inside: a checklist of the five essential elements in projections. a table of basic assumptions. a sample accountants’ report for compilation of a projection.
by ed mendlowitz
77 ways to wow!
a key element of a business plan is the financial projections. basically, these should show how much will be made and how much is needed to accomplish the goals.
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putting these together is a much harder task. the projection period is usually five years, although shorter periods are not so uncommon. to prepare the projections a mindset must be established that puts the preparer five years into the future and has them looking back on the five-year history of what has been done.
this involves a thorough understanding of the business, the underlying assumptions and probable market conditions. business plans are prepared for anyone seeking outside funding. the plan could be prepared for a startup business, for an established business seeking growth or by someone who wants to acquire a business. the targets of the projections are potential investors, bankers and finance companies, and future key staff and personnel. investors and bankers risk their capital; employees risk their career or opportunities.
many times, the people developing the projections are unclear on the aspects of getting started, setting up and operating the business or activity, and the types of exit strategies that lenders and investors look for. the process of preparing the financial projections, especially for a startup business, should provide those answers. for established businesses, the projections bring the business to the next dimension and use the current status as the starting point. it is mandatory for growth to be clearly shown, be identified and be logical.
what needs to be done is for the preparer to pull all the elements together using information provided by the person starting the project with every assumption probed and tested to determine its soundness and the level of consideration put into their determination.
the projections are prepared for three groups – the person attempting to raise the money; the investors’ accountants, sitting somewhere in a back office trying to pick holes in the assumptions in a way that determines how serious the efforts of the principals have been; and the investor seeking to assess the depth of knowledge of the individuals spearheading the project and their ability to achieve the success set forth in the plan.
the investment is a financial one but is based primarily upon the ability of the people seeking the funding and the confidence the investors feel they need in those people. the confidence is not only in the ability, experience and background of the principals, but in their evidencing the desire and drive to see the project through to achievement. the principals also need to know if their proposed project is financially viable, and the level of initial commitment needed to see it through to completion.
often, funding is raised in different stages, with the success of the later stages necessary for an attainment of the “dreams” of the person seeking to raise the capital. for very large undertakings this is normal with failure sometimes only hours away. for smaller deals it is almost mandatory to have full funding lined up with release of the funds automatic as benchmarks are reached. the more the stages, the more precarious the undertaking.
checklist: five essential elements in projections
there are five parts of the projections:
- a statement of operations that will show how successful and profitable the venture will be, and when.
- a statement of cash flows that shows how much cash is needed, and when, and how and when it will be paid back.
- a balance sheet that shows snapshots of the company at various stages of development.
- detailed assumptions describing the basis of how every amount has been determined showing the care that went into it and the limiting conditions, if any.
- the fifth part is the accountant’s report detailing their level of responsibility. generally, the projections will consist of an accountant’s compilation or examination report in accordance with attestation standards established by the american institute of certified public accountants. this is not included where company personnel have prepared the projections.
the end product is some numbers on pieces of paper. however, preparing the projections is an extremely creative process using all the skills of the preparer and principals, and ends up with a document that not only is used to raise funds, but one that will show how the project will be financially achieved, and can serve as a framework for an operating budget once activities commence. an occasional byproduct of the projections is the development or addition of secondary product lines or ways of doing business, and the company’s marketing advantages.
part of the projection process is to determine the best business and tax structure for the company and investors. many businesses seeking funds have various layers of capital and borrowing. accountants can be very helpful in suggesting ways to do this. this usually evolves as the business takes shape through the projections.
starting a business and obtaining funds is a very serious undertaking and needs to be treated as such by advisors and those assisting in the initial stages with the same degree of care and importance as the principals ascribe to it. the process, once started, will take a concentrated effort on everyone’s part and will require numerous and frequent meetings to achieve the intended results and to provide a valuable tool that will be used extensively by the principals and others.
in many instances the principals will only get a single opportunity with an investor to present their case – and the investors need to be provided with the right business plan and projections to show what the principals believe will occur, what they need and what type of company they can build.
when all is said and done, a business plan is a marketing document and needs to capture the small moments that were devoted to its examination with thoroughness, thoughtfulness, imagination, creativity and excitement.
summary of significant assumptions and accounting policies
this is a fourth part of the projected financial statements, and it is essential that the projected accounting policies be stated and which basis the projections have been prepared under. it is mandatory for the underlying assumptions to be clearly presented.
