Business Growth and Strategy: 3 Steps and a Key Tip Regarding Projections

Creating solid business projections is crucial, whether you’re looking to sell your business, secure capital for growth, or plan for acquisitions. Reliable projections form the backbone of any meaningful discussion with potential acquirers or capital providers. In this article, I will outline three essential steps for developing robust projections and a key tip to ensure their effectiveness and credibility.

Introduction

Accurate and reliable business projections are fundamental in various business contexts. They play a critical role when engaging with potential buyers, investors, or partners. A solid projection helps in presenting a clear picture of future performance, thereby instilling confidence and facilitating informed decision-making. The key to creating these projections lies in focusing on specific, measurable aspects of your business.

Step By Step

Step 1: Unit Economics

When building projections, start with unit economics. Instead of vaguely stating that revenue will grow from point A to point B, break it down into the sale of individual units. For example, specify the number of automobiles, widget manufacturing machines, or service packages you plan to sell. This approach makes projections more tangible and believable, as they can be directly linked to specific sales efforts and activities.

Unit economics involve detailing how many units of a product or service will be sold, and at what price, over a given period. This method allows you to track the effectiveness of your sales strategies and marketing efforts. By focusing on unit sales, you can better understand the drivers behind revenue growth and ensure your projections are grounded in realistic sales targets.

Step 2: Understanding Expenses

The next step is to have a thorough understanding of your expenses. It’s essential to project how expenses will grow in relation to revenue. This involves considering both the cost of goods sold (COGS) and operating expenses. For instance, if you’re projecting to sell more units, you need to account for the costs associated with producing or delivering these units.

Operating leverage is a critical concept here. It refers to the extent to which operating costs remain constant as revenue increases. In some cases, certain expenses may not scale linearly with revenue. For example, you might have fixed costs that don’t increase with additional sales, but you will still incur variable costs related to each unit sold. Clearly delineating these expenses helps in creating more credible and realistic projections.

Step 3: Boil Down to Fundamentals

Ultimately, your projections should focus on the fundamentals, particularly profitability. Show how your revenue and expense projections translate into profit over time. This could involve presenting detailed projections quarterly, semi-annually, or annually, depending on the nature of your business and the level of confidence you have in your projections.

Break down the projections to illustrate the journey from revenue to profit. For instance, start with projected revenue, subtract COGS to get the gross profit, and then subtract operating expenses to arrive at EBITDA (earnings before interest, taxes, depreciation, and amortization). This approach provides a clear picture of financial health and profitability, which is crucial for anyone evaluating your business.

Key Tip & Conclusion

Do Not Miss Projections During the Deal

One of the most critical aspects of maintaining credibility during a deal is to meet your projections. Missing projections can significantly undermine confidence and trust. To balance optimism with realism, provide baseline projections that you are confident you can meet, and then offer an upside scenario that shows potential for even better performance if certain conditions are met.

Managing expectations is vital. Overly optimistic projections that you fail to meet can damage your credibility. Conversely, being too conservative may not fully showcase your business’s potential. Present a realistic baseline while highlighting the possible upside, ensuring you maintain credibility and manage expectations appropriately.

Conclusion

Creating solid projections involves a detailed understanding of unit economics, a thorough grasp of expenses, and a focus on profitability. By breaking down revenue into unit sales, accurately projecting expenses, and clearly illustrating profitability, you can develop robust and reliable projections. The key tip to remember is to always meet your projections during the deal process to maintain credibility and trust.