Projections . . .

are management’s best estimates of how its company will progress. The word "projections" is usually used to refer to the financial estimates contained in a business plan. They are where all the narrative analyses and market research of the business plan are translated into language investors understand best - dollars and cents. In a way, they are the heart of the business plan.

Usually, projections are given in substantial detail, in the format of financial statements, and include pro forma cash flow and income statements broken out on a quarterly or monthly basis. Projections usually appear immediately after the company’s historical financial data in the business plan. Most venture capitalists like to see projections carried forward three to five years.

Investors scrutinize projections. If the numbers interest them, they will question management thoroughly about the assumptions underlying the projections. The more rigorous, considered, and realistic the projections, the more likely they are to be achieved, and the more likely they are to withstand an investor’s scrutiny.

Projections provide investors with a basis for determining how much equity they will require in return for funding a company. Projections can also help management of a company estimate a reasonable range of value for their company using a discounted cash flow or market pricing methodology, which are discussed in the Discounted Cash Flow and Pricing entries found in this book.

Unrealistic projections that fail to provide for foreseeable contingencies are not likely to attract funding. If a venture capitalist does offer to fund a company with unrealistic projections, it will usually be at a substantially higher price than management anticipated. By contrast, realistic projections not only help attract funding but also help management to forecast how much equity the company will have to sell to obtain funding.

Some entrepreneurs believe that having a large accounting firm review their projections will help them raise money. The theory is that such projections are more believable and, therefore, more likely to convince prospective investors to invest in the company. The fact, however, is that accountants cannot guarantee the accuracy of the assumptions underlying the projections, and investors know this. As a result, an accountant’s signature near a company’s projections may make an investor more comfortable with the accuracy of the arithmetic in the projections but will not make him more likely to invest. See: Benchmarks, Business Plan Format, Pricing.