[MUSIC] Welcome back to Module 1 and our discussion about financial statements. Over the past four lessons we've covered the basics of the three financial statements, the income statement, balance sheet, and statement of cash flows. Our intent with the previous lessons was to get you familiar with the structure and terminology of the statements, so that you'd be prepared to begin building out your own financial projections, also known as pro forma financial statements. So why do we need projections? Due to the fact that you've taken the time to enroll in this class, I'm going to assume that at the end of the day you're not only interested in starting your own new business, but also seeing it succeed. Well, for a business to succeed, it's important to understand the road map to get you there. In course three, you explored the business planning process with Dr. Carter. You should consider the financial projections to be an extension of that planning process. One, developing financial projections, if done correctly, it will force you to become an expert in your industry and market. This understanding is critical to future investor or bank financing. Not to mention it will ensure that you have realistic expectations of sales and cost structures. Two, it determines whether or not your venture is worth the time and risk to you. You may uncover during your due diligence process that the financial realities of the business are not what you anticipated. And three, the development of financial projections allows you to define what the expectations are for your company. Essentially, what do you need to achieve to be considered successful in your eyes? Having these goals can be very helpful when developing a go to market plan, which we'll discuss in a later course. Before you start building your projections, I recommend considering the following words of caution. One, be reasonable. The downside with financial projections is they're just that, projections. No one really knows what will happen when a business launches. But you need to expect the unexpected. Entrepreneurs have a tendency to think that their projections should only show the best case scenario. But remember that these projections, and all the planning for that matter, should help you as the owner, not to impress someone else reading your plan, so be reasonable. Next, be mindful of accidentally underestimating your cost. This is where good research can be helpful in determining that you have accounted for all the different components necessary for you to run your business. Be especially mindful of any upfront construction costs, fees associated with banking or credit card processing, as well as marketing expenses. I find that entrepreneurs often underestimate those items. Also remember that it might take longer to generate sales than you think. So make sure to account for a ramp up in sales volume and make sure you have cash to handle expenses during that beginning period of time. Additionally I've found that it's much more advantageous to build your model from the ground up as opposed to the top down. Meaning that instead of thinking about your revenue and expenses occurring on a monthly basis or yearly basis, try to build your model from the ground up on a daily basis on predicted sales volume. This will give you a much more realistic insight into what it will take to generate sales. And lastly, make sure to think about seasonality. Remember that cash is paramount, so build your model to account for seasonality, which will play a part of your business model. Some examples of this might be a business located in a resort or college town, or a retailer that gets heavy volume during the holiday season but then has very light months during January and February. Accounting for these fluctuations now will allow you to create a cash flow plan to ensure bills get paid in slower months. Now, it's time to get started building your statements. In this type of video format, it's difficult to guide you step by step. So I've provided some guidance and tools on this slide to get you started. One thing to remember is that the three statements are all integrated with one another, so changes to one statement will impact the others. A general rule of thumb is that you should project out three to five years for your proposed business. I personally think three years is sufficient but that'll depend on whom you're speaking with. I also think it's helpful to detail year one on a month by month basis. This will force you to think more bottom up in your approach. Some resources to get you started can be found at the United States Small Business Administration website, which is www.sba.gov. It's also worth exploring the many templates which can be found in Excel and online. In fact, a simple Google search will give you access to thousands of templates to follow. You could also take a look at utilizing a number of different software solutions, Live Plan and EZ Numbers are a couple that come to mind. I will note that I'm not endorsing the use of these products, but some people do find them helpful. Also, it can be very advantageous to work with your accountant on this matter, as they'll have a wealth of knowledge on line items that need to be accounted for in this process. To close out this lesson, your job will be to create a peer-reviewed one-year income statement projection. It's time to get to work. [MUSIC]
