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Want to Start Your Own Accounting Firm? Create Financial Projections First.

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BEFORE you leave your position at a large CPA firm and decide to jump out on your own and start your own accounting firm, create some financial projections with ProjectionHub and prove to yourself that this is a good financial decision.

The Challenge

I have worked with a number of small accounting firms lately and realized just how difficult it is to operate a successful, small accounting firm.  The challenge for a small CPA or accounting firm is that they big firms can offer excellent salaries and benefits for staff accountants.  It is going to be almost impossible to match the compensation package for a staff accountant at a small firm that serves small businesses and individual tax payers.

Right now it seems like most of the small accounting firms I know are really struggling to hire staff accountants.  It is relatively easy for a CPA to put up their own shingle and start their own firm, and you might even be able to grow by adding a partner or 2 to the firm, but once you need to start hiring non-partner staff accountants the math becomes difficult.  Larger firms have larger clients that they can charge a higher billable rate to, if your firm is working with smaller businesses and non high net worth individuals you won’t be able to charge as high of a billable rate per hour and it just becomes difficult to hire good talent.

SO… in this blog post I am going to create an example set of financial projections for a startup accounting firm to demonstrate the likely financial results during the first 5 years of a startup accounting firm.

Startup Accounting Firm Example Financial Projections

I am going to use the “Accounting Firm” business model on ProjectionHub to create a set of example financial projections for a startup accounting firm.

Sales Projections for Startup Accounting Firm

The Accounting Firm business model comes with 5 default revenue line items:

  1. Bookkeeping
  2. Tax Services
  3. Audit Services
  4. Payroll Services
  5. Other Services

Typically the lowest barrier to entry is to provide Bookkeeping and Tax Services, so in the 1st year of projections I would focus on those 2 services right from the get-go, then you can break into more specialty services like audit, payroll and other niche services.

Here is an example of revenue projections for a startup accounting firm where you the accountant are the only employee for the first year.  My example shows just $33,500 in revenue in the first year as you are ramping up.

So if you are planning to leave a high paying job you should expect to take a significant pay cut in the short term.

accounting-firm-year-1-revenue

Example Expenses for a Startup Accounting Firm

I have included typical expenses for a first year, 1 person accounting firm in the Accounting Firm business model.

accounting-firm-year-1-expenses

Assets, Liabilities and Investors

The final 3 sections of your financial projections will include assets, liabilities and investors.  As a 1 person, new accounting firm, all 3 sections should be pretty light.  I have included a computer and some furniture as assets for the default accounting firm startup, and a small loan.  I doubt that you will find any investors as an accounting firm is not typically a high growth, “investable” type of business.

Financial Projections for New Accounting Firm

So based on my example projections I show a first year, 1 person accounting firm bringing in about $33,500 in revenue and just under $20,000 in net income before paying yourself.  SO… if you are making more than $20,000 as an accountant today, before you jump out on your own, just be very aware of the challenge you have in front of you and go in with eyes wide open.

Here is an example of our graphing capability for your year 1 monthly sales projections:

sales-projections-for-new-accounting-firm

If you have any questions at all please feel free to contact us at support@projectionhub.com

 

Starting a Photography Business: From Hobby to Profits

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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 financial projection template specifically for photography businesses which you can use.

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:

  1. 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.
  2. 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.
  3. 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

  1. 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.
  2. 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:

  1. 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.
  2. Let’s assume you charge $2,000 per wedding and get paid 1/2 up front
  3. 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).
  4. Lets assume you charge $500 per portrait session and get paid at the time of the service.
  5. 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.
  6. 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 I have created some revenue projections for your first year below:

New Photographer Revenue Projections

Step 3 – Forecast Expenses

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

Photographer Expense Projections

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, 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

Equipment for a Startup Photographer

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.

Friends and Family Loan for Photography Startup

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.  As you can see in this set of example photography startup cash flow projections 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

Starting a Dental Practice? How to Build Financial Projections

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If you are looking to start a Dental Practice you are likely to need some financing, which means you probably need some financial projections.  According to a report by Sageworks, Dentist Offices show an average of 14.9% net profit margin.  This is great, but as a Dentist, you didn’t go to school for financial modeling, so that is where we come in to help.

We have created a custom financial model for a dental practice which you can use here.

