Financial Projections: A Must-Have for Every Startup Founder
In today’s article, we will cover the core fundamentals of building a financial projection, when to create it, and the skeleton of an effective financial model.
Many founders view financial projections as mere deal collateral, something to prepare only when an investor demands it. But this mindset is far from ideal. Whether you’re fundraising or bootstrapping, having a financial model is non-negotiable.
If you’re approaching an investor asking for $1 million, you must back up that ask with data. How did you calculate the amount? What’s your plan to utilise it? These are questions that only a well-structured financial projection can answer.
This article is inspired by a session with Jagriti Shreya, the founder of Predict Growth. With 10+ years of experience in the tech industry, Jagriti and her team at Predict Growth are dedicated to making business and financial models easier to understand, helping businesses make data-driven decisions, and offering tech solutions to support the next generation of leaders.
In today’s article, we will cover the core fundamentals of building a financial projection, when to create it, and the skeleton of an effective financial model.
Why Financial Projections Are Essential?
At their core, financial projections are estimates of your startup's future financial performance over a set period—typically one, three, or five years. These projections cover key elements such as revenue, expenses, and profits, giving you a clear picture of how your business might perform under various scenarios.
Financial projections often include:
Revenue Forecasts – Estimating how much your business will earn through sales or services.
Expense Estimates – Projecting the costs required to run the business, from salaries to marketing expenses to overhead.
Profit Projections – Predicting the profit your business will make by subtracting your expenses from your revenue.
Startups often begin tracking their income and expenses once they validate an idea and start building the product. This tracking forms the foundation of your financial projections. Think of your financial projections as converting your business plan into numbers:
How much will you spend on marketing?
How many customers will you acquire in the first quarter?
How much do you need to spend to reach your revenue goals in the next 5-6 quarters?
When Should You Build Financial Projections?
The ideal time to start building financial projections is when money starts moving out of your business—be it for development, research, or operations. Even if you’re in the earliest stages and just trying to keep things afloat, having a basic record of your expenses (even in something as simple as an Excel sheet) is crucial. The moment you kick off your Go-To-Market (GTM) strategy, it’s time to formalise your financial projections.
As a founder, especially in the pre-seed or seed stages, you may not have a lot of concrete data yet, and that’s okay. It’s perfectly normal. But you still need to make informed guesses or assumptions. These assumptions shouldn’t be arbitrary; they should be based on:
1. Industry Benchmarks:
Look at businesses in your space and see what’s typical. For instance, what does the average revenue per user look like for startups in your industry? How much does it cost to acquire customers in your sector? Using benchmarks from your industry will ground your projections in reality and give you a clearer picture of what’s possible for your business.
2. Competitor Analysis:
Take a close look at your competitors. How are they performing in similar market conditions? While you may not have access to their financials, plenty of public data points and third-party reports can give you insight into their growth patterns. If competitors are successfully growing and reaching profitability in your niche, you can use their trajectories to build your own projections, adapting based on your unique value proposition.
A good financial projection evolves with your startup’s growth. As you get more data, refine your assumptions and adjust your projections. If your financial projections aren't changing and adapting as you progress, your business isn't progressing as it should either.
When building financial projections, you might find yourself creating a financial model because projections are based on assumptions that need a structured framework for accuracy. A financial model allows you to break down these assumptions into measurable components—like revenue drivers, cost structures, and cash flow—which helps ensure your projections are realistic and grounded in data.
For example-
Your financial projections might show that you expect $500,000 in revenue by year three, but your financial model will allow you to explore different growth scenarios: What if your customer acquisition cost is higher than expected? What if you can increase your prices?
Financial Model vs. Business Model: What's the Difference?
As a founder, you’re juggling a million things. You’ve got a great idea, you’re building your product, and you’re thinking about how to market it.
But there are two things you absolutely need to get right from the start: your business model and your financial model. They sound similar, but they play very different roles in the success of your startup.
Let’s break it down in a way that’s easy to understand.
A business model is the big-picture plan for how your company will create, deliver, and capture value. It outlines how your business will operate, generate revenue, and meet customer needs. Essentially, it’s the strategy that answers the question, “How does your business make money?”
A financial model takes the business model a step further and focuses on its financial aspects. It’s a detailed, data-driven representation of how the business will generate income, incur expenses, and grow over time.
Example-
A subscription-based e-commerce platform that sells organic products might have a business model that includes:
Value Proposition: High-quality, eco-friendly products delivered to your door.
Revenue Stream: Monthly subscription fees.
Channels: Online sales via a website and app.
The financial model might include:
Revenue projections based on estimated customer acquisition and retention rates.
Operating costs such as marketing expenses, platform development, and shipping costs.
A timeline for reaching profitability, including projected monthly and yearly profit margins.
Simply put, your Business Model is about the what and why of your business, while your Financial Model is about the how much!
If your business plan defines your vision, your financial projections quantify it.
Components of a Financial Model
One financial model can’t serve all investors and can’t serve all stories, just like your pitch deck.
Every financial model is unique. However, there are four key components that every effective financial model should include:
1. Revenue Projections
Estimate your income streams over a defined period (e.g., 2-3 years for early-stage startups).
Break down revenue by product lines, markets, or customer segments.
2. Expense Projections
Categorise your expenses into operational, marketing, and product development costs.
Don’t forget hidden costs like legal, compliance, and customer support.
3. Cash Flow Analysis
Highlight how money flows in and out of your business to identify gaps and ensure sustainability.
Determine your cash runway and burn rate.
4. Growth Assumptions
Use realistic, data-backed assumptions to forecast growth.
Include metrics like Customer Acquisition Cost (CAC), Lifetime Value (LTV), and conversion rates.
How Can You Build Financial Projections for Your Early-Stage Startup?
1. Track Every Penny from Day One
It’s easy to overlook small expenses when you’re just starting out, but every dollar counts. Be it software for development or marketing ads for your launch, keep track of everything from the get-go. This will give you a clear picture of where your money is going and help you identify any leaks in your spending. You don’t need to use fancy tools from the start—a simple spreadsheet will do.
2. Make Smart Assumptions Early On
In the early days, you probably won’t have tons of historical data to rely on, and that’s okay. Use industry benchmarks and competitor insights to fill in the gaps. Look at similar startups or businesses in your niche to estimate revenue per customer, churn rates, or marketing costs. While these assumptions might not be 100% accurate, they will serve as a strong foundation.
3. Plan for the Next 2-3 Years
As an early-stage founder, the most critical thing is to focus on the time you can operate with your current cash flow before needing any funding. So, your financial projections should focus on the next 2 to 3 years.
This will cover the time leading up to your first or, preferably, the next fundraising round, allowing investors to see how you plan to grow and when you'll start becoming profitable. It’s okay if projections are rough—just ensure they show a realistic trajectory.
4. Revisit and Revise Every 6-8 Months
Your financial projections aren’t set in stone. As you gain more experience, collect accurate data, and refine your strategies, your initial assumptions will likely need some tweaking. Review your projections every 6-8 months to adjust for things like shifts in the market, unexpected expenses, or growth spurts.
Final Thoughts
Strong financial projections are a must when it comes to attracting investors or securing funding. They show that you’ve thought through the financial side of your business and that you have a clear path to profitability. However, in the case of early-stage startups, a solid financial projection can still leave a strong impression on investors. It shows that:
You’re prepared for challenges.
You understand the financial dynamics of your business.
You have a clear plan to grow and sustain the business over time.
Financial projections might feel like just another task on your ever-growing to-do list, but they help you map out the journey of your business. So, start small, stay consistent, and let your model grow alongside your business.
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