Creating financial projections is an imperative part of running a business. Financial projections are basically a forecast of your future expenses and revenue. It can be difficult to anticipate business expenses and how fast your business will grow, but financial projections are a necessary part of all business plans. Most often, financial projections account for historical or internal data, and include a prediction of the external market factors.
It is necessary to develop both short term and midterm projections. A short term financial projection covers the first year of your business while mid term projections normally account for three years of business to come. When creating financial projections, keep in mind that three types of financial statements should be included.
- Income Statement – An income statement will show business expenses, revenue, and profits for a particular period of time. If you have not yet started your business, this is when you will do financial forecasting.
- Cash Flow Projection – Cash flow projections will show investors and loan officers that you will be able to pay back a loan and are a good credit risk. The three parts of a cash flow projection are cash revenues, cash disbursements, and reconciliation of cash revenues to cash disbursements.
- Balance Sheet – A balance sheet will provide a clear picture of the net worth of your business during a particular time. Balance sheets include a summary of your business’ financial data split into three categories including liabilities, assets, and equity.
Tips For Making Informed Financial Projections
- When making financial projections, you should always plan for the worst.
- If you are an already existing business, use historical data to develop realistic projections.
- Use cash flow projections to predict problems so you can plan big expenses accordingly.
- Base important financial decisions on your break even point (a break even analysis should be done as part of your financial projections.)
- Keep close track of your financial projections throughout the year so you are able to assess the financial health of your business.
- Research your target market to determine what kind of profits you can expect.
- Have a financial contingency plan because things do not always go as expected.
- Give yourself a financial buffer so that your forecasts are not too low.