Once you sign up and use the Dental Practice financial model, then you can start by projecting your revenue (income):

Step 1 – Dental Practice Revenue Projections

There are a number of services that a dentist can provide, the list of services that we have added to our model is as follows:

  • Cleaning/Exam
  • Dental Bridges, Crowns and Implants
  • Emergency Dental Services
  • Extraction
  • Fillings
  • Oral Surgery

The question is how do you predict how much revenue you will generate for each of these services?  In my opinion a good way to model a dentist office is to start with the number of patients you can secure for regular exams and cleanings.  That is your customer base, then from your customer base you will be able to predict the percentage of the general population that needs crowns, implants, tooth extraction, cavity fillings, etc.  You need to focus on building your customer base and how that business model works, and then simply assume some percentages for all of your other services based on the core customer base.

So here is the exercise I think you will need to go through to build out your revenue projections:

  1. How much advertising will it take to acquire one new patient?  Whether you do radio, tv, Google, or direct mail advertising, you will need an advertising budget and will need to assume some cost per acquiring a new patient.  This Question and Answer on Quora gives some nice guidelines on how to calculate this.  Since you are a new practice let’s assume that you have to spend $200 in advertising to acquire a patient, and initially you are starting with a $5,000 monthly ad budget.  This will bring in 25 new patients per month.
  2. Now you need to determine how much revenue you will generate from the first visit of each new patient, then what percentage of patients will you retain to create your patient or customer base, and then finally how much will your patient base spend each month on the various services you provide.  I have created a spreadsheet to help model revenue for a dental office that you can use here.
  3. In order to determine how much revenue you can generate from your different services I suggest that you find some stats on the prevalence of various issues like cavities, the need for crowns, root canals, etc.  For example the CDC provides data on the prevalence of tooth decay (ie the need for fillings) among the US population.

Percentage of People with Dental Cavaties

In this example I created a basic revenue projection for a startup dental office in the first year.  Total revenue for the year is only $73,000 which is much less than what you might be hoping to bring home as a first year dentist, but you have to start somewhere.  As your customer base grows, revenue and profit can grow substantially.  But for your first year revenue you might try to use our revenue spreadsheet here.  Based on this spreadsheet I entered in my monthly revenue projections into ProjectionHub as seen below.

 

Dental Office Revenue Projections

 

Step 2 – Expenses for a Dental Practice

Our financial model also has about 20 default expenses related to dental offices.  The key expenses I want to point out are:

  • Advertising is $5,000 per month – this is what you use to acquire new patients
  • Insurance can get pretty expensive when you include malpractice insurance and liability insurance for the office.  This article is a helpful guide and helps me estimate around 1,500 per year for all the insurance you need.
  • Software – you can price different software packages for dental offices here – I would expect at least a $1,000 set up fee and $300 per month as an average.
  • Wages – I am assuming that you don’t hire a dental hygienist until month 7, you will just do the cleanings yourself initially.  I am also assuming that you don’t take a salary yourself until month 7 at which point you take a small $1,000 per month owner draw.  Finally, I assume a part time office manager at $1,500 per month.
  • Equipment Rental vs. Purchase – You will certainly want to consider the difference between leasing/renting equipment and furniture vs. purchasing with a loan.  In this example I am going to assume you purchase with a loan.

There are a number of other common expenses that you will need to estimate.

Dental Office Expenses

 

Step 3 – Equipment Required for a Startup Dental Office

According to an article by DentalTown written in 2013 the average price to open a new dental office can range between $250,000 and $500,000.   The primary expenses include:

  • Equipment and Furniture – $150,000
  • Leasehold improvements – $200,000 (assuming 2,000 square feet at $100 cost per sq. foot)
  • Working Capital – $50,000 you are also probably going to need approximately $50,000 in working capital to fund your operating losses during the first year while you get started

This is a total cost of $400,000.

Step 4 – Financing for Dentists

Coming up with $400,000 is not easy, so you are likely going to need a loan or an investor.  Banks seem to like dentists, for example Bank of America has an entire program established for new startup dentist practices.  The Bank of America program boast 100% financing, so you may be able to secure the full $400,000 in a loan.  In this example, I am going to assume you get the $400k from a lender.

Dentist Office Startup Loan

 

Let’s assume you also raise an investment from friends and family for $75,000 just to give you some extra wriggle room in that first year if things don’t go quite as planned.

Step 5 – Example Financial Projections

Starting a new dental practice is not for the faint of heart.  You should expect to lose significant money in the first year as you build up your customer base, but as you know once you build a strong customer base this is a very profitable business.  I think it is always important to know what you are getting yourself into though, so I have attached the projected first year income statement for a startup office. 

