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Banks Don’t Always Require Full Financial Projections – Here Are 3 Examples

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Generally, banks require loan applicants to create a set of financial projections, and although this is probably wise for you to do, it may not always be required.  If you are applying for an SBA loan, the SBA recommends the following financial forecast guidelines:

“Provide a projection of future operations for at least one year or until positive cash flow can be shown. Include earnings, expenses, and reasoning for these estimates. The projections should be in profit and loss format.”

Although some banks may require a full set of 3 year projections including a cash flow, balance sheet, and profit and loss, there are many situations where this may not be necessary.  Here are 3 examples of loan requests that may not require complete forecasts for the entire business.

1.  Efficiency Savings Greater Than Loan Payment – This is a common loan request situation that may not require you to develop a full set of financial projections because the math is obvious.  For example, let’s say you drive your work vehicle 150 miles per day on average, and you get 15 miles per gallon.  So you purchase 10 gallons of fuel per day at $4 per gallon for 20 work days each month.  That means you spend $800 a month in fuel.  Let’s say you can get a used car for $10,000 that will get 30 miles per gallon.  Now you will spend half as much on fuel which is a savings of $400 per month.  If you do a 3 year loan at 7% for the vehicle you will pay about $300 a month for your loan payment.  This situation may not require a full set of financial projections for the business because the finances are clear,  you will save $100 bucks a month.

2.  Signed Contract With Adequate Profit Margin – Another common situation, you get a signed contract for 1,000 units of your product.  Let’s say you make $100 profit on each unit, but you need a $50,000 loan in order to produce the products for the order.  The bank may be willing to look at this particular order and the $100,000 in profit that you should make based on your profit margin, and lend the $50k without requiring a deeper, long term look at your financial projections.

3.  Expanded Capacity With Collateral – Another possible situation might be if you own a trucking company and you need a larger trailer to expand the amount you can transport.  This will allow you to increase revenue per each delivery, and will allow you to bid on larger jobs.  The bank may be willing to make the loan simply based on the increased potential for sales, and the fact that in the worst case scenario if you can’t make the payment they bank will collect on the collateral and be able to re-sell the trailer.  This only works for collateral that will hold its value well like a semi truck trailer.

The point here is not to suggest that you shouldn’t create financial projections for your business because it is a great planning tool, and important to do for the success of your business, BUT sometimes banks won’t actually require you to go through this exercise as part of the loan application.

ProjectionHub Releases Version 3 of Financial Projection Web Application for Startups

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3/21/2013 Indianapolis, IN – ProjectionHub is excited to announce the newest version of our financial projection web application, which allows startups and existing businesses to create up to 3 years of financial projections.  Now entrepreneurs can avoid complex and time consuming Excel templates and instead quickly create a set of properly formatted financial projections through our web app and then download them as an Excel file to share with potential investors or lenders.

Version 3 of the tool includes a new design of the product, the addition of a sources and uses of funding section for startups, and a new lower level pricing option for startups. Over the last 6 months nearly 1,000 business owners have utilized ProjectionHub to create a financial forecast for their business.

The long term vision for the tool is to utilize the data that can be made available through tools like Quickbooks Online and TurboTax.  Based on aggregate data from thousands of businesses we hope to be able to help business owners create more accurate financial projections.  For example, you might be working on financial projections for a new restaurant and you project that your cost of goods sold will only be 7%.  If the tool accessed data from thousands of other restaurant financials and knew that the average COGS for a restaurant was actually 18%, it could warn the user, in real time, that their projections may be a bit unrealistic.  This is just one way that we hope to continue to innovate in the financial projection space for small businesses.

So check out the newest version of the tool today and get started with your financials.

How to Determine When Your Startup Will Breakeven

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The process of calculating the breakeven point for your startup is really quite simple in theory.  The problem is that it is hard to predict for most businesses because the process requires you to make a number of assumptions.  If these assumptions are wrong, your breakeven point could change drastically.  This can cause a series of problems like a cash shortage, which will then cause you to either invest more of your personal money, find new investors, or secure a loan, all of which can be quite painful.  Now let me explain how to calculate your breakeven point.

1.  Calculate Gross Profit per Unit

Sales Price per Unit – Cost of Goods Sold per Unit = Gross Profit per Unit

See Video:  How to Determine Cost of Goods Sold for a Startup

If you are a service business you will do everything by the hour instead of the unit.  For example, sales price per hour – cost of services sold per hour = gross profit per hour.

