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How many years do you include in a financial projection?

We are debating if with our CFO if it would make sense to do a 3-year projection or to go as far as 5 years. From your experience, what would you say it makes sense to include if we are looking to raise a Seed round of financing?

23 Replies

Wade Eyerly
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Wade Eyerly Entrepreneur
CEO, co-founder at Beacon
3 is plenty. Everyone can drag an excel column to the right. The numbers, at this phase, are more art than science - and everyone knows it. So - it's more about showing that you've thought through how the company will make money some day - rather than what the numbers actually are. There's not an investor alive who is going to look at your projections in month 40 and question something. :) Wall Street spends a lot of money trying to predict tomorrow, with mixed results. You probably won't be better and you're projecting a lot of tomorrow's away.
Ayelet Hirshfeld, Ph.D.
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Co-Founder & CEO Capsoole Inc.; Dr. Hirshfeld; Advisor @ Earn2Learn
between 3&5 you must outline the first 6, 12 & 18 months in detail the rest is projection based [image: Capsoole] *Ayelet Hirshfeld*, PhD - CEO & Co-Founder @AyeletHirshfeld | [removed to protect privacy] http://www.capsoole.com/
Stephen Mitchell
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Stephen Mitchell Entrepreneur
Owner, MLogiq
Hi! Yes, 3 years is well more than enough. It's a catch 22 - even 3 years, we all know is pie-in-the-sky forecasting, but 1 year is simply not good enough.

Paperwork is one thing - speak to your ability to pivot, your expectations that things will change but that your core is ready to adapt and prosper. 3 years is good. :)
Sal A. Magnone
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Sal A. Magnone Entrepreneur
Co Founder, Chief Architect at Angry Robot Labs, LLC.
I agree with Ayelet Hirshfeld. The most important thing for good and likely (as opposed to typical and just curious, whom you'll meet allot of) investors is that you thought it out in detail and can back up your projections. The accuracy is actually less important. That'll go to pot many times before you succeed. Don't fudge it! Just be able to explain the details well and make sure they jive with your overall story.
Irwin Stein
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Irwin Stein Advisor
Very experienced (40 years) corporate,securities and real estate attorney.
3 years is fine but projections must be reasonable and supported. Best to have a good idea of your actual expenses and how much revenue you will need to break even. It tells investors that you have your eyes on keeping the doors open. They already know that you are trying to hit a home run.
Mike Adhikari, MBA, CM&AA
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M&A, Valuation and Business Valuation Software
I suggest 5. Marginal effort to do 5 is small. 5is definitely important if first year of revenue is out in the future. You do not have to present 5; you can choose to keep it simple and present 3. If they do ask, just in case, you can say ...Yes, we have 5 years. All you are doing is closing an escape hatch.
Vanessa Kruze, CPA
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Vanessa Kruze, CPA Entrepreneur
Startup CFO Consultant
Here are some common points that you'll want to include in your financial model:

  • 3 Years of Projections.Occasionally investors will ask for more/less, but start with 3 years. I personally believe that 5 years is way too much / overkill / pointless; but if your investor wants it, then yes, you should do it.
  • 3 Statement Model.Include a Profit & Loss Statement, Balance Sheet, and Statement of Cash Flows. Each should balance and tie back to each other (this gets tricky).
  • Your KPI's should be your Drivers.Every company has a dashboard of metrics that they track growth and success by. A few examples include number of users, customers, margin, customer acquisition cost, Twitter followers, website traffic, etc. Look to the past and show that there is a correlation between X (could be # of Sales Reps) and Y (could be your revenue), then use this as a driver towards the future projections.
  • Churn. Customers will leave. Account for this.
  • Waterfalls.Your financial model should be dynamic. Waterfalls show how you actually performed against your projection and then resets the future accordingly.
Don't show an investor a financial model that shows smooth growth "up and to the right." No company's growth is without bumps. These models take a lot of time to build and are highly personalized, so it really is best to consult with a professional. If you're planning on raising $3M+ you should come prepared with a well thought out financial model.
Stephen Mitchell
1
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Stephen Mitchell Entrepreneur
Owner, MLogiq
Almost more important is the Use of Funds doc - ensure that the investment is clearly directed to understandable and achievable goals.
Mitchell Bolnick
1
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Business Mentor, Adviser, Consultant for Start-ups, Small Businesses, Growing Businesses
If you are looking for financing ultimately the source will tell you what they want. I work with my clients on detailed 3 year projections by month that then can easily be extrapolated if someone wants to see 5 years. Typically, but not always, banks want to see 5 years. The 4th and 5th year can be done quarterly or even annually instead of monthly. Most valuation models discount years 4 & 5 so much that adding them does not add a great amount to the valuation. But if you can prove a true hockey stick in those years, it may mean giving up less equity than you may otherwise have to. Many suggest only detailing year 1 monthly, I disagree. The key to people buying off on your projections will be your assumptions and use of constraints in modeling. If you only show detailed assumptions for a single year, and then extrapolate or use some simple inflation factor the risk of the projections increases greatly in my opinion. Therefore, investors are going to place a higher capitalization rate on the valuation and it will mean you give up more equity than you may otherwise have to. I can help if you are interested. I charge $300 to review existing financials if they exist, and then I will sit down with you and discuss what is missing and how to make the projections as risk free as possible. If not, or if what you have is insufficient, I have a process that I walk clients through that costs them between $1500-$2000 if starting from scratch. Less depending on how good what you already have really is. My service includes a complete valuation model, internal rate of return (investors want to know that) and determination of real upfront and
Chuck Bartok
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0
Chuck Bartok Entrepreneur
Marketing and Sales Manager at MD Building Systems of Florida, Inc
For whom are your writing the Plan?
We have always focused in great detail the first 18 months with emphasis on expenditures in detail (weighted a bit heavy) and income from researched sources (weighted lightly), then throw in the reasonable growth out the next 18 months.
We never borrow, so all Cash Flow Projections are for our personal Plans of Action and roadmaps to over 5 decades of success.
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