If you would like us to review your projections for your specific situation please don’t hesitate to reach out, we can help.  Email adam@projectionhub.com

Auto Repair Shop Projected Financials for First 3 Years

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Auto Repair Shop ProjectionsAccording to a report by the Georgia Small Business Development Center, there are nearly 175,000 businesses in the US that are classified as Mechanical Automotive Repair Shops.  There are thousands of new auto repair shops that start each year.  The challenge is that many new owners are great mechanics, good with cars, and assume they can run a successful business.  Just like a good cook is not always a good restaurant owner, a good mechanic is not always a good auto repair shop owner.

In this article, I am going to walk you through the process of creating financial projections for the first 3 years of business as an Auto Repair Shop.  To open your shop you are probably going to need to get a loan or investment to get started.  The purpose of this article is to help you create a set of financial projections that will help you secure a loan or investment to start your shop.

The hardest part of creating financial projections for an auto shop is creating a sales projection model.  So I am going to create a sales projection Excel template that you can download for your auto shop here.  Just look for the Auto Repair Shop revenue projection template. Additionally, if you would rather have us prepare projections for you, sign up here for a free 15-minute consultation with our CPA, Grace Cisna, or submit an interest form.

Lets get started.

Sales Projections for New Auto Repair Shop

In my opinion, sales for an auto repair shop rely on your number of repeat/loyal customers.  According to the Georgia SBDC report, there are 10 general services that the average auto shop will provide.  The following table shows the 10 services, the average number of jobs per week of that service, and the average price for that service.

Auto Repair Shop Revenue Projections

So in order to create realistic projections for your startup, you can’t just assume that you are going to start out from day 1 doing the average.  You are going to have to win those customers, and then find ways to get them to come to you for all of their auto service needs.  So I am going to go through the process that I would go through if I were starting an auto repair shop in a community.

Step 1 – Potential Market

So first I would start with determining your market potential in terms of customers.  Actually, you might look at each customer as a vehicle.  So how many vehicles are there within the geographic area that you can serve?  Maybe customers would potentially come 20 miles to your shop, so your potential market is the number of vehicles within a 20 mile radius of your shop.

Step 2 – Initial Marketing Budget

Once you get an initial base of customers you might be able to grow and sustain the business based on word of mouth and referrals, but initially you are going to have to do some marketing and advertising to get a base of customers who can then hopefully help spread the word.  You will probably have to run some cheap deals to get customers to try your shop, they won’t likely switch for nothing.

Step 3 – Cost to Acquire 1 New Customer

Initially you need to know the cost to acquire 1 new customer so that you can set an adequate startup marketing budget.  You need to have enough money set aside for initial marketing to be able to secure a core of repeat customers.  So maybe you send out mailers with coupons for a $10 oil change.  You will need to estimate how much it will cost to send out each mailer and what percentage of people who get the mailer will actually come in.  That represents your cost to acquire a new customer.

Step 4 – % of New Customers that Turn Into Repeat Customers

Now out of these new customers what percentage will turn into repeat customers?  Maybe 25%?  You will have to make an educated guess here.  You can be sure that every new customer will not turn into a repeat customer, the question is what is that percentage.

Step 5 – % of Customers that Recommend your Service

Once you build that initial base of repeat customers, some percentage of them will share about your shop.  It is very common for people to ask each other where they take their car when it has a problem.  Not everyone is going to share, maybe it is just 5%, but those 5% can be very powerful.

Step 6 – Average Number of People your Customers Share your Service with Each Month

Now that you assume 5% will share with other people, you have to estimate how many people they will share with each month.  Maybe they only share once every 4 months, so you would estimate that they share with .25 people each month.

Step 7 – What % of those Shared With Actually Become Customers

Next you need to determine what percentage of those people that they shared with will actually come to the shop as a customer.  Then again you are back to the same question, what percentage of those new customers will become repeat customers.

Step 8 – Total Customers per Month

Finally, you will get to your total customers per month.  So in this model that I am building, this number represents your repeat customers.  This is not asking how many actually come to the shop each month, just how many people would you consider to be on your repeat customer list. Maybe it is 2,000 vehicles.  Of course not every customer comes in every month, but we will address that with the next step.