2.  Calculate Fixed Monthly Expenses

Once you have gross profit you need to determine what your fixed expenses look like each month.  Generally what I do is add up all of my monthly expenses, and then take any of my annual or or quarterly expenses and just divide by 12 months or 4 months respectively to come up with the monthly expense equivalent.

3.  Determine Number of Units Sold to Breakeven

Now all you need to do is take your fixed monthly expenses divided by your gross profit per unit, and you will be able to determine how many units you need to sell in order to breakeven.

4.  How Much Time to Breakeven

Now you can take it one step further and try to estimate how many days, months, or years it will take you to reach a breakeven point.  For example, if you found out in the step above that you need to sell 500 units a month to breakeven and you are only selling 250 units a month now, you can estimate how long it will take to breakeven by figuring out how long it takes your sales team to sell one more unit and then multiply that by 250.  If your sales team is increasing the monthly units sold by 5 units per day, then you would expect to reach a breakeven point in 50 days (250 divided by 5).

5.  Funding Needed to Reach Breakeven

You can take it one final step by determining how much funding you will need in order to reach a breakeven point.  If you know it is going to take you 50 days and your fixed monthly expenses are $10,000 per month, then your fixed expenses per day is $333.33.  Three hundred and thirty three dollars times 50 days equals $16,666.67.  You need to borrow, or invest approximately $17,000 in order to survive until you reach a breakeven.

There you have it.  The calculations are really pretty simple.  The hard part is predicting your cost of goods sold, your monthly expenses, and how long it will take you to generate new sales.  If your assumptions are correct, this process will give you a good idea as to when and how you will breakeven.

Creating Financial Projections for a New Restaurant

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image for new restaurant blogThere are probably more restaurants started and more restaurants that fail each year than any other type of business.  There are several reasons that so many restaurants fail:

  1. Just because you can cook does not mean you can start and run a profitable restaurant
  2. Owners underestimate how much it will cost to open, and have no working capital left once they open
  3. They don’t create realistic financial projections BEFORE they start the business

So now I am going to help you by creating an example set of financial projections for your restaurant.  I am going to walk through the process that you need to think through as you are creating your projections, and I am going to use ProjectionHub to actually complete a 12 month set of projections.

Restaurant Sales Projections

The first thing you need to do is build a set of sales projections.  Let’s assume you are going to open up a cafe that offers breakfast, lunch, and dinner, with a focus on the business professional lunch crowd.  In order to develop sales projections you will need a set of assumptions to build off of.

Sales Assumptions

  1. There are 100 seats in the cafe
  2. Average order is $10
  3. At full capacity the restaurant will serve 50 people for breakfast, 100 for lunch, and 50 for dinner
  4. There will be 3 months of expenses, renovation, training etc before the store opens
  5. We will assume that the first 2 months of sales will be below your ultimate capacity by 25%

So each month we will project the number of meals sold.  At capacity it would be 200 meals per day x 30 days = 6,000 meals, but during the first couple months we will estimate 4,500 meals as sales ramp up.

Expense Projections for a Restaurant

There are 3 different types of expenses that we will need to forecast, your cost of goods sold, general expenses, and startup costs.  Here are some basic assumptions that you will need to develop for your own situation.

Cost of Goods Sold Assumptions

  1. I am assuming that my labor costs will be 30% of sales
  2. I am assuming that food costs will by 20% of sales

General Operating Expenses

These are all of your normal operating expenses like rent, salaries, wages, taxes, advertising, maintenance, cleaning, accounting, legal, etc.  You can see the monthly and one time expenses I entered for the restaurant below.  I did not assume that the owner will take a monthly draw each month, so the owner is actually working for free initially in order to help stabilize cash flow during the first year.  

Restaurant Startup Costs

Now we need to determine the startup costs that we will incur before we even open the restaurant.

  • Furniture = $10,000
  • Kitchen Equipment = $30,000
  • Building Renovation = $5,000

Once we enter these startup costs we will also enter two loans that the business has incurred in order to cover initial costs.  A $10k loan from family and a $15k loan from a local bank.

That is it.  Now we need to check and see how the final financial projections turned out for the first 12 months of the business.  I have included a link to the Excel file that ProjectionHub produced based on our inputs and assumptions.  It looks like you will make money in the first year based on these assumptions.

