Financial Projection Basics #1: What are Financial Projections?

May 26, 2016 by Adam Hoeksema Leave a Comment

Since we started ProjectionHub back in 2012 to help entrepreneurs create and share financial projections, more than 20,000 business owners have used ProjectionHub. If there is one thing that has become clear to me since starting ProjectionHub it is that the vast majority of our users are great at running their business, but not financial experts. So after 4 years I am finally getting around to writing a series of blog posts that will walk business owners through the process of creating financial projections from the very basics to the advanced.

My hope is that this series of articles can help you create your own financial projections for a lender or investor without the need to hire an expensive accountant!

Also, right from the very beginning I want to offer my personal email – adam@projectionhub.com – so that you can ask me any clarifying questions along the way.

What are Financial Projections?

So let’s start from the very beginning by answering the question, what are financial projections.

Definition: Financial Projections

Financial projections are simply a set of forward looking financial statements. In other words, financial projections show what you think will happen in the future of your business. Financial projections commonly contain the 3 primary financial statements:

Income Statement
Balance Sheet
Cash Flow Statement

You can see an example of financial projections built using ProjectionHub

If you want to get started creating your own financial projections, give ProjectionHub a try for free.

Share your Financial Projections with Investors, Lenders, Accountants, and Partners

April 20, 2016 by Adam Hoeksema Leave a Comment

We just released a new major feature for ProjectionHub. You can now easily share your financial projections with your business partners, accountant, investors or lenders. This will ensure that these users always see the most up to date set of financial projections instead of worrying about version control. Here is how it works:

Add Users that you Want to Share Projections with:

Click your company name and then click “Users”

Add Users to ProjectionHub

Share your Projections with as Many Users as you Want to

Sharing Reports

Users you Invite will get an Email Request

Invited Users will get to See Your Projected Financial Statements

You can Revoke your User Access at Any Time

Revoke User

So, if you haven’t already started creating your financial projections, you can do so now with a free trial here.

Check out our New “Click and Drag” Feature

March 20, 2016 by Adam Hoeksema Leave a Comment

Here is a quick clip to show off our new Click and Drag feature that we believe will make creating the expense portion of your financial projections up to 10x faster:

How to Complete the Form 1023 Financial Projections Section

March 9, 2016 by Adam Hoeksema Leave a Comment

I got a call today from a pastor who has planted a new church and is going through the process of becoming a 501c3 non-profit and just so happened upon my blog post – Creating a Startup Budget for a New Church Plant.

He was looking for some help in creating a set of financial projections as part of the process of completing IRS Form 1023 – which is required in the application process to become a non-profit. As I was looking at the Form 1023 I realized it was quite confusing for the “non-accountant” so I wanted to write this blog post to help other non-profits complete the financial data section of the 1023.

This blog post is going to focus on organizations in existence for less than 5 years. If you have been operating 5 years or more, the requirements are slightly different in terms of the financial data section.

Completing Form 1023 Financial Data for a New Non Profit

Step 1 – Determine How Many Years of Projections you Need

According to the IRS, you need 3 years of projections if you have not filed a tax return in the past, and you need 4 years of projections if you have completed at least on tax year. If you have been operating for 4 years or more, then you don’t need projections, you just need to show your last 4 years of financial records.

Step 2 – Using ProjectionHub to Create your Standard Financial Projections

To create your financial projections in the first place you will want to take a look at our non-profit financial projection template to help give you a head start. Here is a video demo to walk you through filling out the projection template for IRS form 1023:

Step 3 – Add Non Profit Revenue Forecast

Next you will need to add your revenue projections for your non profit. Our template in ProjectionHub has each revenue line item from the form 1023, I have listed those categories below and provided some explanation:

Gifts, grants, and contributions received – This would also include donations.
Membership fees received – Non profit associations or other groups will probably receive membership fees.
Gross investment income – For large endowments or foundations they will probably generate significant gross investment income.
Net unrelated business income – This is income that you generate that is not directly tied to your mission.
Taxes levied for your benefit – This would be if taxes are levied by the IRS and then given to you.
Value of services or facilities furnished by a governmental unit without charge – This is essentially in kind services that you receive and count as revenue, but will not actually receive cash for.
Any revenue not otherwise listed – This can be a catch all other revenue section.
Gross receipts from admissions, merchandise sold or services performed, or furnishing of facilities in any activity that is related to your exempt purposes
Net gain or loss on sale of capital assets – For example if you bought a building and sold it at a profit, you would record that gain on the sale as revenue.
Unusual grants – This is pretty straightforward, just grants that our out of the norm for the organization.

