The Most Common Financial Projection Mistakes Entrepreneurs Make
BENGALURU: Many entrepreneurs, who are very much passionate about what they do or plan to do, tend to miss the most important part and that is “financial projections”. One needs to realize that this is most critical aspect of the operation and sustainability of a business. There are many critical facets to this problem but one effective way to become more competent in doing your financial projection is to be aware of the common frailties of your fellow entrepreneurs and learn from them. They’re either too aggressive or they really have no idea how they got to their estimates. Listed below are some of the common mistakes:
1. Top Down Assumptions
One of the worst mistakes one can make when developing financial projections is to start from the top and work your way down. Your projections should be bottom-up. A common top down approach is to say that the total market is a billion dollars and you think you can get 1% of the market. Here is an example of a disastrous top-down assumption provided by Projectionhub.
“I want to start a coffee shop. If Starbucks can make $1.5 million in profit per store each year, then I should do at least half as well as Starbucks because my coffee and my service are better. Therefore from my assumption I will make an annual profit of $750,000 next year.”
This way you will expose your flaws clearly by having made a decision based on a top line number. You don’t just get the number of customers Starbucks get. You will have to do research and analyze the region where you are trying to open your business, the consumption rate of coffee in the area and even people’s standard of living.
2. Stating, “These Projections are Conservative”
This is the most common fault with entrepreneurs with their projected financial statements. There is no other thing that will send investors away faster than by terming your projections conservative. One thing that needs to be kept in mind is that investors know that startups are risky so there is no point in going out with statements that are over-conservative.
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