I remember being around 7 or 8 when my parents would ask, “What do you want to be when you grow up?” I’d say, “Batman.” (Spoiler: I didnโt become Batman, nor did I save Gotham.)
This instance is relevant to todayโs discussion. (Besides, it gave you a chuckle. ๐คญ)
Why long-term financial projections may not work for startups?
When I was a child and my folks asked me what Iโd do in 15 years, I didnโt know the answer.
But, when they asked the same question after I finished high schoolโit was pretty clear that Iโd build software, software that makes human lives easier.
You might wonder, how is this relevant? ๐ฅฑ
Thereโs a fine line between predictions and guesswork. Cross it, and your well-thought-out predictions become wild guesses.
Thatโs what happens when you foresee your future too far beyondโyou see nothing but some blurry visuals.
Why I prefer 3-year financial projections over 5, 7, or 10-years
When I say I prefer 3-year financial projections, Iโm specifically referring to startups.
As your business grows, you can extend your projections to 5, 7, or even 10 years, depending on your industry dynamics and investor expectations.
1. Startups are unpredictable.ย
Unlike established companies with years of historical data, startups often operate on assumptions.ย
Predicting revenue or expenses five years down the line can feel like looking into a crystal ball.ย
What if your business pivots? What if an unexpected market trend changes everything?ย
Startups thrive on adaptability, and rigid long-term projections can restrict that flexibility.
2. Long-term projections are all guesswork.
While short-term projections are typically built on measurable data (like customer acquisition costs or unit economics), long-term forecasts lean heavily on assumptions.
The farther out you go, the more those assumptions compound, turning educated predictions into wild guesses.
And I donโt call making decisions based on guesswork a great strategy, will you?
3. Investors care about the exit.
Sure, investors might look at your 10-year plan, but what they really care about is how you can give them a good exitโyour ability to deliver in the next 12 to 36 months.
They want to see how youโll acquire customers, manage costs, and achieve profitability sooner rather than later.ย
So, instead of spending hours fine-tuning distant numbers, focus on showing achievable goals and how you plan to hit them.
4. Agility beats overplanning.
Startups need to pivot quickly in response to market feedback or unexpected challenges.ย
Sticking to a long-term financial plan can lead to decision paralysis or force you into strategies that no longer align with your business reality.
Instead, opt for rolling projectionsโadjust your forecasts every quarter or year as new data comes in. This keeps your plans relevant and actionable.
5. A long-term vision is all you need.
Investors want to see a clear vision for the future, but that doesnโt mean you need to map out every dollar and cent for the next decade.ย
Itโs okay to have a broad, flexible plan instead of a detailed roadmap for 2034.
Now, how do you do that? Create 3-year projections.
The tools to help you get the job done are countless. You can even use ChatGPT. However, Iโd say give Upmetrics a try.
I remember sending out a newsletter teaching financial forecasting in 10 minutes. It explains how you can use Upmetrics to create accurate forecasts with its AI assistance. Feel free to have a look.
To conclude, Iโm not against the idea of a long-term vision, but overplanning. The best business strategy focuses on building flexible and adaptable startups.
Have a long-term vision and know when to pivotโyouโll do great.
See you until the next time,
Happy business planning.
