At the beginning of every year, most entrepreneurs take the time to set forth the goals that they intend to achieve for their respective businesses depending on how things went in the past and what they think the future might hold.
This is a positive practice that allows founders to make timely decisions once the wheels are in motion while it helps them in determining potential financing needs.
However, the task of forecasting a company’s financial results might seem daunting at first glance for owners that have no expertise or background in the financial field.
To help entrepreneurs in this particular endeavor, we will be sharing 5 valuable tips to draft more accurate financial projections for an online startup.
Keep in mind that some of the data needed for these projections might not be readily available depending on what e-commerce platform you use. To make sure it is, owners can download the Beprofit app to get the kind of insightful information about the past performance of their businesses.
#1 – Draft projections for multiple scenarios
Financial professionals understand that uncertainty is the name of the game when it comes to drafting projections for a business. The proper way to address this is to make predictions for multiple scenarios so owners can respond rapidly and appropriately depending on how a business performs.
In most cases, three scenarios will be sufficient to account for all the possible outcomes. These scenarios are named as follows:
Optimistic: an optimistic scenario assumes that all variables will reach the upper bound of their estimates. This includes profit margins and sales growth.
Baseline: a baseline scenario is the average expected outcome for all relevant variables involved based on the historical performance of the business.
Pessimistic: a pessimistic scenario outlines what could possibly happen if everything goes wrong.
#2 – Rely on all the available historical data
Historical data is typically easy to get for an online store, especially if you are using advanced e-commerce platforms such as Shopify or WiX.
The more insightful the data, the better, and the same goes for how far into the past the data goes as averages tend to be smoothed out during long periods.
In statistics, there is something known as the normal distribution. This concept assumes that during long observation periods, the most highly probable value ranges will be clearly defined.
If you have a rich data set of your store’s sales – say for the last 48 months or so – you can estimate the average monthly sales for every product along with the standard deviation for each of them so you can determine best and worst-case scenarios for each of them using Excel or some other spreadsheet software.
#3 – Read market research reports
Market research reports will allow you to understand the microeconomics of your business and the narratives that are dominating the space at the moment. Right now, most retail businesses are struggling with elevated logistic costs amid the ongoing supply chain crisis.
You might identify that this will affect your business as well – depending on what kind of store you run – and you can make assumptions and estimates that incorporate the impact of this situation to increase the accuracy of the projections.
#4 – Take into account your financing needs
The capital needed to grow a business does not come out of thin air. Either the company produces enough gains to sustain its growth or it will have to turn to investors or lenders to raise the money needed to expand.
For online stores that sell merchandise, the most important item that will need to be financed to keep growing is inventory and, perhaps, warehousing space.
Depending on what your plans are and what kind of growth you expect to produce in the future, your financing needs will affect the bottom-line profitability of the business.
Taking loans will generate interest expenditures that will eat up your net income while raising money through the sale of a portion of the business could result in a lower annual return on investment (ROI).
#5 – Stay on the conservative side
Finally, whenever you are drafting a projection that is highly dependable on assumptions, it is a good idea to remain on the conservative end.
If you underestimate the kind of growth that your store might experience, it might not be such a big deal. However, if you overestimate it, you might end up spending more money on personnel, financing, and other similar items because of those overly optimistic expectations.
Interesting Related Article: “Business Formation Guide: Choose a Business Structure“