Photo by Rachel Claire from Pexels

How to Start a Coffee Shop and NOT Go Bankrupt

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At one time or another almost every aspiring business owner I know thinks they would like to open a coffee shop someday.  Usually someone is able to talk them out of it, but sometimes you find a person that is so committed to entering this highly competitive market that there is no stopping them.  The reason that most independent coffee shops fail is because the business owner loves coffee not accounting.  They love fair trade beans, not sales.  In the end coffee is their hobby, not their business.  If that describes you, then please keep reading.  Here are 4 key steps to starting a coffee shop that is sustainable and profitable.

1.  Don’t Start With a Shop –  The first step is NOT to start your coffee business by opening a coffee shop.  Depending on how much renovation the space needs, you should expect to spend between $50,000 and $250,000 to open a coffee shop.  This is all before you make your first sale.  What if you ended up picking a bad location?  What if you took out a loan to purchase the equipment and make the renovations, and now it is taking you a bit longer than expected to ramp up your sales, and now you can’t make your loan payment?  What if you find out that people are not willing to leave their current coffee shop to come to yours?  All of your potential customers are coffee drinkers right?  They probably drink coffee every day right?  Which means they are currently getting coffee somewhere else, and  they may not care that there is a new coffee shop down the street.  There are many, many reasons not to start by opening a coffee shop right off the bat.  Instead, you should start to generate sales.

2.  Build Recurring Sales – Before you even think about investing a couple hundred thousand dollars to open a new coffee shop, start by finding customers.  That is right, you can actually build a base of repeat customers before even open a store front.  Find a small space, purchase or lease a coffee bean roaster, and start roasting your own small batches of fresh coffee beans.  Then sell your coffee to other coffee shops, local office buildings, churches, and individuals.  You need to build a base of recurring customers, customers that you can count on every day, week, or month.  Once you have that recurring income, you can start looking into financing.  You probably wouldn’t be able to get a loan anyway without sales, but even if you could it is a much better position to be in if your current customers are producing enough positive cash flow for you to be able to make the monthly loan payments.

3.  Purchase an Existing Coffee Shop – Next, I strongly recommend that you consider purchasing an existing coffee shop before you open your first shop on your own.  Why?  Because you can review the financial statements of the existing shop and see that it is profitable and sustainable based on the current customer base.  When you own your first coffee shop, you are going to make mistakes, you can afford to make a few more mistakes when you have an established and profitable business rather than trying to start something from scratch.  So you can use the wholesale and coffee by the pound business that you generated in step 2 to help you secure the financing to purchase an existing shop.  So many questions are already proven when you purchase an existing shop.  You know the location is good enough, the customer demand is there, the pricing is right, the environment in the shop is working.  You know all of these things because the business is already profitable, if you were to start from scratch, you could make mistakes in any of these areas.  I encourage you to purchase an existing shop instead of starting your own for your first experience as a coffee shop owner.

4.  Become a Pro Forma Financial Statement Expert – Now it is time to become a pro forma financial statement expert.  You have some stability with your wholesale and coffee by the pound customers, along with your established shop, now you need to start looking at various options for growth.  A pro forma is essentially a financial projection based on some given scenario. So you might create 4 pro forma coffee shop financial statements for the next 12 months based on the following scenarios:

  1. Keep everything the same as it is now
  2. Expand your wholesale side of the business by hiring a salesperson to pick up new wholesale accounts
  3. Take what you have learned from owning the first coffee shop and look to open a second location from scratch
  4. Purchase another existing coffee shop

You can develop financial projections with ProjectionHub for all 4 scenarios and determine which option you believe will be the most profitable, and put you in the best position for continued growth.

So if you are thinking of draining your retirement account and starting your own coffee shop, Don’t!  Consider how you can build the business the right way, the smart way, and the financially sound way.  Good luck!

How to Create a Projected Balance Sheet for a Startup

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photo of balance sheetCreating a projected balance sheet for a startup can be an incredibly complex task.  Do you know what the hardest part is?  To get the balance sheet to BALANCE!  I speak from experience because I spent hours and hours trying to get our financial projection model that is used with our financial forecasting tool – ProjectionHub, to balance and tie in with our projected cash flow and profit and loss.

Although you could just use ProjectionHub or other Excel templates that help you create a balance sheet, this post is to help those of you that want to create a custom financial projection model and need to build your balance sheet from scratch.

Steps to Create a Balance Sheet Forecast

1. Format Your Balance Sheet – The first thing you need to do is format your balance sheet.  In the simplest form all you need to remember with your Balance Sheet is that Assets = Liabilities + Owner’s Equity.  You can see the basic line items that make up a balance sheet in the image below.  

