Continuing the post from earlier in the week titled Startup Financial Models after Product/Market Fit, I wanted to talk a bit more about financial projections. Too often an entrepreneur asks for feedback on their executive summary, slide deck, and financial model only to have the financial model show a top-down projection. A bottom-up projection is a much better way to do it. Let’s look at a few details:
- A top-down projection is often something like “we’ll sell $500k the first year, $3 million the second year, and $10 million the third year” without detailing what it takes to actually achieve those results
- A bottom-up projection details the tactical items like number of sales reps, sales rep quota, hiring plan, percent of sales reps that won’t work out, ramp up times for sales reps, ad spend per rep or per new client, etc
- A bottom-up projection more accurately outlines the assumptions and thought process of the entrepreneur, which then allows advisors or investors to offer more valuable feedback
- A bottom-up projection helps the entrepreneur better budget for the startup and it often shows it’s more expensive than expected to reach the goals
My recommendation is to do bottom-up financial projections to better understand the business and what it takes to be successful.
What else? What other ideas do you have about financial projections?