Understanding your company involves knowing where you are financially at any given moment as well as where you will be in the future. For this reason, financial projections are imperative for any company. Financial projections draw on available historical data to model the future financial performance of your company, including cash flow, costs, and revenue. Modeling this data is a standard practice. But it’s important to know why it is a standard practice and how financial projections can benefit your company.
3 Benefits of Financial Projections
1. Funding Rounds
In order to take your business to the next level, you need funding from investors, and they want to see future growth in sales and revenue. Financial projections provide potential investors with key benchmarks for your company that let them assess whether you are worth investing in, including, most importantly, when you will start bringing in a profit and showing them a return on their investment.
As with funding, companies may need loans for additional capital. In order to give out loans, banks and other lenders require not only a full accounting of the current state of your company but projections for where it will be in the future. They need to know that your company is viable and that you’ll be able to pay back the money you borrow.
3. Planning and Growth
Financial projections are also important from an operational standpoint. On the one hand, they allow you to assess how your company is doing from a cash flow perspective and when you need to open a new funding round or seek out loans. On the other hand, financial projections allow you to analyze key performance indicators, including assessing actual vs. projected numbers so you can re-adjust your projections to account for deficits or surpluses in projected funds. These are necessary for long term growth strategies, including knowing when you need to start hiring new employees, spending money on capital investments, and investing in other expenditures or reducing costs.
The Importance of Accurate Financial Projections
It bears mentioning that it’s important your financial projections are accurate. Ultimately, you want to be optimistic but realistic at the same time. If you want to have X million dollars in sales in 2 years, you need to have a plan to get there. Likewise, you need to have reasonable explanations for all of your expenses. For example, you need to show why the salaries you are paying are necessary (e.g. are they in line with the average for the market) or how you are coming up with your future sales projections (e.g. are they based on current contracts and the prospects for renewals and growth). If your numbers aren’t realistic, investors and lenders will not provide you with funds. Moreover, inaccurate projections can lead to shortfalls that undermine your ability to operate.
Financial Projections for SaaS Startups
Financial projections are particularly important for startups, especially in the SaaS industry. Because startups are in the infant phases of developing, they often lack direction in their first few years as they adjust to changes in the market and within the company. Likewise, they are often pre-revenue and need to understand future financials. At such an early phase, they need to know their monthly and annual burn rates to see how much cash they have on hand and how much they need to keep operating.
Likewise, they need projections to tell them when they can break even or even start pulling in revenue. From a purely operational standpoint, projections allow them to know when they need to cut costs and when they need to spend money as part of their growth planning, whether this is hiring new employees or acquiring new technologies or another company. Finally, financial projections are key to understanding when they might need to bring in outside capital through a new funding round or loans and what their valuation is.
Recurring Financial Projections with NOVAA
Both as a standalone service and as part of our fractional CFO services, NOVAA offers experienced recurring financial projections using cutting edge business intelligence technology. This involves offering more than just a model or template. Models and templates are based on projections and historical data. But startup companies in particular evolve in directions that alter financial projections. Most companies don’t have the skills to re-assess and re-model their projections, which become obsolete as your company changes and grows. It’s necessary to maintain accurate and useful financial projections whether you’re looking for investment or just engaging in long term planning. To help do this, we tailor your projections to your company and business plan, then maintain and change them on a recurring basis so that your projections develop as you do. This avoids your financial projections becoming obsolete because of changes in markets or within your company.
Additionally, we have a proven track record helping SaaS startups grow into successful enterprises. Given this, we know how to account for future expense projections and costs as you grow from pre-revenue to revenue-bearing. This includes accounting for cash flows, planning for the next 6 to 12 months of operations, and figuring out when you need to open a new funding round. Given that in the tech industry who you know is as important as what you know, we also have connections in the venture capital world and can get word out about your product.
For more information on NOVAA’s financial projections services, contact us today.