From Historical Data to Future Forecasts: How to Build a Financial Projection Model
If you’re a revenue generating startup that wants to build a financial model for your next round of funding, you can start by gathering these documents
Historical income statement
Historical balance sheet
Historical cash flow statement
Annual budget
Sales forecast
Cost of goods sold forecast
Operating expense forecast
Capital expenditure forecast
Working capital forecast
Debt schedule
Interest expense forecast
Tax forecast
Depreciation forecast
Amortization forecast
Inventory forecast
Accounts receivable forecast
Accounts payable forecast
Customer data, including customer demographics and purchase history
Industry and market research
Creating a comprehensive financial projection model for a business can be a complex process, but by following a step-by-step approach, it can be made manageable. Here's a detailed guide on how to create a financial projection model:
Step 1: Clean and organize the data. Once you have all of the necessary financial documents, it's important to clean and organize the data in a way that makes it easy to work with. This includes formatting the data in a consistent manner and removing any irrelevant or duplicate information.
Step 2: Create a forecast template. Using the historical data, create a forecast template for the income statement, balance sheet, and cash flow statement. This template will serve as the foundation for your financial projection model and will be used to project future financials.
Step 3: Project future revenue. Using the historical data and industry benchmarks, project future revenue for the business. Consider factors such as current customer acquisition and retention rates, pricing changes, and any other relevant market trends.
Step 4: Forecast expenses. Forecast expenses for the same period as your revenue projections. Be sure to include both variable costs (such as customer acquisition costs) and fixed costs (such as salaries and rent).
Step 5: Calculate key metrics. Using the information from steps 3 and 4, calculate key metrics such as MRR, LTV, and CAC.
Step 6: Create a pro forma income statement. Use the information from steps 3, 4 and 5 to create a pro forma income statement, which shows projected revenues and expenses, as well as your projected net income.
Step 7: Create a pro forma balance sheet. Using the information from the historical balance sheet, forecast the balance sheet for the period of the projection.
Step 8: Create a pro forma cash flow statement. Using the information from the historical cash flow statement, forecast the cash flow statement for the period of the projection.
Step 9: Perform sensitivity analysis. Perform sensitivity analysis to evaluate how changes in key assumptions (such as revenue growth rate, cost of goods sold, etc.) affect the financial projection.
Step 10: Create summary and presentation. Finally, create a summary and presentation of your financial projection model that highlights the key takeaways and potential areas of concern.
Step 11: Review and finalize the model Review the model and make any necessary adjustments based on feedback from your advisors. Once the model is finalized, it can be used as a tool for decision-making and strategic planning.
Note that, even though the steps provided are a general guide, the specifics of the model will vary depending on your business and the scope of the project. Additionally, it is important to keep in mind that a financial model is a representation of the past, present and future based on certain assumptions, and it should be reviewed and updated regularly.