Balance Sheet

2.  Enter Starting Balances – The first thing you need to do is enter starting balances.  I am going to show you an example of a fictitious business called Adam’s Lawn Care.  When I started the business my balance sheet was pretty empty as you can see below.  All I had was a bit of cash in the bank, a lawnmower, and some “Paid in Capital” which was my personal investment into the company to purchase the lawnmower initially.

Balance Sheet Example

You can also see that the $4,500 in cash that I have also shows up in the Paid in Capital section as my investment into the company.

3.  How Sales Impact the Balance Sheet

So the next thing that will hopefully happen with the business is SALES!  So let’s assume I get a contract with 5 local businesses to mow their grounds.  I will do the work, and then invoice the company and expect to get paid in 30 days.  Let’s say that I charge each company $1,000 for the first month of work, so I would have $5,000 in sales, but the day after I invoice that does not show up as cash on the balance sheet yet.  Instead it shows up as Accounts Receivable.

4.  How Expenses Impact the Balance Sheet

In the process of generating those sales I will have some expenses like fuel, oil, meals, etc.  Let’s assume that I have $1,000 worth of expenses half of which I paid with cash, and the other half I paid with a credit card.  So let’s see how that changes my balance sheet.

Balance Sheet Example

Now you will also notice above that Retained Earnings went up to $4,000.  Retained earnings is all of your cumulative net profit or net loss.  So as of right now I have $5,000 in income and only $1,000 in expenses so I have a $4,000 net income that flows through to retained earnings on the balance sheet.

5.  How Does a New Loan Impact the Balance Sheet

Finally I want to show you how the balance sheet changes when I buy a small office for my business.  I had to get a loan from the bank to purchase the building, so my liabilities increase by the loan amount of $75,000, and my assets increase by the price of the building, $75,000.

New Balance Sheet Example

I hope this has been helpful to see how different transactions impact the balance sheet.  As you are creating your own financial model, just remember that each transaction that impacts an asset, must impact a liability or equity account equally so that you always stay balanced.

If you have any questions please feel free to email me at adam@projectionhub.com and I would be happy to help.

Photo by RODNAE Productions from Pexels

20 Universities Use ProjectionHub for Entrepreneurship Courses

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Business or educationA few weeks ago we released our updated version of ProjectionHub to the world to help make the task of creating financial projections easy.  Since our team is comprised of a recent college grad, and a current college student, we decided to make the tool free for all students with a valid .edu email address.

Over the past few weeks students from 20 colleges and universities have used ProjectionHub to create up to 3 years of financial projections including a Profit and Loss, Balance Sheet and Cash Flow Projection:

  • University of Pennsylvania – Wharton School of Business
  • University of California
  • Fresno State University
  • Liberty University
  • University of North Texas
  • University of the Rockies
  • University of Waterloo
  • Ivy Tech Community College
  • King Abdullah University of Science and Technology
  • Landmark College
  • Clemson University
  • Depauw University
  • Drexel University
  • Brandeis University
  • Quinnipiac University
  • Concordia University Texas
  • University of New Hampshire
  • Southern Methodist University
  • University of St. Thomas
  • Alaska University

Thank you everyone for giving our tool a try and for all of your great feedback as we look to improve the tool over the coming months.

Example Financial Projection for a Lawn Care Business and Other Seasonal Businesses

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Are you thinking of starting a lawn care business this spring?  As the manager of a microloan program, I have seen several loan applications from seasonal businesses including lawn care businesses.  The challenge for the average lawn care service is that it is a really simple business to start, but it is actually very difficult to manage cash flow to sustain the business.  So today, I wanted to use our Lawncare and Landscaping Financial Spreadsheet to create a set of 24 month financial projections for a lawn care business.  The resulting Excel template will be an excellent guide for other seasonal businesses to create a set of financial projections.  Let’s get started.

Sales Projections

First we need to start with your sales projections.  So I created Adam’s Lawn Care on ProjectionHub, and started by adding our first and only service… lawn care.

So here you can see that I am assuming we will charge $55 an hour for our service, it will take 40 days for the average customer to pay us, and finally I am assuming that all of our annual sales will occur in the 9 middle months of the year, from March to November.

