How do you balance enthusiasm and realism in your financial projections?

Financial projections are a crucial part of any venture capital pitch. They show how you plan to grow your business, generate revenue, and achieve profitability. However, they also pose a challenge: how do you balance enthusiasm and realism in your financial projections? How do you avoid being too optimistic or too pessimistic? How do you convince investors that your numbers are credible and achievable? In this article, we will explore some tips and best practices to help you create financial projections that are both realistic and compelling.

1 Know your market

The first step to creating realistic financial projections is to understand your market size, growth, and dynamics. You need to research your target customers, competitors, and industry trends. You also need to validate your assumptions and hypotheses with data and feedback. This will help you estimate your market share, customer acquisition cost, pricing, and revenue streams. It will also help you avoid unrealistic claims or projections that are not supported by evidence.

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R. Adam Smith

Expert in family enterprise, alts, M&A | LinkedIn Top Voice | single family office| Family Business Audiocast | RAS Capital Partners | Salomon Brothers | Columbia Business School | 10x BOD | led $1B directs | Author
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Gather a small circle of trusted advisors in the space. Poll them through the process on key factors. Apply learnings adding to personal viewpoint. Stay open minded.

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Charles Follini

Teaching How to DIY Your Wealth 💸 | Professor of Real Estate | Alternative Investment Expert | Financial Literacy Educator | Board Member | The #1 newsletter in Personal Wealth | Public Speaker | Proud Dad
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Hello Linkedin Community! Excited to share on "Balancing Enthusiasm & Realism in Financial Projections"! 1. **Use Data:** Ground projections in past data and trends. 2. **Market Potential:** Understand its scope to drive growth. 3. **Scenario Plan:** Have base, pessimistic, and optimistic cases. 4. **Seek Feedback:** Engage peers for diverse perspectives. 5. **Stay Agile:** Adjust projections as new data emerges. 6. **Clear Assumptions:** Ensure transparency in all forecasts. Balancing enthusiasm with realism isn’t opposing; it's harmonious. With data, agility, and feedback, we can forecast with both vision and grounding. #FinancialForecasting #BusinessGrowth

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Eliyahu Rapaport

CEO – Global Construction Tech. | Solving the Industry’s Most Pressing Problems.
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When assessing projections you need to have a clear understanding of your: Total Addressable Market (TAM) - this is where you can be as optimistic as you would like. Dream big, very big. Serviceable Addressable Market (SAM) - this is where you get very realistic and targeted on exactly who you will realistically be able to service on the next 5 years. This should be data driven preferably based on real examples of competitors or complimentary services with parallel similarity. Serviceable Obtainable Market (SOM) - this is where you get somewhat skeptic with very little room for projection. You should be basing your projection based on your pipeline, real time customer feedback and financial runway etc.

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2 Use scenarios and ranges

The second step to creating realistic financial projections is to use scenarios and ranges. You need to acknowledge the uncertainty and risk involved in your business model and plan for different outcomes. You can use scenarios to show how your financial performance will vary depending on different factors, such as market conditions, customer behavior, or product development. You can also use ranges to show the minimum, expected, and maximum values for your key metrics, such as revenue, expenses, or cash flow. This will help you demonstrate your flexibility and adaptability to changing circumstances.

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Tin Wei, Hong

Dad | Sustainability Advisory | Founder | ISO 14064 | CFA ESG Investment | MEcons
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Agreed. Scenario analysis allows a company to think structurally along the lines of their risk and opportunities. The impact (financial and non-financial impact) that those risk and opportunities have on the company, environment as well as the social space. Quantify the impact of risks and opportunities is important but unfortunately is not being done enough. This results in usually very qualitative description for the forward looking statement that may not be fully right-size or right-phrased for the occasion.

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3 Be conservative and transparent

The third step to creating realistic financial projections is to be conservative and transparent. You need to avoid overestimating your growth potential or underestimating your costs and challenges. You also need to be transparent about your assumptions, sources, and methods. You need to explain how you derived your numbers, what factors influenced them, and what risks and opportunities they entail. This will help you build trust and credibility with your investors and show that you have a realistic and prudent approach to your business.

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4 Align with your milestones and strategy

The fourth step to creating realistic financial projections is to align them with your milestones and strategy. You need to show how your financial projections relate to your product roadmap, marketing plan, hiring plan, and other strategic objectives. You also need to show how your financial projections support your funding needs and valuation expectations. You need to explain how much capital you are raising, how you will use it, and how it will help you achieve your milestones and grow your business.

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Kevin Moore

Guiding Founders To The Top | Founder and Managing Partner at Serac Ventures
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Financial projections are derived from thoughtful analysis of the market you are targeting. For pre-revenue companies it's helpful to calculate the total addressable market (TAM) and the serviceable addressable market (SAM). SAM is always smaller than TAM. These types of analyses will help you and your investors understand if the market is large enough to consider pursuing. What the analysis doesn't do is provide sufficient insight into "how" you plan to capture market share. Personally, I'm always more interested in the "how" than the "what."

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5 Get feedback and revise

The fifth step to creating realistic financial projections is to get feedback and revise. You need to test and validate your financial projections with different stakeholders, such as customers, mentors, advisors, or peers. You also need to update and revise your financial projections as you learn more about your market, product, and customers. You need to incorporate new data, insights, and feedback into your financial projections and adjust them accordingly. This will help you improve the accuracy and relevance of your financial projections and show that you are learning and iterating.

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6 Present with confidence and clarity

The sixth and final step to creating realistic financial projections is to present them with confidence and clarity. You need to communicate your financial projections in a clear and concise way that highlights your value proposition, competitive advantage, and growth potential. You also need to anticipate and address potential questions, objections, or concerns from your investors. You need to show that you are confident and enthusiastic about your financial projections, but also realistic and humble. This will help you persuade and impress your investors and increase your chances of getting funded.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How do you balance enthusiasm and realism in your financial projections?

1

2

3

4

5

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1 Know your market

2 Use scenarios and ranges

3 Be conservative and transparent

4 Align with your milestones and strategy

5 Get feedback and revise

6 Present with confidence and clarity

7 Here’s what else to consider

Venture Capital

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How do you balance enthusiasm and realism in your financial projections?

1

2

3

4

5

6

7

1 Know your market

2 Use scenarios and ranges

3 Be conservative and transparent

4 Align with your milestones and strategy

5 Get feedback and revise

6 Present with confidence and clarity

7 Here’s what else to consider

Venture Capital

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