Step 9 – Average Revenue Per Customer Per Month

So rather than try to estimate what percentage of your customers will come in each month, it might be easiest to just estimate an annual dollar amount that the average vehicle will cost an owner each year in repairs and maintenance.  Maybe that number is $1,000 per year for the average car.  So then all you have to do is divide $1,000 by 12 months and you end up with your average revenue per customer per month.

Step 10 – Total Revenue

Finally, you will take your average revenue per customer per month and multiply by your number of active repeat customers.  Those 1 time customers will also help you generate revenue, but it might be likely that you are offering such steep discounts to get them in the door, that you don’t make any profit on those jobs.  You should still show the revenue for 1 time customers, but your focus should be completely on those repeat, loyal customers.

Cost of Goods Sold for an Auto Repair Shop

First, let me define Cost of Goods Sold for you.  Your cost of goods sold is any expense that you incur when your provide a service.  Essentially you have 2 primary cost of goods sold categories.

  1. Material Cost – These are the costs for purchasing parts or materials for a customer’s vehicle.  So if you buy parts for a customer’s vehicle and then add 30% to the cost of the part to charge to the customer, then your cost of goods sold would essentially be 70% of your parts and materials sales.  This is not quite accurate, but probably close enough for your projections.
  2. Labor Cost – This is actually a tough question.  First, do you pay your staff the same amount whether there is a full day of work or not?  Or do you pay them directly based on the specific jobs that they completed that day?  If you pay based on the jobs completed, then you have labor costs.  Let’s say you charge $100 per hour to the customer for labor, and you pay your mechanics $15 per hour, then your labor cost should be between 15 and 25% probably.  Why wouldn’t it be 15% flat?  Because you should consider taxes and benefits that you pay to mechanics as well.  If you just pay by the hour, then it might not make sense to enter in any labor costs in your Cost of Goods Sold section and just enter in Salaries/Wages in your Operating Expenses section.

According to BizStats, the average Cost of Goods Sold for an Auto Repair Shop is 46.72% of your total sales.

Operating Expenses for Auto Repair Shop

The easiest way to estimate your operating expenses for your auto shop is based on industry data provided by sources like BizStats.  The following categories and expense percentages are taken directly from BizStats:

Officers Comp. 7.40%
Salary-Wages 12.86%
Rent 6.64%
Taxes 3.21%
Advertising 1.18%
Benefits-Pension 1.28%
Repairs 0.94%
Bad debts 0.11%
Other SG&A Exp. 11.55%
Amort. & Dep. 0.00%
Interest Earned 0.01%
Interest Expense 0.59%
Other Income 0.52%
Net Profit 6.58%

All of these operating expenses are expressed as a percentage of sales.  So first you will need to create your sales projections and then you should be able to apply these percentages to your sales.

Startup Expenses for an Auto Repair Shop

According to an article by AppointmentPlus, the average startup costs are as follows:

  • Lift with Installation – $4,000
  • Insurance Cost per Year – $4,000
  • Tools – $15,000
  • Diagnostic Machine – $5,000 to $10,000
  • Rent – $1,500 to $15,000 per month

Your startup costs could range between $25,000 and $75,000 especially if you are planning on keeping some reserve funding to pay rent and other operating expenses during the first several months before you are at a breakeven point.

If you work through this process and present your plan to a potential lender or investor, you will be more sophisticated than many auto repair shops right off the bat.  If you need any help as you are creating your financial projections, feel free to reach out to me at adam@projectionhub.com

How Accurate Should My Financial Projections Be?

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TargetThis is a common question I get from ProjectionHub users.  There is no simple answer but there are some basic principles I can share.

Who are the Projections For?

Depending on who the projections are for, you will need varying levels of accuracy.  Here are some differences in your projections based on how the projections will be used.

Investors – Primarily concerned with your business model in general.  They will want to know what your margins are and what your market potential is.  See my answer on Quora titled “How to Calculate Market Potential for a Startup”

Lenders – Concerned with financial ratios.  Will review your projected and current balance sheet to compare assets vs. debt, and cash balance to current liabilities, etc.

Planning Purposes – If you are creating projections in order to determine if you have enough cash to survive, or to find out when you will need more capital, you will need to improve your accuracy.  

Here are 3 ways to improve the accuracy of your financial projections:

1.  How to Improve Revenue Projection Accuracy?

In order to improve the accuracy of your revenue projections I recommend that you focus on 3 specific areas that will impact your final forecast.  

