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How can I calculate my yearly projection?

Guest Writer
Head of Financial Partnerships, Xero Americas
min read
Opinions expressed by Entrepreneur contributors are their own.
Building a financial model for a business that doesn't currently exist is always tricky. With that in mind, it is important not to get too bogged down on the specific revenue or expense numbers but rather to focus on the general trends of your financial model.

In your question, you asked how to calculate the third and fifth year projections of a new business. This is a difficult question to answer without having more details about the business, industry and financial specifics. However, below I will go through the steps you should consider when building a financial model which I hope will be helpful.

The first step is to highlight all of the specific drivers of revenue growth in your model so that you will be able to measure your progress in reaching your milestones for each growth initiative. Don't be afraid to include more than one driver of growth in year five of the business than the first year as the business will be more mature then and there will likely be more revenue opportunities too.

You can also incorporate relative analysis when building a model by comparing the company revenue growth rate each year to that of other similar company rates.

Let's move to the expense side of running a business. As a side note, this happens to be an area that entrepreneurs usually underestimate and is the common cause for a cash crunch later on down the line.

Your first step is to list as many expenses that you can think of on a plain sheet of paper. Think long and hard on this and do some research because there may be expenses that are not coming to your mind at first. Also, speak with other entrepreneurs in the industry as they will likely fill in any gaps you might be missing on your list.

Once your expense list is complete, incorporate it in the financial model. Keep in mind that as you grow, your expenses will also likely increase so you will want to model operating expenses such as employee headcount, office space, administrative fees and anything else that goes into your business.

In addition, it is often helpful to incorporate some scenario analysis in your model (i.e. worst-case, base-case, expected). For instance, if you were estimating the fuel costs for the company's construction vehicles on a yearly basis, a scenario analysis would entail modeling gas prices at current levels, higher levels and lower levels. It doesn't have to be exact as no one can predict the future, but you should be thinking about different scenarios to better prepare yourself for the future.

Good luck and let us know how it all turns out.

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