3 Signs Your Financial Projections are Unrealistic
Written by Adam Hoeksema Wednesday, June 06 2012
Every young, ambitious entrepreneur has probably had some unrealistic dreams about their business success. It is good to be an optimistic entrepreneur, but when it comes to raising capital from banks or investors, you need to show up with realistic financial projections. The key to developing a realistic forecast is to use a bottom up, data driven approach. Once you have finished your projections, take a few minutes to review and catch any of the following three signs that your projections are unrealistic.
1. Capturing a Percentage of the Market - It is incredibly common to utilize a top down model when building a financial model for your startup. You might say, “if we can just capture 1% of this huge market we would be wildly successful.” Or you might say, “our product is 3 times better and cheaper than our competitor, we should be able to capture half the market immediately.” This is an unrealistic approach because you completely ignore the details. How are you going to capture that market? How many sales calls will you need to make? How long is the sales cycle? Will you be able to finance your growth? If you are starting from the top and assuming you will capture a certain percentage of the market you are setting yourself up for failure because you haven’t considered the details.
2. Everything Goes in a Straight Line - Another tell-tale sign that your financials are unrealistic is if your projections go in a perfectly straight line. Many entrepreneurs will set an initial sales number and then just assume that it will increase at 5% per month every month. Nothing is that easy. Sales will undoubtedly drop during the holidays if you are in B2B sales, and will increase if you sell consumer electronics. If your sales projections show a steady increase over three years most investors or bankers will look at that and assume you just pulled some numbers out of thin air.
3. You will be a Millionaire by Year 3 - Lastly, almost every set of 3 year financial projections you look at, you will notice the same thing. The business owner is a millionaire by year 3. If it were that easy we would have many more millionaires and much less bankrupt companies. Take a look at your projections. Does business really start to take off in year 3? That is very common, and it is almost always unrealistic.
Now take a step back and look at your financial projections as a potential investor or a banker. Ask yourself what could go wrong. What would have to happen for your forecasts to be wrong? Now ask yourself if your projections are truly realistic, data driven, bottoms up numbers, or are you hoping for a miracle?
Adam Hoeksema is the Co-Founder of ProjectionHub. ProjectionHub helps entrepreneurs create financial projections without the need for a PhD in spreadsheet modeling.