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.