Over the last few months, I spoke with micro-lenders - ACCION USA and The Carrot Project. The story is the same, they have capital to lend, but are having trouble finding "qualified" borrowers.
If you are seeking financing to start or grow your business, creating financial projections is paramount. Financial projections are based on historical performance and assumptions of future performance. Potential investors will want to see projected income statements (Profit and Loss), balance sheets and cash flow statements for at least three years.
This information helps lenders evaluate your ability to pay back debt. Obviously, they will look at your cash flow statement to ensure you project enough cash inflow to cover your debt service. Just as important, they will look at your assumptions so they can see how clearly you thought through your business.
When you create financial projections, start with your assumptions. The assumptions of your specific business will vary, but here are some examples of how to think about it:
- How much revenue will you earn? Break it down by month, day-part, and/or revenue stream.
- What will your expenses be? Break it down as far as you can ... detailing each expense by month, day-part and /or revenue stream. Create a sample employee work schedule to outline your labor needs.
- What capital equipment will you need?
- How long will the start-up take? How much cash do you need to get through the start up phase?
- What will be your debt-service? What type of loans or financing will you get?
Once you are clear about your assumptions, you can start building your financial statements. Start with the income statement - detailing revenues and expenses. From the income statement, you can build your balance sheet - outlining what the company has (assets), what they owe (liabilities), and what they own (owner's equity). From your balance sheet you can build your statement of cash flows - to track cash inflows and outflows from operating, investing and financing activities.
Be sure to create your financial statements in a way so you can test your assumptions. For example, what happens if your food cost is 35% instead of 30%? Does your business model fall apart, or can it withstand the increased expense? What happens if revenues fall short of your expectations? Again, can your business model support this shortfall?
Your investors will want to know your business can survive through conservative estimates. And you will have the peace of mind knowing that you have room to breathe should there be an unforeseen circumstance.