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4 Options to Create Financial Forecasts For Your Startup

Any business plan or investor presentation include financial forecasts. Yet, creating financial forecasts is a challenging exercise for most entrepreneurs as it requires solid finance knowledge.

Luckily, many options are available to build rock-solid and realistic financial projections for any type of business, especially for startups and small businesses. In this article we go through the 4 options available to you, their pros and cons, and which one is best for you. Read on.

What is a financial forecast?

A Profit-and-Loss example
A Profit-and-Loss example

Financial forecasts are a projection or a business’ financials. Most startups and small businesses project their financials on a 3 to 5 year period.

The projected financials are usually prepared on a spreadsheet (e.g. Excel or Google Sheet). They are then presented in summary tables and charts as part of the business plan or investment deck (in Powerpoint, or more rarely, Word document).

Depending on the type business, the objective of the forecasts and one’s budget, financial forecasts can either be relatively simple, or very granular. In any case, any financial forecast must include a number of financial statements every investor knows, they are:

  1. Profit and Loss: is a summary of all your revenues and expenses over a given time period. By subtracting expenses from revenues, it gives a clear picture of whether your business is profitable, or loss-making
  2. Cash Flow Statement: all cash inflows and outflows over that same period. Unlike the P&L which includes some non-cash items and misses others (e.g. capital expenditures), the cash flow statement gives a clear picture of your cash balance
  3. Balance Sheet: unlike the P&L and the Cash Flow Statement, the Balance Sheet is a picture at a given time of your financial situation. The balance sheet lists all your business’ assets and liabilities at a given time (at end of year for instance)
  4. Use of Funds: very important when you prepare financial forecasts to raise capital, the use of funds shows where the funds will be spent.

Read our article on the 4 key financial statements for your startup business plan for more details on what they mean and what they should include.

Why do we use a financial forecast?

A must have when you raise capital financial forecasts aren’t just a requirement. Instead, preparing realistic and solid financial projections for your business should be part of your budgeting. As such, they need to be updated periodically, either by your accountant, CFO, or yourself.

Indeed, forecasting the future, whilst likely not to be fully accurate, helps you make better decisions.

When preparing your business plan, financial forecasts help you:

  • Better understand your business
  • Form a good idea of your business’s valuation
  • Assess how much you should raise

For more information on the benefits from financial forecasting when raising capital, read our article here.

Instead, when used as part of your ongoing business’ tasks, as part of your budget, financial forecasts help you make better, informed decisions. A few examples are:

  • Your marketing campaigns and budgets are based on expected revenues
  • A manufacturing business will scale up or down its production capacity based on projected revenues
  • Customer support staffing and budget goes hand in hand with your expected user volume, therefore revenues

In general, any investment decision needs an accurate assessment of its financial consequences (revenues and costs). Typically the finance team is always involved in these decisions. They will prepare (if not the team itself e.g. the marketing team for digital ads budget) estimates for the considered project. This standalone budget is then included in the business’ overall financial forecasts.

Need a financial model?

✓ Fully editable
✓ Charts & metrics
✓ Tutorial + how-to video
✓ Free email support

Option 1: DIY (Do it yourself)

Do it yourself
Do it yourself

If you have a solid knowledge of finance and financial modelling, preparing your own financial forecasts often is the best solution. Yet, if your knowledge is limited or simply good enough, we strongly recommend not to do it yourself. You will easily run into problems and waste precious time you could have spent somewhere else.

Pros

  • You are the best person to judge what are the key drivers to your business. Unlike an outsider (your accountant for instance), you are part of your business (CEO or CFO for instance). As such, you have the best insight into your business
  • You might learn things you do not know yet about your business and your financials

Cons

  • The DIY option takes time. An experienced finance professional (CFO or instance) usually takes 1 to 3 days to prepare a set of forecasts. Instead, if your finance knowledge is more limited, preparing forecasts can easily take more than a week.
  • You may make mistakes. Excel spreadsheets are intricate documents with hundreds of mathematical formulas where it is easy to get lost. If you cannot afford a second pair of (experienced) eyes on your forecasts, forget about the DIY option

Option 2: Hire an expert

Hire an expert
Hire an expert

Hiring a finance expert to prepare your financial forecasts can be a very convenient option if you can afford it. You will benefit from the experience of someone who understands very well finance, financial modelling, and more generally the requirements of good financial forecasts when raising capital. Still, apart from being the most expensive option, relying on an expert can easily bring problems.

Pros

  • Financial modelling consultants (or accountants) have experience producing forecasts for a number of businesses. They understand the requirements of different investors (VC firms, public grants, etc.) and different documents (business plan, pitch deck, investor presentation)

Cons

  • Hiring an expert is expensive. As low as $50 an hour up to $250 for the more expensive, the bill can easily be expensive especially for startups and small businesses who cannot afford it. In our experience, 90% of financial models cost anywhere between $1,000 to $3,000 depending on the granularity of the forecasts
  • An expert is not necessarily knowledgeable in financial modelling. At SharpSheets we often work with entrepreneurs whose accountants did not manage to produce the required financial forecasts. Remember: your accountant is not necessarily proficient with Excel modelling and more importantly fundraising. Get help from a fundraising and financial modelling expert instead. Also, beware of the numerous affordable freelance consultants out there who simply use basic templates and aren’t worth your money

Option 3: Download a template Excel

A financial model template example
Download a template Excel

Instead of building their own financial model or hiring an expert, entrepreneurs and startups often use templates. Indeed most businesses share common characteristics such as the revenue model or expenses. As such, instead of reinventing the wheel, and potentially avoiding a few mistakes, we use templates built by experts and vetted by multiple businesses in the past.

Need a financial model?

✓ Fully editable
✓ Charts & metrics
✓ Tutorial + how-to video
✓ Free email support

Yet, not all financial model templates are good to use, let’s see why.

Pros

  • You might save time and effort using a template. As explained earlier, whilst they are all unique, most businesses share common characteristics that makes templates helpful: no need to reinvent the wheel and build a SaaS revenue model for instance
  • You will avoid mistakes: most templates (free and paid) have been designed by finance experts who have experience building such forecasts. Indeed, it can be very easy to make mistakes when building comprehensive financial forecasts in a spreadsheet. Great model templates are error-free as they have been tested by multiple companies and constantly reviewed by their authors
  • Financial statements are pre-built. Forecasting revenues and expenses might be easy. Yet the consolidation of your operating model into your P&L, balance sheet and cash flow statement is not straightforward. Because investors will ask for it, using a template that consolidates automatically your forecasts into financial statements is very convenient for most people
  • Additional features for fundraising and/or budgeting are pre-built. Having the ability to enter your assumptions and obtaining your key metrics evolution, cap table and cash burn analysis automatically is a big plus. You may need these for any fundraising hence having them already built will save you a lot of time and effort.

Cons

  • Generalist templates are too basic. Whilst most business share common characteristics (revenue model or expenses for instance), not all businesses can use the same template. Also, generalist templates will lack the business-specific metrics and financial investors may ask you
  • Most templates aren’t fully flexible. As such, they often do not allow for customised inputs and assumptions. You should also avoid any template where you need to plug in the revenues yourself: this is not forecasting
  • Templates still require good finance knowledge. Whilst the mechanics are pre-built, you will have to enter your assumptions to customise the template to your business. And if you want to amend the template (to add another revenue stream for instance), you will need a solid grasp of Excel modelling

Read our article here to know whether you should use a financial model for your business.

If you think templates are the way to go for your business, all our templates are business-specific and include tutorial videos and PDF guides so you can make the most of them. We explain you, step-by-step, all the assumptions you need to change to fit the template to your business. See a full list of our templates here.

Option 4: Use a financial modelling software

Use a software
Use a software

Instead of using a template, some businesses have recourse to financial modelling softwares instead. Usually provided as a web application, softwares can be a very convenient solution for budgeting.

Pros

  • Similar to templates, financial modelling software might save you time and effort. The mechanics (calculations) are pre-built for you. Simply enter your assumptions and the model will do the rest
  • Often, softwares and web applications provide onboarding and tutorial (videos or articles). Therefore, even if you have limited knowledge in finance, you might be able to prepare good forecasts. Unfortunately, if your finance knowledge is very limited, softwares or apps aren’t the way to go. You will still have to understand basic finance concepts to use these tools
  • Financial softwares can allow for automated budgeting by giving you the ability to feed in, automatically, each month, your reporting (from Xero for example). This is very helpful when you need to produce monthly budgets to your management, or investors

Cons

  • Financial softwares aren’t as flexible as Excel spreadsheets unfortunately. If you are looking for a high degree of customisation, you will have to pay for an expensive solution (anywhere from $100 to $1,000 a month). Indeed, these softwares essentially reproduce the most basic features Excel into their softwares, adding helpful add-on features (charts, valuation, etc.) which you cannot find in Excel. As such, they do not provide the level of flexibility you would find in a spreadsheet
  • Softwares can be expensive. If you are looking for a more basic software, you may find subscriptions starting at $25 a month per user. Anything more granular can go up to $1,000 a month (solutions for CFOs for instance). Needless to say softwares are recurring subscriptions: in order to keep using it you will have to pay a subscription. Even an affordable $20 a month subscription will cost you $240 a year
  • Like templates, softwares still require good finance knowledge

Need a financial model?

✓ Fully editable
✓ Charts & metrics
✓ Tutorial + how-to video
✓ Free email support