  • Sales Cycle – The most common mistake is probably an overly optimistic outlook on your sales cycle.  In other words, how long will it take from the time you met the potential customer to the time you closed the sale.  You might project a 30 day sales cycle and it turns out that it takes 120 days.  This will make a huge difference in your revenue.

  • Market Potential – You might think that “Everyone” is going to want your product or service.  Rather than assume your target market is Everyone, I recommend that you use the Google Adwords Keyword Tool to find how many people are searching for keywords relevant to your product or service.  I gave a detailed explanation of how to do this with Google Adwords on Quora.  Check it out.

  • Pricing – Lastly, your pricing will dramatically impact your revenue.  You might be able to sell a thousand units if you price the product at $5, but maybe you could sell 500 units at $50 a piece.  Although your units sold is cut in half, your revenue increases 5 times over at the $50 price.

2.  How to Improve Expense Projection Accuracy?

In order to improve the accuracy of your expense projections I recommend that you focus on the following 2 areas:

  • Cost of Goods Sold – Your cost of goods sold is the most important expense to get right.  Why?  Because when you are off, you are off every time you sell a unit or a billable hour.  For example, if you make a $1 mistake on how much it will cost to produce your product, it quickly becomes a $100,000 mistake when you sell 100k units.  It sounds much worse to make a $500 mistake with your monthly rent, but it actually will only cost you $6,000 of the 12 months of the year.  Cost of goods sold is variable, so the more units you sell the more important it is to improve the accuracy of your COGS projections.

  • Bad Debt Expense – It is easy to forget to include bad debt expense within your expense projections.  But every business, every industry can expect to have some bad debt.  Sometimes customers simply don’t pay.  The other important thing to remember with Bad Debt expense is that it is variable as well.  The more you sell, the more bad debt you are likely to have.  You should try to find what an average bad debt expense percentage is for your industry.  Maybe it is 3% of sales, maybe it is 10% of sales.  Whatever it is, try to be accurate here, or this expense could wreak havoc on your projections.

3.  How to Improve Cash Flow Projection Accuracy?

In order to improve the accuracy of your cash flow projections, I recommend that you focus on the following 3 areas:

  • Days to Get Paid – This is definitely the most common cash flow projection mistake.  No one realizes how long their customers will take to pay their bills.  Depending on your industry and the size of your customers you could be waiting up to 100 days to get paid.  This just kills your cash flow.  Many startups and small businesses end up factoring their receivables with companies like our partner Lendio.  You can actually sell your invoices at a discount for cash now.  So if you have a $50,000 invoice out to a customer, you might sell it for $47,500 in cash now rather than waiting 60 or 90 days for that customer to pay. You can find a factoring company that fits your needs at Lendio here.

  • Days to Pay – While your customers may not pay for 90+ days, your vendors will likely require you to pay within 30 days or less.  When you are a startup, you probably won’t get good terms with your vendors.  Don’t assume you can wait 60 days to pay your vendors, if you do it will likely kill your cash flow projections.

  • Sales Cycle – I know I already mentioned this above in the revenue projections section, but I wanted to reiterate how important this is.  One of the most common ways for cash flow projections to end up way off, is to be too optimistic with your sales cycle.  Do you really think it will only take 30 days from the time you meet a potential customer to the time that you close the sale?  This is a dangerous assumption to be optimistic about.  As you watch how long it takes to close a sale for your initial sales, tweak your projections to reflect that sales cycle.

At the end of the day the answer to how accurate should your financial projections be, is… it depends.  It depends on the purpose of the projections and your audience.  I recommend that you start with a very basic set of financial projections, and improve accuracy as needed.  If you have any specific questions about your projections, please feel free to reach out to me at adam@projectionhub.com

How to Create Sales Projections for a Subcontractor

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I recently had a subcontractor who was using ProjectionHub reach out to ask how to structure their sales projections and cost of goods sold.  This contractor installed different types of flooring in residential homes and commercial buildings.  The challenge for this type of sales projection is that 1 contract really  has two distinct types of sales.  There is the sale of product which is the flooring material, and the service sale which is the billable hours for the project.  So now I am just going to walk you through an example step by step for both the cost of goods sold and the sales projections for this type of business.

