Best Practices for Creating a Projection Model

Every business is unique and requires a different projection model; however, there are a few rules that apply to every projection model:

Number 1: The projection model should be a realistic representation of how you believe the business will perform over the next 3-5 years.  Don’t show hockey stick growth because you think that’s what investors want to see.  Show what you will actually be able to do.

Number 2: You should be able to defend every assumption in the model.  Don’t be surprised if you are asked about assumptions during an investor meeting.

Number 3: You should have a detailed revenue build that shows your assumptions for revenue growth, including pricing, # of customers, retention, etc.

Number 4: You should include a detailed headcount buildout (by department at the very least).

Number 5: Use a bottoms-up approach to projecting expenses to make sure you accurately capture all your business expenses.

Number 6: Don’t agonize over trivial assumptions.  Plug in a defensible assumption and move on.

Number 7: Forecast your actual cash needs by creating a full income statement, balance sheet and cash flow statement.  Don’t forget that working capital can have a big impact on your cash needs.

Number 8: When your building a projection model, keep it as simple and easy to follow as possible.  You don’t want to spend a ton of time explaining how to follow the model to investors.

Number 9: Create summary charts that show the high-level financial statements.

Number 10: Add in a cushion.  Things happen, revenue takes longer to come on, you need more people than you think you will. Give yourself some breathing room for the unexpected.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *