August 23, 2022
The most common question I receive from ProjectionHub customers is “do my projections look realistic to you?” I am always happy to provide feedback, but I wanted to share my approach with you as well so that you can determine whether your projections are realistic or not. My approach differs between tech startups where the range of outcomes can vary dramatically compared to small businesses in stable industries with lots of industry data available. Here are 5 things that I will look at to determine whether a set of projections could be realistic or not.
Compare Projected Profit Margins to Industry Average
If you are using one of our financial projection spreadsheets, then I would go to the At a Glance tab and look at the Profit and Loss at a Glance table and look at the Net Income as a percentage of revenue, also known as the profit margin.
If for example the particular set of projections I am looking at is for a fast casual restaurant and I see a 60% profit margin I would know the projections are unrealistic because a simple Google search will show us that the average profit margin for a fast casual restaurant is 6 to 9%.
Review Cost of Goods Sold and Operating Expense Ratios
I follow a similar approach to review the Cost of Goods Sold and Operating Expense ratios. Just Google “what is the typical cost of goods sold as a percentage of sales for industry xyz” and you will likely find a range that you can compare to your projected cost of goods sold percentage. Some industries do have very high gross profit margins, coffee shop gross profit margins can be as high 90%, so it is not an automatic red flag if you are projecting high gross profit margins, it is the high net profit margins that are often a red flag.
Compare Projected Revenue to Actual Data
Next, I like to look at the total projected revenue over the 5 years and make sure that those revenue projections seem reasonable. You can try to Google things like:
- How much does the average trucking company with one truck make?
- How much can a dispensary make per year?
- How much revenue does the average vet clinic generate?
You might find that someone provided a great detailed blog post to answer your question. If you can’t find a good source I have a couple more suggestions.
- For small businesses in stable industries you can purchase an Industry Financial Peformance report from Bizminer and you will get detailed financial data from actual businesses in your industry in your geographic area that you can compare to.
- For tech startups we partnered with StarterStory to analyze actual revenue data from 234 tech companies. You can compare your projections by stage of your business to these companies.
Check Projected Revenue per Employee
Another quick check that can help you identify unrealistic projections is if your revenue per employee is outside of the norm. We studied 234 tech startups to find typical revenue per employee data that you can quickly compare against.
How do Projections Compare to Other Startups in a Similar Stage?
We studied 107 tech startups to see what they were forecasting for revenue broken down by business type and stage of business. Part of what makes your projections realistic is simply the fact that your projections are within the range of what other similar businesses are also projecting. Read the full study here (2022 Tech Startup Financial Projection Report)
Does the Balance Sheet Balance?
If everything is looking good so far, then I just check a couple more simple things. Does the balance sheet actually balance?
Check out our free balance sheet template if you are having trouble getting your balance sheet to balance.
Does the Cash Balance Remain Positive?
Finally, I check to make sure that your cash balance never drops below $0.
If you can pass all of these tests, then there is a good chance that your financial projections are realistic, or at the very least, should pass the scrutiny of a potential lender or investor.
If you would like me to review your financial projections for free, just fill out this Projection Review Form and I will provide feedback ASAP.