Step 4 – Add Expense Forecast

Now add your expenses for each month:

Fundraising expenses – This could be travel, fundraising salaries, and fundraising event expenses, etc
Contributions, gifts, grants, and similar amounts paid out – If your organization provides gifts or grants to others, those expenses would be included here. For example, a Church might provide gifts to members who need financial support, or a foundation might give grants to other non profits.
Disbursements to or for the benefit of members – This could be a disbursement to a church member for financial assistance.
Compensation of officers, directors, and trustees – Salaries and wages.
Other salaries and wages – All other salaries and wages for those other than fundraising salaries and salaries of officers, directors, and trustees.
Interest expense – Interest on any loans.
Occupancy – These are expenses like rent, utilities, etc.
Depreciation and depletion – Depreciation on buildings, vehicles or other assets.
Professional fees – Attorney or accountant fees.
Any expense not otherwise classified, such as program services – All other expenses.

Step 5 – Convert Projections from Template to Form 1023

Next, you will be able to take your non-profit or church financial projections from our template and then enter those numbers into the form 1023.

Step 6 – Add your Current Balance Sheet to Form 1023

You will also need to add your current balance sheet to Form 1023. Our free balance sheet template could be a great starting point along with this video tutorial to help you fill it out.

Once you fill out your balance sheet template, you can enter in your current balance sheet into the form 1023 as seen below:

Form 1023 Balance Sheet

Once that is complete you should be well on your way to completing the financial data section of your Form 1023. If you have any questions at all please don’t hesitate to reach out to me to ask specific questions about your application to become a non-profit. I would be happy to help – Adam Hoeksema – support@projectionhub.com

New ProjectionHub Feature – Calendar Date Picker

February 20, 2016 by Adam Hoeksema Leave a Comment

We keep trying to improve for you

Every couple weeks we push new updates to ProjectionHub, and I wanted to let you know about the latest update.

In the past when you had to pick a month or date to add an Asset, Liability, or Investment we asked you for the “month number” which is confusing.

How annoying right?!?

Well we made it a lot easier, now you can just pick a date with a simple calendar date picker like you see below:

Hope this helps make ProjectionHub just a little bit easier for you. Thanks!

New ProjectionHub Feature – Multiple Currencies

February 13, 2016 by Adam Hoeksema Leave a Comment

We have made a few big updates.

I wanted to let you know about a couple of updates to ProjectionHub.

1. Currency Support – We now support multiple currencies (USD, EUR, GBP, INR, AUD, CAD)

2. Delete Unwanted Business Models – If you added an unwanted business model you can now delete that by going to the business model page and clicking the little red trash can on the right side of each business model.

Here is how to change your currency once logged in:

1. Click on the company name in the top left corner
2. Click on Business Info
3. Change your currency in the Business Currency drop down box.

Here are some images to show you how:

Then change the currency like this:

Hope this helps!

Adam Hoeksema
Co-Founder – ProjectionHub

Oops! We Didn’t Even Know we were on Product Hunt

February 4, 2016 by Adam Hoeksema Leave a Comment

The unforgivable startup sin!

Someone posted ProjectionHub on Product Hunt 10 days ago and we didn’t even realize until today (10 days later).

The Product Hunt audience is the perfect audience for ProjectionHub – we help startups create and share financial projections with potential investors or lenders – so Product Hunt is our exact target audience. But we totally missed it!

Learn from our Mistakes

So this is basically what happened. I was just reviewing our Google Analytics traffic and saw this:

Product Hunt Traffic on Google Analytics

So I looked a bit closer at that little bump and noticed the traffic came from Product Hunt.

