Financial projections are vital to your business plan, but devising them can be challenging if it’s your first time. To aid you in this, we’ve compiled a guide on creating financial projections with all the essential information and tips and tricks you need.
What are Financial Projections?
Financial projections are estimations of future financial outcomes, such as the expenses and revenues of a business over a specific forecast period. Creating a financial projection helps when devising a budget, providing your business with a way to tackle financial planning.
Aside from being useful for private business operations, financial projections are also excellent for showing to investors and bankers, guiding them through how you expect your company to make and receive money.
What Does a Financial Projection Include?
Your financial projections will include several statements that determine your forecasts. Generally, you should incorporate the following documents into your financial projection;
- Cash inflows and outflows
- A balance sheet
- Profit and Loss Statement or Income Statement
Your financial projection should include short and mid-term projections separated into monthly figures. Of course, if your business is new, you won’t be expected to predict your finances entirely accurately, and it’s important to note that projections are rough outlines developed from industry research, such as market trends and competitors.
Creating a Financial Projection
For the most accurate and professional financial projection, it’s essential to follow the specific steps we’ll detail below;
Sales Projection
The first step is to predict how much your business will make in sales. If your small business has been active for a while, you’ll have data on past performance periods to project future sales. For new companies, research your industry and targeted trends to gauge how you predict your sales will go.
Whether your business is new or existing, you’ll need to consider external factors such as seasonal trends, tax and supply chain issues when creating a sales projection.
Expenses Projection
Your expense projection refers to what you expect your company will spend. While you likely have an idea of this, it’s important to factor in different issues that can occur, such as supply disruptions, to ensure you don’t predict your expenses being much less than the reality. To conquer this, consider adding a 10% margin to your costs.
Balance Sheet Projection
Your balance sheet considers the financial position of your business, relating to liabilities (debts your business owes) and assets (tangible objects of value owned by your business). This step is essential to determining the financial health of your business, with your company equity subtracting your liabilities from your assets.
Profit and Loss / Income Statement Projection
Your Profit and Loss statement focuses on the predicted profit of your business, considering the money you have left once all expenses have been accounted for. This step must be realistic, considering previous performance periods and industry averages.
Cash Flow Projection
Your final step will intertwine your income statement and balance sheet to deliver a cash flow projection. This document considers cash revenues, disbursements and your net cash revenue for the most accurate accounting of your company credit.
Still Unsure How to Create a Financial Projection? We Can Help
At YBM, we understand completing financial projections can take time, but we have specialist business advisers who are here to help clients with this task. Get in touch today to learn how we can help you.