Financial Projections Model 6



Financial Projections Model 6.0

Revenue Projections

To project revenues:

1) Determine the key revenue drivers for your business, e.g.

a) Number of customers, transactions or units

b) Price per customer, transaction or unit

c) Average revenue per customer or transaction

d) Distribution channel discount

e) Market penetration

f) Response rate

g) Churn rate (proportion of customers lost each year)

h) Growth rate

i) New services or products

2) Forecast revenues for the 5 years

3) Estimate revenues by months for years 1 & 2 and by quarters for years 3, 4 and 5. Consider such factors as

a) Roll out timing

b) Growth rate

c) Seasonality

Cost of Revenue Projections

To project Cost of Revenues:

1) Determine the key drivers of costs to provide the service or product, e.g.

a) Personnel costs (labor and/or salary)

b) Materials costs

c) Yields

d) Website operating costs

e) Systems costs

f) Warehouse and shipping expenses

g) Returns

h) Outsourcing expenses

i) Lease and/or rental expenses

j) Cost reductions

k) Depreciation resulting from large capital expenditures

2) Estimate all other costs that will be required to produce and deliver the product/service.

3) Forecast costs for 5 years. Evaluate these cost projections in relation to comparable companies

4) Determine Cost/Revenue ratio

5) Estimate Cost of Revenues by months for years 1 & 2 and by quarters for years 3, 4 and 5. Consider such factors as:

a) Roll out timing

b) Cost reduction timing

c) Growth rate

d) Seasonality

Personnel Expenses

To project personnel expenses:

1) Determine key personnel to be recruited

a) Sales and marketing

b) Research and development

c) General and administrative

d) Cost of revenue

i) Salary

ii) Hourly

2) For each of the above areas indicate

a) Position or title

b) Number of employees

c) When will be hired

d) Salary or wages

3) Determine benefits package as a % of base pay

4) Determine incentive plan (options, profit sharing, bonus)

Operating Expense Projections

To project operating expenses:

1) Determine the key drivers of operating expenses, e.g.

a) Sales & Marketing

i) Customer acquisition cost

ii) Personnel expenses

iii) Sales commissions

iv) Exhibitions

v) Brand building

vi) Tech support

vii) Customer service

b) Research and Development

i) Personnel expenses

ii) Beta testing

iii) Time to market

iv) Patent and copyright application

v) Prototyping

vi) Subcontracting

c) General and Administration

i) Personnel expenses

ii) Recruiting expenses

iii) MIS expenses

iv) Office rent and utilities

2) Make a provision in each of the operating expenses categories for all the other operating expenses that are not significant enough to be considered a driver. These might include marketing materials, travel and entertainment, telephone, insurance, legal and accounting, leasing, etc.

3) Forecast operating expenses for 5 years. Evaluate these expense projections in relation to comparable companies.

4) Determine the Operating Expense/Revenue ratio for Sales & Marketing, Research & Development, and General & Administration.

5) Use the Operating Expense/Revenue ratio to estimate Operating Expenses by months for years 1 and 2 and by quarters by years 3,4, and 5. If necessary modify the projections to reflect such factors as:

a) Timing of product or service roll-out

b) Major events, e.g. opening a new location, product launch

c) Growth rate

d) Seasonality

Property & Equipment

To project property and equipment, capital expenditures, depreciation, accumulated depreciation:

1) Determine the major capital expenditure projects for 5 years, e.g. property, plant, equipment, computers, systems, software.

2) Estimate the level on-going capital expenditures.

3) Determine the expected life for the each of the expenditures.

4) Estimate capital expenditure by months for years 1 & 2 and by quarters for years 3, 4 and 5. Consider such factors as:

a) Timing of product or service roll-out

b) Cost reduction timing

c) Growth rate

d) Seasonality

Comparison of Financial Projections with Peer Companies

Identify two or three companies that are similar to your venture where you can obtain financial information. Good sources are publicly traded companies in your industry, particularly those that have recently done an IPO. In more traditional industries you may find financial information by SIC codes in Dun and Bradstreet or the Almanac of Business and Industrial Financial Ratios.

Determine the best comparison with your venture.

Assumptions

Revenue Drivers

Cost of Revenue Drivers

Employees

Headcount

Key positions and when

Operating Expense Drivers

Sales & Marketing

Research & Development

General & Administration

Capital Expenditures

Major expenditures

Depreciation rates

Extraordinary Expenses or Income

Tax rates

Working Capital

Receivables: credit terms and days outstanding

Inventory: turns

Accounts Payable: days paid

Funding

Amount and types of equity

Amount and terms of debt, including repayment schedule

Interest rates

Dividends

Valuation method

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