Step #1 – Structuring Sales Projections

Once you create an account at ProjectionHub one of the first screens you will come to is setting up your sales projection structure.  You will see 3 questions:

  1. How would you like to project sales for products and services?  I would choose “Project sales for each individual product or service”
  2. How many years of projections would you like to create?  Obviously this is up to you.
  3. What do you sell?  You will need to choose  “Products and Services”

This last question can be tricky because many subcontractors might think they are only selling a service, but often times you are selling a product too.  You probably bill the client for the materials you use (which is a product) plus the labor hours for the project (which is a service).

Step #2 – Adding Product and Service Projections

Now I am just going to enter in one example of a product and service.  Let’s say you install tile flooring and for this particular tile you charge $2 per square foot for the materials.  So you would enter in Tile Flooring as a product in ProjectionHub like you see below.

Tile Flooring Sales

You will notice that I entered $2.00 for the price per unit.  We are going to assume that 1 square foot is our sales unit.  Then you can see in the Sales Assumptions text box that I typed out what I am assuming we will sell each month of this particular product.  I took the easy way out here since it is just an example and said that we would sell 5,000 units each month.  If you can come up with better, data-driven assumptions that will improve your projections.  But once you hit submit on this pop up box  you will then need to enter in 5000 for each month 1 through 12 because it asks you how many units you plan to sell each month.

Now you can enter as many types of products as you want here.  If you install 10 different types of flooring, I would suggest entering all of them and estimating how much of each product you anticipate installing each month.

Now you need to enter in the service portion of your Tile sales.  You will need to build your projections based on billable hours.  So for example, maybe it takes you 1 hour to install 100 square feet of Tile.  So in order to determine how many billable hours you will have each month you simply take your 5,000 square feet of tile sold and divide by 100 square feet installed per hour to come up with how many hours it will take you to install that month.

In this example you will have 50 billable hours each month for your 5,000 square feet of installation work.

Now let’s assume you bill the client $50 per hour for installation.  You will enter your Tile Installation Service as follows:

Tile Installation

Now you just need to enter in 50 for the number of billable hours you will sell each month for Tile Installation.

You are done with sales projections for this product and service combination.  Now you will just need to do this for each product or service combination.

Step #3 – Cost of Goods Sold for a Subcontractor

Now we move on to cost of goods sold for this product and service.

In this example we have 1 product and one service that we need to enter in cost of goods sold for.  Both are pretty simple as you see in the image below:

Subcontractor Cost of Goods Sold

For the tile itself you are charging the client $2 per square foot and let’s assume that it costs you $1 per square foot.  So you won’t have any direct labor cost for the tile itself, but you will have material cost of $1 which you can see entered in above.

Then for the service portion we charge the client $50 per hour of labor, and you pay your employees $12 per hour, so you will enter in $12 for the direct labor cost per hour.  In this example I am just going to assume that you don’t have any other material costs for the installation, but you might have another 10 cents per square foot related to the adhesive that you use to install the tile.

You are all set!  Now you just need to move on to your general expenses for the business like phone, internet, supplies, etc.

Feel free to email me with questions at adam@projectionhub.com

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 ProjectionHub – Business Loan Level 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.

Now get started with your own financial projections using http://www.projectionhub.com 

Why You Need to Include a Narrative With Your Cash Flow Projections

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It is incredibly important to include a narrative explanation with your cash flow projections.  Typically, your cash flow projections are provided to your banker or potential investor as part of your funding application.  When a banker or potential investor looks at your projections they want to clearly understand how and where you came up with your numbers.  You made a number of assumptions in order to create your projections, you must clearly explain those assumptions through a written narrative.  Let me give you an example of how I would write a narrative section to go along with my actual projections.

Let’s start by assuming you are applying for a $50,000 loan for your software business in order to advertise and market your product.  You may want to attach a narrative section similar to the following:

Sales Projection Narrative

We assume that the $50,000 loan will allow us to drive 50,000 targeted visitors to our website over a 3 month period.

We assume a $1 cost per click based on the cost per click estimates provided to us from the Google Adwords Keyword Tool.

We assume that we will achieve a 3% conversion rate.  To date, approximately 2.75% of our website visitors have converted into paying customers.  With A/B testing we believe we can increase our conversion rate to 3%.

We assume that the average customer will pay $49 per month for our product based on our performance over the last 12 months.

We assume we will lose 7% of customers each month.

Sales Projection Table

Based on those assumptions our sales projections for the next 12 months are as follows:

Including a narrative will help your audience understand how and why you came up with the numbers that you did, and should help to instill confidence in the future prospects of your business.

