The number one mistake that entrepreneurs make when preparing their financial projections is that they overestimate their earning potential and they underestimate their expenses. This error is a leading reason why businesses fail. When starting your business, you do so with great excitement and anticipation. Friends and family have likely been encouraging you and you are 100% sure that your business will succeed. Hopefully, it will but history shows there is an equal chance that it won’t. Often that is because a business does not generate sufficient revenue to cover its expenses. If there is one thing you can be assured of in business, it is that something unexpected will happen.
Accurate projections also demonstrate to your lender that you have taken the time to research expenses and that you have carefully calculated the business’ earning potential. It is likely that your lender has worked with a similar business before and they will be looking for certain things. A retail store should be anticipating decreased sales after the holiday season and a childcare center that provides transportation to and from schools’ better factor in the various costs associated with a fleet of vans/buses.
When working on your projections, be honest. Your passion will help you sustain your business when faced with challenges but it should play no role when determining whether you can generate enough money to pay the bills and keep the lights tuned on. You need to stick to the facts and the truth.