How to build financial projections for your startup?

Longside accounting basic, creating financial projections for your startup’s a business plan is absolutely essential.Neither is especially exciting—especially once you compare it to the thought at the core of your business. And yet, to grow and scale, you’ll need capital.For external funding, financial projections help convince lenders and investors that your business won't only be profitable but also, offer them a return on investment. For internal purposes, accurate projections enable you to budget for your new business as well as benchmark your milestones.

Comparing your actual financial statements to your projections is mentioned as variance analysis. With this analysis, you’ll be able to see if your business is consistently falling short of your projections or surpassing them. If your projections are falling behind, then you’ll get to make some changes by raising prices, cutting costs, or rethinking your business model. Conversely, if your immediate revenue exceeds your pro forma income, then you may need to hire employees, expand your facility, or seek financing sooner than you expected.

What forecasts should I make first? To establish credibility with prospective investors and lenders, pro forma statements should ideally show projections three years in advance. 

There are two key forecasts to put together.

1. Sales forecast
Project your sales out for a minimum of three fiscal years. Include monthly sales for the first year, then quarterly for the following two years. How many customers can you expect? How many units will be sold? What is the cost of goods sold? How will you price your products? Sales projections can forecast revenue. And when the cost of goods sold is also taken into account, gross profit can be estimated for each of those years.
After accounting for all of your operating costs, subtract this from your gross profit margin to calculate your actual profit — otherwise referred to as net (or profit). Operating expenses can be calculated based on your expense budget.

2. An expense budget
Operating expenses are any expenses that businesses incur performing their normal business operations. These include both fixed costs (i.e. rent for your location) and variable costs (i.e. marketing expenses). You don’t get to do an incredibly detailed breakdown, like listing the value of each office chair. But you do need general figures.