Financial projections are a way of forecasting a startup's future financial performance based on certain assumptions.
It's an estimation of a business’s future income and expenses.
Investors often vet these projections to arrive at a startup's anticipated long-term valuation and to see if it's a compelling investment proposition.
Zeni: Financial projections are also vital for 2 key reasons:
1. They form the key basis of any startup's business strategy.
Financial projections help you to build a solid financial plan for your startup i.e. determining the revenue growth targets you need to deliver, setting up fixed as well as variable expenses budget, the extent of gross profit that you could achieve including the timeline of break-even point and the required funding to achieve all these.
2. They're key to securing funding from investors.
Financial projections reveal whether a startup has a chance to generate profit not just to survive, but even to deliver handsome returns for the investors.
Right Way of Financial Projections
The founders must find a mix of realistic yet ambitious projections (right mix). The right mix indicates that you've a solid understanding of your startup’s opportunities, capabilities, and target market, thereby inspiring confidence in investors and making your venture attractive for further investment, as you grow.
Unrealistic projections freak out the investors!
Don't be too conservative in your estimates either, they should be reasonable based on your input (trusted data sources).
The most important thing about your early-stage financial model is the thought process you go through to figure out the assumptions, and drivers - Gale Wilkinson, Vitalize VC.
Financial Projections Demonstrates the Capability of Business Model
Your financials show whether and how, the business will operate.
One key element to demonstrate is that the unit economics makes sense.
Your projections need to be supported by how will you achieve growth at that rate.
Resources:
How to Get Your 5-Years Financial Projections Right? It covers:
How to Build Financial Projections for a Revenue-generating Startup?