Enterprising Women Vol 10, No 2, 2009

enterprising Women 43 B Y T E RR I K R I VOS HA M any business owners get heart palpitations when thinking about developing projections, but they are essential to any business looking for financing from a bank or from equity inves- tors. Some of the anxiety can be over- come by gaining a better understanding of why projections are important and how to approach their formulation. Projections are predictions of what you think the financial statements of your busi- ness will look like for some future period. They are based on assumptions and are the quantification of your business plan. Projections are necessary to assist third parties who are willing to take a risk on your business to either lend you money or invest in your company. A lender will scru- tinize projections as a baseline to develop covenants for a company’s behavior while the loan is outstanding. An investor will use projections to understand the strategic vision of your company and how you will use their money. Since investors don’t have covenants or the option of repayment as lenders do, projections will help the investors make the business decision about whether your company is a good risk. There are three guiding questions to consider when developing your projec- tions: (1) Are they realistic? (2) Do they tell a story? and (3) Are you confident about your projections? Be Realistic The best projections are based on good solid consistent financials for at least three prior years. That being said, if your busi- ness is new, you may also develop projec- tions based on forward-looking assump- tions. In this circumstance, a successful track record in another business will help to strengthen your reputation with the investors and/or lenders you are trying to attract. Assumptions that are grounded in fact help you predict the future realistically. You can estimate future data from assumptions by looking at the facts on which the assumptions are based. To predict future revenue, start by thinking about assump- Overcoming Anxiety of Developing Projections THE