How to Create Financial Projections for your Business
“Failing to plan is planning to fail.” ~ Benjamin Franklin
Any small business owner understands the importance of financial projections to guide their business strategy.
How can you get started with creating your financial projections?
You can choose to use accounting software to create charts, manipulate figures and give you raw data. This information forms a great foundation, though you must know how to understand the data and create projections that will guide your decision-making.
This is what you need to effectively create financial projections: –
1. Three Financial Statements
a. Balance Sheet – Use your assets, liabilities, and equity to predict where you will be in the future
b. Income Statement – Predict your net income after subtracting the cost of goods sold, expenses, and taxes.
c. Cash Flow Statement – Project your cash-related activities based on the balance sheet and income statement.
If you are using accounting software, you can automatically generate projections of these statements based on historical information.
2. Sales Projections
Review your past sales performance using the financial statements. Specifically, take note of any outside factors such as economic changes, or extra tariffs that may have affected your bottom line. These are factors that alter your costs, thus affecting profits. Use this information to create projections that are realistic and applicable.
3. Expense Projections
Look back at your expenses, both fixed and variable. Your fixed expenses are easy to project, and your variable expenses may increase based on customer patterns and growth. When you come up with a figure, add 20% to that projection to cater for potential unexpected expenses that may impact your cash flow.
Financial projections should fall into two categories – short-term and long-term. Short-term are projections that cover a 12 month period and are broken down into monthly milestones. Long-term projections cover 3 – 5 years and explore bold, strategic goals.
When creating your financial projections, explore the best-case scenario, and the worst-case scenario. With this approach, you think through how you would handle both situations so that you do not get caught off guard financially. For many businesses, it is easy to project the worst-case scenario and predict a crisis response. However, you should also have a plan in place for a sudden increase in revenue to ensure there is no misuse of funds.
Work with a qualified CPA when creating your financial projections. This will ensure that you have a projection that can be presented and explained to an investor if necessary. As you move forward, you can compare your projections against real results to confirm whether you are on target. Find out how to get started by booking a discovery call with RCN CPAs & Business Advisors.
