Creating Financial Projections
Financial projections are a collection of statements that present a numerical model of your business. Any good business plan must pass two separate tests: the story test and the number test. The story test asks, "Does the story make sense?" The number test asks, "Does the story add up?" A well-prepared set of financial projections helps to address that indeed the story does add up, but it also does much more than that. The projections reveal the entrepreneur’s basic assumptions which are usually synthesized together in their mind only. It doesn't matter whether you're applying for your first bank loan or your fifth, or whether you're seeking venture capital or debt financing. Sooner or later, you'll have to prepare a set of financial projections. Lenders will look for a strong likelihood of repayment using your projections. Investors will calculate what they think is the value of your company based upon these numbers. Constructing a set of projections allows you to play with your business model in a safe environment. Playing on paper is a valuable form of prototyping that can raise many questions before you make a decision. Under most conditions, fast learners are going to outperform even the most brilliant planners. The key is not to think of your numbers as a "plan" set in stone, but as a learning environment where you can test out different scenarios and decisions.
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