There are some mistakes that entrepreneurs make when they project the future of their company with financial outlook. These types of mistakes can create confusion and mislead investors but worst of all they can delude the entrepreneurs themselves.
There are many things the top leadership of a company have to do when a new year begins and one of the major things is to plan for the year ahead. This includes creating financial projections for the year. Also known as ‘outlook’, these financial projections set the tone for what investors will expect from the company during the year.While projections made early may not be very accurate they can help the company understand itself better and pave the way towards success. However there are some mistakes that entrepreneurs make when they project the future of their company with financial outlook. These types of mistakes can create confusion and mislead investors but worst of all they can delude the entrepreneurs themselves from accepting the truth when they see it.Here is a compilation of the common mistakes an entrepreneur or company leader could make when preparing financial projections.
1. Listing Deferred Revenue
Deferred revenue is a liability. It refers to money that is received by the company for services or goods that haven’t yet been delivered. While deferred revenue is an important figure, by not being clear about it the company can make it confusing for an investor.
2. Listing one-time Revenue
Companies sometimes get sponsorships, or make a lump sum of money from other activities that are undertaken. For example start-ups can have events to raise funds. These types of one revenue sources have to be mentioned clearly in the records to prevent misleading investors into thinking they are a recurring revenue source.
3. Listing Booked Revenue
This is the opposite of deferred revenue since it is the revenue that is counted while the company has not been paid for it yet. This usually happens when there is pre-sale of a product that hasn’t been launched yet. By listing this separately, investors can be alerted of the fact that while it is ‘booked revenue’ it hasn’t been collected yet.
4. Keep an eye on Cash Flow
It is very essential that company executives have an eye on the cash flow. While it can be easy to disregard the cash flow amid the other numbers floating around, it still remains very important to do so.
5. Are expenses going overboard?
For a start-up most expenses can seem like an investment in the company’s long term future. However it is important to remember that expensive perks and staff expenses for activities not relating to work can quickly burn a hole in the company’s financials. While activities and perks can be great morale boosters for the staff, they should not be the reason the company’s financials are heading downstream. Ensure all expenses are appropriate for the company’s growth stage and its financial position at the time.
6. Don’t assume anything you aren’t sure about
Make assumptions based on industry research and averages but be prepared for them to be wrong. Ensure the numbers you project are not figures you made up but outlook you derived from credible sources. While it is easy to assume things will go as planned, you have to be ready to face any kind of eventuality that may arise. If you are a start-up company then you must just stop with a plan B for an issue or situation but should also be equipped with plan C and D.
7. Understand the different business costs you incur
Knowing all about the direct and indirect costs incurred in relation to buying materials, providing services and all other business related costs are very important and should be included when making your projections.
8. Bad debts
Unfortunately bad debts are not something you can avoid. While you can work towards reducing bad debts they are likely to happen. Bad debts can dent your financial position so it is important to be on top of them.
If you have any loans, then your predictions should include any loan payments you have to make in the future.
Companies sometimes forget to include taxes in their future expense predictions. Taxes can be a big expense they should be reported and planning should be made for tax payments.
11. Margin for error
This is especially important for start-ups since things can go either way depending on market circumstances or the general economic weather at the time. Hence it is important to have some room for errors that you could have made either in revenues or expenses. Projections can be wrong but having a margin for error makes the company more prepared.
12. Founder’s salary
Don’t forget to include the salary of the CEO or founder while making financial predictions. While some start-up founders may work without a salary, remember that it is more likely to feel negative about a bad situation when you aren’t getting paid yourself. Also, free work is not sustainable in the long run.