a self-test that should be applied to the assumption to determine if it is clear is whether a reader will need to ask a question about how the amount was obtained and if there could be an issue of the assumption skirting credibility under the context of the projections.
illustration: basic assumptions
an example of the types of information that should be included in the assumptions is shown in the table:
| item | type of details needed |
| sales | the types of customers; the number of customers; the frequency of orders and reorders; the size of each order; the identity (signified by an anonymous id) of the projected four or five largest customers and the aggregate concentration of their business; the reliance on a single customer or group or industry the customer is in; how the customers will use the product; who will maintain the inventory; the potential for style becoming stale; the uniqueness of the product, or the reason the customers will patronize the company; the need for contracts with a customer and their length.
indicate if the business cycle is seasonal and make sure that is provided for in the projections of monthly sales. if seasonal, provide a schedule showing each month’s percentage of the annual sales and use this information in the purchasing, manufacturing and inventory buildup projections. besides providing dollars show the units that will be manufactured, inventoried and sold. provide schedules for growth in units and sales prices. also indicate the geographic area the company will sell in – will they have a local, regional, national or international customer base, and why and what expectations of success does the company have? if not local, what warehousing and distribution facilities will the company have and how will they be staffed and controlled? |
| sales returns, discounts and markdowns | explain what is considered normal in the industry and the potential for these items occurring in the proposed company.
the size and nature and frequency of such reductions in sales and penalties the company will be subject to for late delivery or delivery of defective merchandise. |
| sales costs | indicate what the sales compensation policy will be. explain whether the company will use its own salespeople, independent agents or reps, or will sell direct to the consumer or end user, and to what extent sales will be generated from the web.
if the company will be using salespeople, will advances or minimum income guarantees be provided, and who will bear the costs of selling expenses? also indicate the type and quantity of marketing materials and support that will be provided to the salespeople. |
| facilities | provide details of the type of office, factory and warehouse space that will be needed and the approximate location, and the importance or lack of importance of the location. indicate the estimated square footage, and utilities, maintenance and rent costs.
also provide information as to the availability of suitable, employable personnel in the area. |
| personnel | provide a schedule of the types and numbers of employees, expected duties, salary ranges, and bonus and raise policies; the payroll taxes, insurances and fringe benefits; and whether there will be any worker unions. |
| cash flow from customers | indicate the expected accounts receivable and credit-setting policies. for example, provide estimates of the percentage of the sales that is expected to be collected in the month of sale and each month afterward.
go out as long as possible and be as conservative as possible. collections occurring sooner than projected can only help you, while collections later than projected might be devastating to your cash balances. |
| manufacturing cycle | be very clear of the manufacturing cycle. explain how long it will take to receive raw materials, convert into a completed product, the stages of manufacturing and finishing, the workstations and potential for bottlenecks. |
| raw materials | you need detailed assumptions for every number you enter on the projection.
the more the better, just be clear and concise and don’t ramble. |
accountants’ report letter when a cpa works on the projections
comment: this report letter is a sample that is included for educational purposes and likely will not be the prescribed report that should be included with the projections at the time the projections are prepared. further, the language of these reports is continually revised and changed.
the cpa issuing the report is responsible for including the current report as of the date they issue their report.
accountants’ report – compilation of a projection
to intended management of projected startup company:
we have compiled the accompanying projected balance sheets, statements of income, and cash flows of projected startup company as of end of startup period and each 12-month period through month 60, and for the period and years then ending, based on management’s assumptions described in note 1, in accordance with statements on standards for accounting and review services promulgated by the accounting and review services committee of the aicpa. we did not examine or review the pro forma financial information nor were we required to perform any procedures to verify the accuracy or completeness of the information provided by management. accordingly, we do not express an opinion, a conclusion, nor provide any form of assurance on the projected financial information or any evaluation of the support for the assumptions underlying the projection.
furthermore, even if the proposed financing is obtained and the business commences operations during the time frames indicated, there will usually be differences between the projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. we have no responsibility to update this report for events and circumstances occurring after the date of this report.
the accompanying projection was prepared for the purpose of management obtaining financing in connection with a proposed business startup and is part of, and should be included in, a comprehensive business plan, and is intended solely for the information and use of those obtaining from management the comprehensive business plan and who signed a letter of confidentiality and these statements are not intended to be used and should not be used by anyone other than these specific parties.
cpa firm signature
city and state of cpa firm
date of report