Projection direction: Build bottom-up, check top-down.

Before you can select snapshots of financials to include in your pitch, you’ll need to build your financial model—typically in MS Excel. If you don’t have expertise in finance, accounting and Excel, you should probably get help from someone who does, preferably someone with experience building projections for startups.[1] Whether you build the model or get help, be sure to follow this simple rule: Build from the bottom up, and validate from the top down.

Building from the bottom up means starting with the details of each item, and extrapolating from there. Top down means looking at the overall market, and makes assumptions about how your company will fit in. For example, let’s say you are projecting sales for a Widget company (“Widget Co.”). Start with a bottom-up calculation, like this:

BOTTOM UP CALCULATION: WIDGET CO. SALES REVENUE, JANUARY 2011

Number of sales reps	5
Sales calls per rep	40 per day * 5 days/week * 4 weeks = 800 calls per month
Percent of calls that generate sales	15%
# of sales closed per month	120
Average product price	$100
Average # products sold per transaction	5
Average transaction size	$500
Sales revenue /  month	120 transactions * $500 per sale =   $60,000

Then make sure your numbers are realistic by doing a calculation like this, and considering whether a 2% market share is realistic at that point in time:

 

TOP DOWN CALCULATION: WIDGET CO SALES REVENUE, JANUARY 20011

Sales revenue for entire market, per year	$36,000,000
Projected market share for Widget Co.	2%
Projected sales for Widget Co.	$720,000 per year / 12 = $60,000 per month

 

Turning to the example of marketing expenses, start with a bottom-up calculation like this:

 

BOTTOM-UP CALCULATION: WIDGET CO. MARKETING EXPENSE, JANUARY 20011

Cost of leads per month	$12 per online lead * 800 leads = $9,600
Brochure cost per month	800 sales calls * 1 brochure to each prospect * $2 per brochure = $1,600 per month
Cost of industry events per month	2 events attended per month * $1,500 per event = $3,000 per month
Marketing expense / month	$9,600 + $1,600 + $3,000 = $14,200

 

Then give your numbers a reality check with a top-down calculation like this:

 

TOP-DOWN CALCULATION: WIDGET CO MARKETING EXPENSE, JANUARY 20011

Marketing costs as a percentage of sales, based on industry standards	23.4%
Sales per month	$60,000
Marketing expense / month	23% * $60,000 = $14,040

 

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[1] Many entrepreneurs without financial backgrounds get help from investment bankers. Sometimes these bankers create models so complicated that the entrepreneurs never truly understand how they function, and have trouble explaining them to investors and modifying them.