Financial projections are a critical aspect of business management regardless of the size of the business. A financial projection serves to plan for the near and distant future. Businesses base their projections on previous financial statements to forecast incoming revenue and typical expenses. This enables companies to form a strategy. It’s about more than surviving; it’s about planning for growth and innovation. It’s critical to know how to make financial projections for a business, regardless of its size.
Why Make Financial Projections?
There are a myriad of reasons to make financial projections. Often these projections are a means to attract investors and secure loans. Even when a business isn’t operational yet, investors and banks will want to see these projections as part of a business plan. Established businesses use financial projections to measure their financial health and a record of current and previous performance and where the company will be in the coming years. Even businesses not looking for loans or investors can use their financial projections to inform budgets to grow the business.
Types of Financial Projections
Businesses create long-term and short-term financial projections to predict how their business will perform to make savvy business decisions. These decisions may relate to inventory management, investments, product or service offerings, and more.
- Short-term financial projections focus on the year ahead, with a monthly breakdown of projected income and expenses.
- Long-term financial projections are expanded to the coming three to five years, focusing on strategy and attracting potential investors.
How to Make Financial Projections
There are several steps involved in making financial projections
1. Calculate spending and sales figures
List recurring operational costs such as salaries, rent, marketing, software subscriptions, insurance, etc., to get a sense of the minimum running costs. Next, account for once-off expenses such as equipment. Then, create a sales forecast for anticipated revenue based on the current market and economy.
2. Predict cash flow
With expenses and revenue predictions, the flow of finances from the business should be evident. Together this information makes up the financial projections. For short-term projections, consolidate this information for the coming 12 months. For long-term projections, after the 12-month mark, continue and create financial forecasts for each quarter.
This information will be drawn from the accounting and business software which records all financial transactions. This process will be streamlined with regular financial reporting, making financial projections faster and more accurate.
3. Assess the financial needs of the business
For businesses looking to secure loans or attract investors, it’s critical to identify shortfalls, wastage, and growth opportunities. This information makes it easier to make a case for a business loan.
4. Start planning
More than financial projections, it’s critical to plan for various scenarios. The economy may hit a rough patch, the business could flourish, or it could encounter unforeseen events. Create projections for various circumstances, analyse the impact of these events and strategise accordingly.
5. Expect the unexpected
Projections for various circumstances and strategies to deal with them may not be enough. The best way to weather the storm is with a healthy cash reserve when all else fails. The typical cash reserve for a business covers the running expenses for 90 days.
6. Keep track of the cash flow
Continue to track the projections against actual results to gain insight into the business’s cash flow and prepare for variations in trends. To stay on target, it may be necessary to adjust strategies periodically. Continuously monitoring these projections makes it easier to address issues early on.
Knowing how to make financial projections for a business is a critical aspect of business strategy. To simplify the process, switch to a comprehensive accounting software package.
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