I thought that seemed strange because we never submitted ProjectionHub to Product Hunt, but sure enough it was there. So I looked a bit closer and noticed that this kind soul had submitted ProjectionHub to Product Hunt about 10 days earlier.

So in case you are not aware, the way Product Hunt works is that when your product gets submitted it goes to the “Upcoming” page.

So once you are on the Upcoming page you need to start a conversation with the community and encourage genuine feedback. Product Hunt has an algorithm that helps them determine which products should make it to the Featured Page.

The featured page is where Product Hunt could change the trajectory of your startup. You could get thousands or tens of thousands of new visits and signups if your product is successful.

Stuck on the Upcoming Page

Unfortunately by the time that I realized that we were on Product Hunt it was too late to really have a chance to be moved to the featured page.

So if this happened to you, what can you do?

Ask for a 2nd Chance

According to the Product Hunt FAQ page you can actually ask for a second chance in the future:

So… here at ProjectionHub we are going to keep our heads down, keep trying to build an awesome product and prepare for our second chance someday, and maybe next time we will hit it big on Product Hunt!

Data Shows Your Financial Projections are Probably 5x Too Optimistic

December 7, 2015 by Adam Hoeksema Leave a Comment

Entrepreneurs are optimistic.

As I was chatting with one of my banker friends last week, he made a comment that over the last 10 years he had only seen a couple of financial projections from a business owner that projected that the company would lose money. He speculated that in reality a majority of those businesses actually lost money at least for a year or two.

He was probably right.

As outlined in this report by the American Enterprise Institute the average person believes that companies earn an average profit margin of 36%. In reality the average profit margin across 200+ industries is between 6 and 8% as seen in the graph below:

3 Ways to Determine Whether Your Projections are Too Optimistic

So if you have completed a set of projections with our tool – ProjectionHub – now you need to do a reality check and see if your projected profit margins are reasonable. There are 3 key things I think you should do:

Step 1 – Check your Bottom Line

The first thing you need to do is calculate your projected profit margin. You can do this in ProjectionHub after you create a set of projections then go to the Dashboard and view the Income Statement Report.

You will then be able to find the numbers you need to calculate your profit margin. Profit Margin = Net Income / Total Sales. So if you have $100,000 in sales the first year and $15,000 in net income, then your profit margin would be $15,000/$100,000 = 15%

Remember the average profit margin across 200+ industries is only between 6 and 8%.

Step 2 – Check your Growth Rate

Next you should check your monthly sales growth rate. There is a question on Quora that is helpful here. The question is aimed at web-based startups, but I think it can be helpful for your business no matter your industry. The question is “What is a typical user growth rate for a hot web startup the first year?” The answers are very helpful. You can see Facebook’s average revenue growth rate per week for 2004 through 2012. I think your goal should simply be to calculate your growth rate and make sure it is less than Facebook’s growth rate. There are a lot of startups that create projections that make it look like they will set the world on fire in 3 years. Facebook was not a billion dollar business overnight and yet it was one of the fastest growing businesses ever, so just do yourself a favor and don’t embarass yourself by projecting a sales growth rate faster than Facebook for your coffee shop, mobile app, or consulting firm.

Step 3 – Compare to Industry Ratios

A great way to determine whether your projections are reasonable is to compare to industry average ratios. BizStats is a great tool to find this information. For example, below you can see the average key ratios for a business in the Restaurant Industry.

As you can see the average profit margin is 6.33%. It sounds so easy to open a restaurant and make such a great profit, but that is not the norm. You can have a nice business with a 6% profit margin, but before you risk your life savings to start a new restaurant, it is important that you know what you are getting yourself into.

If you haven’t created a realistic set of financial projections yet, I encourage you to give our tool (ProjectionHub) a try here and make sure that you go through a reality check to make sure your projections are 5 times too optimistic.

If you have any questions or need any help along the way please don’t hesitate to reach out to me directly – Adam Hoeksema – adam@projectionhub.com

Starting a Photography Business: From Hobby to Profits

November 27, 2015 by Adam Hoeksema Leave a Comment

You have 140,000 competitors…

According to the US Bureau of Labor and Statistics, there is likely about 140,000 “professional photographers” in the US.

