Financial projections are the cornerstone of any solid business plan. Whether you are developing a new strategy for your financial planning, trying to obtain investment, or attract investors, forecasting future revenue is crucial to any business owner. This is why we've compiled this short guide to financial projection, why it is important, and how to develop your own projections.
Financial projections - explained
Financial projection describes a forecast that looks at income and expenses. To create financial projections, both historical data and predictions are taken into account. When creating financial projections, you can look at different time periods and create short-term, medium-term, and long-term forecasts. A short-term projection tends to be a financial forecast for the first year of your company's running, long-term projections normally look at a period of three to five years.
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What is the advantage of financial projections for my business?
- They help you understand your business's area of strength and any areas that need improvement
- They help establish a route for growth in your business
- They inform long-term strategies for your business and business financing
- They help you understand the state your business is in
- They help you translate strategic goals into defined targets
- They can be used to attract investors and apply for a bank loan
How to get started - making financial projections for small business
As a starting point, make sure to have the key documents you need: financial statements required include a balance sheet, an income sheet and a cash flow statement.
There are a number of steps to creating financial projections:
Sales projection
A sales projection projects an estimate of future sales your company is likely to generate. This sales forecast should consider external factors, such as the state of the economy. Also, consider the projected cost of sales to arrive at the gross margin.
Expense projection
An expense projection estimates possible expenses, including both fixed costs (eg rent of your store) and recurring costs (eg utilities). Also, consider one-off expenses (eg repair costs).
Balance sheet projection
When developing a balance sheet projection, you look at the projected financial status of your business, considering assets, liabilities, and equity balances. It is advisable to consult your existing balance sheet to determine your business's.
Income statement projection
An income statement projection estimates the net income of your business in the future. To arrive at this figure, you look at the sales projection to work out your gross margin (Sales minus Cost of Sales), and then use the gross margin to work out net income (Gross Margin minus Expenses minus Interest minus Taxes).
Cash flow projection
In the last step, develop cash flow projections. Cash flow forecasting is done based on your current cash flow statement. Break the cash flow projection up into relatively short periods to see fluctuations in cash flow.
Financial projections are a crucial source of information for your business plan and improve your company's long-term financial health. If you do not have a lot of time to spare, you can use templates to create your financial projections. You can find a number of different templates online. Also, accounting software could help produce more accurate data.