1/ I see lots of financial projection spreadsheets (mostly for seed stage and Series A companies). The spreadsheets often have yellow (or red) flags that are easy to fix.
Below are some tips for making better financial projections:
2/ Extract all core assumptions into their own spreadsheet cells. Don't hard-code things like monthly revenue or churn #'s because then you can't play w/the model easily.
Modeling out "what if monthly churn is 1.5% instead of 2%?" should not require changing more than one cell.
3/ Avoid sudden jumps in metrics. A company doesn't go from 10 employees for all of Year 1 to 20 employees in the first month of Year 2. Most things (growth rates, employee counts, COGS, etc) ramp up or down gradually.
4/ Keep assumptions realistic. Search online for benchmarks for key levers like churn rates, growth rates, CAC, etc. Example: if you sell to SMBs then your annual churn will be probably be >10%, and if you sell to enterprises then your CAC won't be $0.
5/ Have a hypothesis on how your key levers will evolve over time. Will revenue per customer increase as you go upmarket? Will COGS drop with scale? Will monthly churn decrease?
If all of your key levers remain static, readers will assume you didn't put much thought into them.
6/ Costs like travel, office space, etc, should scale as your headcount grows. These costs should not stay flat as you grow from 5 to 15 to 50 employees.
7/ When budgeting for employee salaries, don't forget to add another 20%-40% for benefits, payroll taxes, and other costs.
8/ If you're raising capital, make sure the capital will be enough to get you to your next set of milestones.
For example, if you're raising $2m for 18 months of runway, then adding up your monthly burn for 18 months should not exceed $2m.
9/ The goal here is not to generate a financial model that appeases investors, but to have a model that gives you high confidence that your business is viable and attractive. If you can't build a model like that, then perhaps the business you're building isn't great.
10/ Finally, if you're someone who has looked at lots of projections, what are some yellow and red flags that stick out to you?
You can follow @lpolovets.
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