With that level of competition, if you want to turn your photography hobby into a profitable business, you are going to master the financial side of the business. Here is an article by ShootDotEdit that would be helpful as a general overview when starting a photography business, and in the article below I am going to walk you through the process of creating financial projections for your new business. This process will help you get a feel for how many jobs you need in order to breakeven and/or leave your day job.

Step 1 – Sign up for ProjectionHub Photography Financial Model

We have developed a professional service projection template which can be used for your photography businesses

Step 2 – Project Income for the First Year

It seems that most photographers go from hobby to career by taking pictures for friends and family at weddings, engagements, and family photo shoots. This is how you break into the industry because you need to have a portfolio of your work to show off to potential customers. In the financial model that we developed we added 3 default revenue line items:

Charge by the Hour – Sales – Here you can project sales for customers that you bill by the hour. You might not be selling any specific package, rather you are simply charging an hourly rate. So the question is how much to charge per hour? This is an excellent article that talks about how much you should bill based on how much you hope to earn in take home pay per year. As a general rule of thumb you should charge at least 2 times as much per hour as you want to take home for yourself. So if you want to earn $60,000 per year, you should bill $60 per hour so that you can take home $30 per hour X 40 hours per week X 50 weeks = $60,000. One reason is because you will obviously have expenses, but you also won’t be able to bill a client for every single hour you work. Many of your working hours will be non-billable, some suggest that 50% will be non billable. When you are getting started, don’t price your services too low because it is not sustainable, make sure to bill at a sustainable rate as early on as you can.
Services for Individuals – This is probably where you will get your start. By providing packages to friends, family, and acquaintances first you can build a portfolio and improve your skills. As you think about how to structure and price your different packages I recommend this helpful article – “How to Create Photography Packages that Sell” As you are projecting your revenue for packages that you sell, you should be able to break it down to the number of billable hours and your rate per hour.
Services for Businesses – At some point you may expand from services only for individual weddings, family pictures etc, to start serving businesses. In this situation you may just charge by the hour, or offer packages.

Photography Business Cash Flow Considerations

When you book a job you should probably receive a deposit up front. This means your revenue projections should consider this unique aspect of cash flow.
Keep in mind that photography can be quite seasonal depending on your market, so you need to plan accordingly. This is why it is great to receive deposits up front, you can get deposits in the fall and winter for weddings the next spring and summer to even out your cash flow during the slow season.

Assumptions for Expected Revenue Projections

Below I have included the assumptions that you will need to develop for your own specific scenario:

How many weddings do you expect to happen next year in your network of friends and family? Lets assume 10 and that you will be able to convince 5 to use your services.
Let’s assume you charge $2,000 per wedding and get paid 1/2 up front
How many potential portrait sessions are there in your friends and family network? Estimate the number of graduations, engagements, new babies, and other events that might be a good excuse for a portrait session. Let’s assume 40 of these in your extended network and you can close a deal with 12 people (1 per month).
Lets assume you charge $500 per portrait session and get paid at the time of the service.
Finally, let’s assume you secure a couple of freelance corporate projects at $1,000 per project toward the end of the year after you have built up a portfolio.
One nice thing is that you should be able to start booking some weddings for the following year the last few months of the current year which will help your cash flow.

Based on these assumptions you can have a starting place for your revenue forecast

Step 3 – Forecast Expenses

Expenses are a bit easier to project in the first year. Here are expenses that you should expect:

Step 4 – Getting a Loan for a Photography Startup

In addition to these monthly expenses, you will also have several thousand dollars of startup costs to buy a computer, photo editing software such as Picsart to quickly edit images, a camera, and accessories. You will be able to add these in the “Assets” section of ProjectionHub. Once you add those startup costs, you will be able to determine how much of a personal investment you will need to make, or how large of a loan you will need. I added the following startup costs/assets:

Computer – $3,000
Furniture – $500
Camera – $3,000
Camera Accessories – $1,500
Total = $8,000

Then you can add a loan (maybe it is a loan from friends and family) for your startup. I am assuming you will need about $10,000 in startup funds to make the cash flow work.