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

How to Forecast Sales for an iPhone Application

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By Adam Hoeksema

There are tens of thousands of iPhone app developers out there hoping to hit it big and develop the next app that sells a million copies.  The problem is that when you remove the top 10% of iPhone apps from the conversation, then the average app sells just over 11,600 copies. With the average sales price for an iPhone app hovering around $1.50, and by the time Apple takes its commission, the average app will generate just over $10,000 in sales. Considering the cost of mobile app development, the average iPhone app is probably losing money, or just breaking even.  In order to increase your chances of building a profitable app, you need to do a bit of research first and determine the market potential for your app, and then work your way up to a final sales forecast.

Now I am going to outline exactly how I would forecast sales for an iPhone application.  Let’s take the popular bubble level app.  A level allows you to place a device on a surface and determine how level that surface is.  You might use it for hanging a picture, pouring a concrete floor, or building a house.  A traditional level is a tool used by millions of people everyday.  So let’s say that you wanted to develop the first iPhone app that functioned as a level.  How would you begin to forecast sales for this tool?  Here is what I would suggest:

1.  Start with the Google Adwords Keyword Tool – I would start by using the Google Adwords Keyword Tool to get an estimate of the number of people that are searching for a level tool each month.  Here is what I found for just a few of the relevant keyword phrases:

  • Bubble Level – 165,000 monthly searches
  • Level Tool – 110,000 monthly searches
  • Laser Level – 135,000 monthly searches

These three pieces of data give you an idea of your market potential.  With 410,000 monthly searches represented in just 3 search phrases on Google, it is safe to say that there are at least 1 million monthly searches for level related keyword phrases between all of the major search engines.  So for simplicity, let’s assume that there are 1 million people searching online for a level each month.

2.  Other Markets – To be clear, you will probably be able to sell many units of your app to people who never performed a search for a level.  For example, a worker on a construction job may have purchased your app, when he pulls out his phone to use the app the entire crew working with him sees the app and immediately purchase the app for their own phone.  There are other markets, but it is difficult to quantify when you are forecasting future sales.  You just don’t know how many times someone will see one of your customers using the app and purchase it themselves, so in order to stay conservative, I would base my sales projections on search data.

3. Start to Breakdown the Total Market – Now that we know there are at least 1 million searches per month for a level tool, it is time to start breaking that number down to determine how much of that market you can realistically capture.  Here is how I would do it:

  • Let’s assume the 1 million searches are representative of the US population
  • 88% of adults in the US have cell phones ( 1 million x 88% = 880,000 )
  • 53% of adults cell phone users have smartphones (53% x 880,000 = 466,400)
  • 30% of smartphones are iPhones (30% x 466,400 = 139,920 searches)

So after you whittle away at the original 1,000,000 monthly searches you find that only 139,920 of those 1,000,000 searchers have an iPhone.

4. Advertising Click Through Rate – Google Adwords is incredibly powerful because you can target ads for specific keyw

ord phrase searches on specific devices.  So you might set up an ad campaign that targets all of the level tool related keyword phrases that is only displayed when the user searches using an iPhone.

Google says that the average click through rate for an adwords ad is 2%, so now let’s assume that of the 139,920 searches per month that occur on an iPhone, 2% will click through on your ad.  139,920 x 2% = 2,800 monthly clicks.

5. Sales Conversion Rate – Now that you know you will have 2,800 visits each month, you need to determine a conversion rate for those visitors.  You can assume that those 2,800 are highly qualified and targeted visitors, but conversion rates are still going to be no more than 20%.  Let’s say you convert 20% to purchase a $1.99 Level Tool App.  2,800 x 20% x $1.99 = $1,115 per month.

6. Additional Sales Sources – Now that you have a monthly sales projection for your app based on Google Advertising, you might want to add sales projections from other sources.  For example, you might be able to find data that suggests each person who buys your app will result in 0.25 additional app sales because they tell others about the app, share it with their friends or co-workers, or share via social networks.  Maybe you are able to bring in strategic partners to increase sales.  For example, maybe one of the major level tool manufacturers would sell a copy of your app with every physical level they sell.

At the end of the day you need to create your sales projections based on data, or risk losing thousands of dollars.  Many apps cost more than $10,000 to develop and maintain, but with average sales for an app only reaching approximately 10 grand it is app developer beware.

You can get started creating your profit and loss projections today utilizing the ProjectionHub web application.