a loan is worth it:

1. Buy Larger Quantities of Inventory – This is a fairly straightforward calculation. Let’s say that right now you are buying inventory in shipments of $1,000 at a time. Each time you have to pay $100 for shipping.

If you were to secure a $25,000 loan to purchase inventory maybe you would purchase one large $25K order. You might get a quantity discount from your supplier of 10%, so you immediately save $2,500. You might also only pay $500 to ship the entire order together which is another $2,000 savings. You are saving $4,500 by ordering in larger quantities, but you will have to pay interest on the loan. Let’s say the loan is at 10% interest for a 12 month term because your small business is relatively risky. For the life of the loan you would pay $2,500 in interest, but the cost savings makes this a no brainer. Ultimately, you end up saving $2,000 which makes this loan worth it!

2. Advertising for the First Time – Now let’s say you want to take out a 12 month $25,000 loan at 10% in order to advertise your product through Google Adwords. This is the first time you have ever used Google Adwords to advertise your product which makes this situation very risky. Let’s assume you make $50 of gross profit on each item sold. Since this is your first time advertising you can’t know the average cost of customer acquisition. Let’s say Google charges you $1 a click and you only convert 3% of visitors into customers.

So for $25,000 you would get 25,000 website clicks and you would convert 750 into customers. You would make $37,500 in profit ( $50 x 750 ). But you paid $25,000 + $2,500 in interest for the life of the loan. Again, in this situation it would be worth it to take out a loan, but if your conversion rate went down to 1.5%, you would only make $18,750 which would make advertising a terrible use for the loan funds.

When you are looking to secure a loan for your small business, make sure to run through various scenarios. If you aren’t sure whether you will be able to make a profit from the loan, then you should do more testing and analysis until you are certain the loan is worth the risk.

ProjectionHub Announces Free Financial Projection Tool For Student Entrepreneurs

June 26, 2012 by Adam Hoeksema Leave a Comment

ProjectionHub, a web application that helps entrepreneurs create realistic financial projections without the need for a PhD in spreadsheet modeling, has announced the availability of the ProjectionHub web application for student entrepreneurs. Now, any college student with a .edu email address can create a set of financial projections using the ProjectionHub web application at no cost.

Student entrepreneurs can simply answer questions about their business, input sales and expense projection data, and the tool will automatically create a bank or investor ready set of financial projections. Students can create a 1 to 3 year cash flow or profit and loss projection. The projections will automatically be delivered to the student via email as an Excel Spreadsheet that can be edited or revised in the future.

24 year old Co-Founder Adam Hoeksema explained, “I wanted to offer ProjectionHub as a free tool for university entrepreneurship programs and student entrepreneurs to utilize as they complete business plan financial projections for class, business plan competitions, and potential investors. I want ProjectionHub to become the leading educational resource on how to create realistic financial projections for startups and small businesses, and I think this is a great first step.”

ProjectionHub is a web application that helps entrepreneurs create financial projections for their business without the need to have a PhD in spreadsheet modeling. For more information visit ProjectionHub or email Adam Hoeksema adam@projectionhub.com.

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Why Banks Require Pro Forma Statements | Learn What A Pro Forma Bank Statement Is Why Banks Require Them – ProjectionHub

June 25, 2012 by Adam Hoeksema Leave a Comment

What Is A Bank Pro Forma Statement & Why Do Banks Require Them?

What is a pro forma statement and why are pro forma statements required at banks? A pro forma bank statement is a financial statement that serves as a prediction tool used to help companies make future business plans and conduct comparisons between strategies.

When you apply for a small business administration (SBA) loan or other commercial loan you are often required to provide financial projections. In fact, the SBA requires a 1 year pro forma income statement and narrative explanation of how you will reach your projections with an application for the following loans:

SBA 7(a) Loans
SBA 504 Loans
SBA Express Loans

Why do banks require pro forma financial statements? There are two core reasons why banks require pro forma statements in addition to the fact that the SBA requires it.