Step 5 – Transition from your Day Job to your Business

I titled this blog post as a transition from Hobby to Full-time because it will need to be a transition. It is simply a tough business to jump into full time right away. In this projection I assumed you paid yourself $250 per month for the first 3 months and then increased that by $250 every 3 months for the first year. You obviously will need to have another source of income in the first year.

We would love for you to try out ProjectionHub to create your own financial projections and please reach out if you have any questions at all – we are here to help – adam@projectionhub.com

Financial Projections that Prove Whether a Food Truck can be Profitable

November 18, 2015 by Adam Hoeksema Leave a Comment

According to an IBISworld Report, the Food Truck Industry has grown an average of 9.3% per year over the last 5 years. If you are considering starting a food truck business you can find many different opinions on whether or not a food truck can be a profitable business for you to start, so the only way to prove it to yourself (and potential lenders and investors) is to create a set of financial projections for your own food truck concept.

Financial projections?!? Don’t hyperventilate, we are here to help you through the process.

So we created a Food Truck Financial Plan Template

Once you choose the Food Truck model you will need to set up your company and then move on to Revenue Projections.

Step 1 – Food Truck Revenue Projections – We have broken revenue projections into 3 segments:

Food sales
Beverage sales
Catering sales

Of course, you can add any custom revenue line items for your business.

Now the hard part is to project how much you are actually going to sell. This Question and Answer on Quora provides some great perspective on what you can expect in terms of revenue for a food truck. The problem is that the Quora answers give a range between $65,000 in monthly sales and $5,000. It should be no surprise that your revenue “depends” on a number of variables. How much competition is there? How big is your potential market (in other words how many people are close enough to walk to your truck location?) How much do you charge per plate? All of these things make a huge difference. You should probably walk through some math like the following:

Sales Assumptions for a Food Truck

# of people within walking distance of my location during lunch – 3,000
% of people who buy lunch – 50%
Equals number of potential customers each day – 3,000 x 50% = 1,500 people
% of market that will choose your food truck each day – 5% or 75 people
Average sale from your menu – $8
Average daily sales on week day – $8 x 75 = $600
Then let’s assume you do some catering or events and you make $1,000 per event 2 times per week = $2,000 in catering/events per week.
Total monthly sales = (($600 per day x 5 work days) + $2,000 in events) x 4 weeks per month = $20,000 per month

Now that we have a monthly sales projection we can split that between Food, Beverage, Catering or any other categories as I have done below.

In this example I assumed the same $20,000 in sales per month for every month of the year, but you will likely need to adjust that if you live in a seasonal climate where people may not eat at a food truck in the winter as often.

Step 2 – Food Truck Cost of Goods Sold – By far the 2 most important costs for your food track are Food Cost and Labor Cost (just like a restaurant). According to Mobile Cuisine, the average food cost for a food truck is between 25% and 38%. For this example I am going to assume 30% food cost which means that $6,000 per month will go between food and beverage cost. Labor cost is likely to be around 33% of sales. For this example I will assume labor cost (which might be your salary) is $6,500 per month.

Step 3 – General and Admin Expenses – You will also have a number of general and admin expenses like:

Accounting
Advertising
Car Washes
Insurance
License and Permit Fees
Event/Parking Fees
Supplies
Telephone
Uniforms

I threw in some estimates for these expenses as displayed below:

Step 4 – Startup Costs for a Food Truck –

There are a number of startup costs for a food truck. At the very least you will likely need the following:

Food Truck
Kitchen Equipment
Generator

For a fully outfitted food truck you can pay between $20,000 and $100,000+. You will need to do some shopping, you can shop around some different pricing for food truck here. In this example I am assuming that you pay $50,000 for a truck, $25,000 for equipment, and $10,000 for a generator for a total startup cost of $85,000.

Step 5 – Food Truck Financing – With $85,000 in startup cost you are likely to need a loan or an investment to get started. I am going to assume that you invest $30,000 personally and get a loan for $55,000 to cover your startup costs. So you will need to add a Loan and a Personal Investment in ProjectionHub as seen below.

Example Financial Model

Get started by choosing the Food Truck Financial Model here. Please let me know if you have any questions at all – adam@projectionhub.com

Photo by James Frid from Pexels