In running a site that gets people funded, I get a lot of questions from people about how to forecast the finances of a startup company. 

Many people think there is some secret formula that seasoned entrepreneurs use and VC's require that make your forecasts completely reasonable and reliable.

There isn't.  Entrepreneurs, even the seasoned ones, basically take a stab in the dark at forecasting and hope like hell it's accurate.

Of course over time you get a little more accurate.  With Go BIG, this is my ninth startup, and I'm proud to say we've been hitting our revenue targets consistently over the last 18 months with an eerie amount of accuracy.  But there are a few reasons for this, and here are some that might help you:

Forecast Low

If there is an Eternal Rule of Startup Forecasting, it's that revenues will come in lower than you expect and expenses will be higher.  While that's not real shocking, I'm constantly amazed at how often we neglect this fact.

I'm a big fan of forecasting revenues as conservative as possible and expenses as high as possible.  This makes sure you don't start spending "right on budget" while you're earning revenue at a much-reduced rate.  This is the most common downfall of startup finance management. 

Most likely your forecast is going to show a deficit with this strategy, and that's OK.  A deficit forces you to constantly watch how much you can save and push harder to get a sale closed on time.  A profit is a cushion that encourages a pat on the back instead of a kick in the butt.

Use Trends Sparingly

So it cost you $10 in Adwords marketing to earn your first $20 in revenue - woo-hoo!  You've got some sweet operating margins my friend.  Yet if you think you're going to be able to extrapolate that trend out to your next $20 million in revenues you're nuts. 

Over time the cost to acquire a paying customer, the cost to service customers, and the cost to operate the business will invariably go up over time, all things being equal.  Your current trends may buy you some visibility into the next quarter or so, but be very careful about how you project them much further.

To that end, I recommend you "trend your trends."  Assume that if it costs $10 to acquire a customer today, that next quarter it will likely cost $12, and the quarter after it will cost $14.  The face of the business will change SO much in the next year that you'll have to constantly update the numbers.

Update Daily

Which brings me to my next point.  At Go BIG we track our finances down to the penny on a daily basis and adjust as we go.  I'm not suggesting your business needs this level of detail, but the point of changing your numbers as you go is critical.

What your forecast should be is a scorecard that includes a number of critical variables that will inevitably change as you go.  There's no way you can know exactly how much money you'll make 9 months from now.  But you can know exactly what your variables (cost of acquisition, average customer sale, etc.) need to be in order to hit those numbers. 

That way, as your trends change, you should be changing your variables accordingly until you start to see some consistent patterns emerge.  With more data you can start to map out a longer-term plan.  Until then, you're just guessing, testing, and guessing some more.

And that's how startup forecasting really works!