1. Have A Pro Forma Bank Statement History Based on Cash Flow

The bank does not want you to have to borrow additional funds from another source in order to make your loan payment each month. Your pro forma bank statement history should demonstrate that you have sufficient cash flow from operations to make your loan payment. Your pro forma financial projections should also show 2 scenarios. The first scenario is your business without the loan, while the second scenario shows how your numbers change when you do take out a loan. The idea is to show positive cash flow and profits due to the use of the loan.

2. Demonstrate Competence In Your Pro Forma Bank Statement Data

Your pro forma bank statement data should demonstrate to the lender that you know what you are talking about. If your projections are completely unrealistic and out of line with the industry, the bank is going to slap a denial on your application immediately. Do some research. If you are opening a coffee shop, and the average coffee shop has profit margins of 3%, then your projected profit margins shouldn’t be 30%.

Check out ProjectionHub’s services or choose an excel financial projection template to prepare the necessary materials for your pro forma bank statement and get ahead of the game.

3 Ways to Reduce Cost of Goods Sold

June 23, 2012 by Adam Hoeksema Leave a Comment

By Adam Hoeksema

Cost of Goods Sold, also known as COGS, is one of the most difficult, yet important elements of your business to understand. The basic definition of cost of goods sold is as follows:

“The direct costs attributable to the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good.”

Today, I want to focus on 3 simple ways you can reduce your COGS which will translate directly to your bottom line.

1. Buy in Larger Quantities – When you buy in larger quantities you will often be able to take advantage of quantity discounts. You may also benefit from shipping discounts. It is much, much cheaper per unit to ship a truckload full of product than it is to ship a pallet full of product. This is a no brainer, but some entrepreneurs never even ask their supplier what sort of discounts they could benefit from if they were to purchase in larger quantities.

2. Automate – In a world where we need jobs, this might not be a popular answer with the governments of the world, but for each job you can replace with a machine, your cost of goods sold will decrease drastically. Machines don’t form unions, they don’t go on strike, they don’t need health insurance, and they get to work on time. If you don’t automate in the areas that you can, your competitors will, and you will ultimately go out of business because you simply won’t be able to compete with their prices.

3. Lock in Long Term Pricing for Raw Materials – This is a bit of a risk, but for some companies this strategy really pays off. For example, Southwest Airlines locked in pricing for jet fuel in a long term contract right before fuel prices spiked exponentially. This gave Southwest a huge advantage over their competitors. On the other hand, what if Southwest locked in the prices right before the price of fuel crashed? Their COGS would have been awful compared to the industry. If you think the price of a raw material that is core to your business is poised to increase, you may consider entering into a long term agreement with a supplier.

If you would like to play around with some numbers and project how your cost of goods sold would be impacted by various scenarios, then create a quick set of financial projections with ProjectionHub and we will walk you through the process of projecting cost of goods sold. Good luck!

Year 2020: Small Business Lending Predictions

June 21, 2012 by Adam Hoeksema Leave a Comment

Small Business Lending in 2020

By Adam Hoeksema

The financial services industry is ripe for disruption on a number of fronts. In my opinion, small business lending is one of the most likely sectors to see a complete transformation. I have listed 5 predictions that I believe will impact small business lending by 2020.

1. Personal Credit Scores Will Have LITTLE to do With Small Business Loan Approval – Currently, lenders look at the personal credit score of the business owner as a major factor in the creditworthiness of the business. Clearly, the personal credit score has no bearing on the quality of your business model, marketing plan, or profit margins. In the past, banks have had no other option because other (more relevant) data was not readily available.

New data is becoming available. For instance, Intuit can provide data to banks including:

Accounting Data through Quickbooks
Industry Data through Quickbooks
Personal Budget and Financial Data through Mint.com
Personal and Business Tax Data through TurboTax

If a bank can access this data for individual borrowers and compare to the aggregate numbers provided by Intuit, the personal credit score starts to become the least relevant piece of data.