Now let’s assume that you are in the commercial lawn mowing business, so you spend the winter months going from business to business signing contracts for the coming year.  Let’s assume you are able to get 50 business customers and the average customer will be charged for one hour of your service each time you mow.  Now I just need to enter in the number of hours I expect to provide each month.  To keep things simple I am going to assume that we provide service in increments of 50 hours, so in months where you only mow once, you will only provide 50 hours of service.

Before I show you how I projected sales for the first two years, I also want to assume that in year two I will be able to sign a total of 75 clients to a year long contract.

Now that we have our sales projections input, it is time to move on toward expenses.

Cost of Goods Sold for Lawn Care Business

Our next order of business is to project our cost of goods sold.  We are going to assume that you pay yourself $20 an hour and you have $3 an hour worth of fuel costs.

General Expenses

Now you need to enter your general monthly expenses which you can see vary by month just as your revenue varies by month.

Add Equipment

Next I am going to add equipment.  Let’s assume you purchase a lawnmower in month 1 for $4,000.

Cash Flow Statement

Now that we have added all of the needed info let’s check out our cash flow statement and see how the business is doing.  We are assuming that you started out with $3,000 in cash in the bank on month 1.  The only problem is that in your first month it was still winter so you did not generate any revenue.  You were able to start working in month 3, but then it takes 40 days on average to get paid by your customers, so you don’t actually receive any payment until month 4.  With the current situation you run out of cash in month 2 and have a negative cash balance for the first 6 months as seen  below:

Small Business Loan for Lawncare Company

So at this point your best option is to seek a small business loan for your company.  You may start with friends and family, and then seek out microlenders and other organizations that make small loans.  You will need about $6,000 to safely make it through your first year.  So let’s add a $6,000 loan to your projections that we assume is from your friends and family.

This solves your cash flow problem for a while, but the first year you were using your old truck and a fairly slow and limited lawnmower.  In year 2 you are going to need a used truck, a trailer, and another lawn mower.  Let’s say you are going to need to come up with another $35,000 in month 1 of your second year.  You were profitable in year 1 so you do have some cash, but is it enough. Take a look at month 1 of year 2:

As you can see you have about $30k in savings from last year’s profits in month 13, but after your purchases, you drop to a negative cash balance over $5,300.

If it was not for the seasonality of the business, your cash balance would have remained positive, but you must remember that you won’t generate any revenue during certain months of the year, and you must built that into your financial projections.

How Many Years of Financial Projections Should I Create?

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CalculatorThis is a common question for many early stage businesses looking to secure a loan or investment for the first time.  Of course there are differing opinions on this topic but I believe the answer is either 1 or 3 years depending on your situation.  Le me give you some scenarios for each option.

1 Year Forecast

  • If you are an established company with many years of historic financials, then you probably only need a 1 year forecasted budget because the past is the best predictor of your future.
  • If you are applying for a small loan
  • If the term of your loan is only 12 months

3 Year Forecast

  • If you are an early stage company looking for investment you will probably need at least 3 years because you want to be able to show potential investors when they will be able to expect a return, and that doesn’t typically happen in 1 year.
  • If you are applying for a large SBA loan or other commercial business loan, you may need to put together several years worth of financial projections.
  • If you are applying for private equity or venture capital funds, you will likely need to produce several years worth of plans and projections.

I recommend that you use a template or a tool like ProjectionHub to simplify the process of creating financial projections.

How to Forecast Costs to Start a Business

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How much does it cost to start a business?  This is a very common question for first time business owners, the problem is this is a complicated question with no direct answer.  Since I know you are probably looking for someone to give you an exact dollar amount, I will list a few of the most common startup expenses.

  1. Incorporation – $100 – You should be able to incorporate your business as an LLC in most states for under a hundred dollars.  I suggest that you visit your state Secretary of State website to learn how to incorporate.
  2. Logo – $50 – You should be able to get a solid logo design for $50 on free lance websites like Elance.
  3. Website – $500 – This all depends on whether you know how build your own website, and how much functionality you need.  It is certainly possible to build a simple website for $500 or less.  You might consider building your own site on SquareSpace
  4. Business Cards – $50 – As a new business owner you will probably want business cards so that you can promote your business.  I have used VistaPrint a few times for business cards and have always been very satisfied.
  5. Bookkeeping Software – $150 –  I strongly encourage you to start with Quickbooks software right away.  You should be able to pay for a 1 year license of Quickbooks for about $150.

ProjectionHub.com can help you project your cash flow for the first 3 years of your business.