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Jessie Eby contributed to this blog.
If the term “financial projections” triggers your panic response, you’re not alone. Many people have reservations when it comes to the financial side of their businesses, but you shouldn’t let that keep you from rolling up your sleeves and digging into your business’s finances. Keep reading to find out how to use financial projections to assess the health of your business.
What are financial projections?
A financial projection is an estimate of your business’s budget for at least a year (two years, ideally), and it serves as part of your business plan. It includes your expected revenue, spending, and cash flow for the year. You can set a fairly accurate financial projection by using your financial data from previous years; however, if your business is new, you’ll need to do a little homework to figure out realistic earnings for your type of business in your location.
Why would I need financial projections?
Your financial projections serve a similar purpose to your business plan: By reviewing your actual financials against your projections, you can be sure your business is moving in the right direction. You want to know if your business is on track to meet your goals, or if you’re going to fall short. Financial projections can also help you make decisions when it comes to adding staff, adding (or removing) products, or taking out a loan. It’s a good idea to know how these big decisions can affect your bottom line, and your financial projections can show you in black and white.
How to make financial projections
If you’ve been in business for a while, setting your financial projections can be pretty straightforward. Although you’re not likely to duplicate your past year’s finances exactly, they can be a pretty solid indicator of what to expect for the upcoming year. Be sure to account for any plans you have to invest in the growth of your business, whether you’re considering adding staff, new products, or services. These things, while increasing your profits will also have related costs and can affect your bottom line.
This process requires a little more research and guesswork if you’re a new business owner. Here are a few things to consider as you set your financial projections.
Income and expenses
First, you’ll want to have a solid grasp of your projected income and your expenses. Begin by laying out all of your startup costs. Include your materials, rent (if applicable), utilities, gas, maintenance, insurance, machinery, website costs, marketing, etc. Keep in mind that some of these expenses will be recurring, while some may be one-time purchases.
Next, you’ll need to estimate your income. Take the price you’ve set for your product or services and multiply it by the amount you estimate you’ll be able to sell in a month. This can be tricky, and it’s important to be realistic. This number can vary widely from business to business based on location and demographics, so it’s important to do thorough market research.
Zero in on your cash flow projections
Just because you estimate that you’ll be able to sell a certain amount of products or services doesn’t mean that money will immediately go into your pocket. You’ll need to replenish materials, pay employees, put it toward utilities, or otherwise invest in your business. Make sure you’re paying attention to your costs before you consider your profit.
Ask for help
You don’t have to go it alone. We offer free assistance in planning and setting your financial projections. Reach out to wbc@cfra.org or click here to learn more.
How are financial projections used?
Once you’ve set your financial projections, you’ll want to refer to them regularly to ensure that your business is on track. If your revenue isn’t as high as expected, look at your budget and compare it to your projections. Did you spend more than you estimated on expenses? Perhaps something unexpected came up. Or maybe you didn’t sell quite as much as you thought you would. Using your projections alongside your budget and actual financials can help you make the decisions necessary to keep cash from going out too fast. Plan to look at your projections at least once a month to make sure you’re on the right track.
Additionally, if you plan to take out loans, your lender will look at your financial projections as they go through your business plan. Keep in mind that lending decisions are based on actual financials and not projections.
Setting yourself up for success
Possibly the best thing you can do is have a professional look over your financial projections. It’s not uncommon for optimistic entrepreneurs to create their financial projections through an idealistic, rose-colored lens. The last thing you want to do is set your future business up for failure. Having an accountant or like-minded business owners or mentors review your projections can help bring a grounded, unbiased perspective.
Once you’ve set your financial projections, refer back to them often. Your projections can serve as a roadmap to where you hope to go, and syncing them with your actual budget can help you make the decisions that will elevate your business.