2. Peer to Peer Lending and Crowdfunding will Dominate the Traditional Bank – Major platforms like Prosper.com, LendingClub.com, and Kickstarter have such an incredible advantage over traditional banks when it comes to small business lending. A bank may not even be able to make a profit on a loan that is $50,000 or less because of the incredible overhead costs. Web-based platforms don’t need a physical branch location in every city to get distribution of their loan products. Without that overhead these online lenders will be able to start lending profitably at a much lower dollar amount. Right now a borrower might only be able to borrow up to $30,000 on these platforms, but by 2020 I am certain these lenders will find a way to increase their loan capacity in order to eat away market share from the traditional bank.

Online lending is simply more efficient, it is only a matter of time before online lenders will do to the banks what Amazon.com is doing to retailers.

3. Cash Flow Will Still be King – On Deck Capital is already proving this to be true. On Deck looks for businesses with a large number of smaller clients. For example, a grocery store has a large, diverse customer base that is consistent. On Deck can look at their credit card deposit data and feel very comfortable lending based on the fact that they are generating cash, and it is protected from a major shortfall because of the diverse customer base.

4. Factoring Receivables Will Become Incredibly Efficient For the Small Business – New web based technologies and data will make it much easier to factor smaller invoices. The Receivables Exchange is already proving that it is possible to factor receivables much more efficiently. In the past a business owner might give up 10% of their sale for cash today instead of waiting 45 days to get paid. If you annualize this interest rate, you will see that it is a terrible way to finance a business. The Receivables Exchange is ultimately much cheaper because it diversifies risk for everyone. I might purchase a small portion of your invoice along with 100 other people. You end up paying a small percentage of the invoice in exchange for getting your cash up front.

Right now, the invoices must be bundled in $10,000 increments at minimum, but I believe this type of system will ultimately allow you to sell very small invoices which will reduce your need for a line of credit from the bank.

5. Two Years in Business Won’t Matter Anymore – Business moves fast these days, and it is only going to accelerate. In 2 years Groupon went from nothing to hundreds of millions in sales. In less than 2 years Instagram was launched and purchased for $1 Billion. Not every business will move that fast in 2020, but I believe that banks will have the data and technology needed to analyze the creditworthiness of a loan applicant without considering whether or not they have been in business for 2 years.

If the business is growing, and can afford the loan, 2 years of operating history should not be required.

I am sure I am wrong on some of these points, but in my opinion the next 5 to 10 years is going to be a painful one for the traditional small business lender. Small businesses will find other sources of funding that are becoming available at an accelerating pace. I think most business owners are incredibly frustrated with their current bank, and would leave them in a minute if there was a better alternative. Once they leave, it will be nearly impossible to get them back.

I would love to hear your thoughts on the subject. What predictions do you have?

4 Key Ingredients You Need to Be Approved for a Bank Loan

June 20, 2012 by Adam Hoeksema Leave a Comment

Every year small business owners waste months trying to apply for a small business loan when they never had a chance to begin with. In 2012, it is difficult to satisfy all the requirements a bank is looking for as a small or early stage business. There are 4 key ingredients that your business should have if you don’t want to run the risk of completely wasting your time and hurting your credit score by applying for a loan that you never had a chance to secure.

1. Credit Score Above 650 – Each bank will have a different number, threshold or requirement, but if your credit score is above 650 you should be safe. In this range your credit score probably won’t help you or hurt you.

2. A Couple Years in Business – Many banks require that you are in business for at least 2 years before they will seriously consider you for a business loan or line of credit. If you don’t have 2 full years of financial statements and business tax returns, you might run into a dead end at most traditional banks who will tell you to come back in a couple years.

3. $400,000 in Sales – There are many different key milestones when it comes to sales. Each lender will have their own policy, but lately it seems that many are willing to start lending once a business reaches $400,000 in annual sales. If you have not reached $400,000 in sales it is unlikely that your business is producing sufficient cash flow to pay your salary and make the monthly loan payments for your proposed loan.

4. A Stable Industry – Finally, banks want to lend to businesses in steady, stable industries. If you are reliant on one big job, a large one-time event, a single customer that accounts for a majority of your sales, or if you require a raw material that is in short supply, a bank is going to be very nervous about approving your loan request.

If you are a small business considering applying for a loan at a traditional bank, but you don’t have these 4 ingredients, then work hard to meet these minimum requirements, and in the meantime you may need to secure financing from investors and friends and family.