How to Prepare Financial Projections

You’re thinking about your company’s future. How much will sales grow next year? What will your revenue look like in five years? Or, if you’re just starting out, how long will it take for your business to turn a profit? 

Though the future is uncertain, you can make informed predictions about your company’s performance in the years ahead. These projections, sometimes called financial forecasts, assist in estimating your future income and spending. Understanding your company's path will help you by analyzing your present and expected financial data. They usually come up with different scenarios so you can observe how a change in one aspect of the financial statement (e.g., increasing sales or decreasing operating expenses) would affect your company's profitability.

Here’s everything you need to know to master budgeting and financial projections.

Understanding Financial Projections

A financial projection estimates your company's future income, expenditures, and earnings, similar to making a budget. The projection will usually include current and past company data and an assessment of potential future changes in external elements.

Financial projections can benefit businesses already in operation, including better decision-making, increased investor interest, and loan eligibility. Startups should include financial predictions in their business plans.

Making short-term and long-term financial predictions for your company is a good idea. Most monthly breakdowns of a year's worth of data are used to make short-term estimates. A long-term financial projection breaks down each year and covers three to five years.

How to Create Financial Projections?

Financial forecasts use the information you already possess to foretell potential future income and expenditures.

Another common component of financial projections is a "what if" scenario, in which your business or industry undergoes a transformation in the future. An example of a financial projection would be a company that is open five days a week and is considering opening a sixth day.

Typically, you should have three statements when you are preparing financial projections for your business:

• Cash flow projection

• Income statement projection

• Balance sheet projection

After you've completed all three steps, you may gather your data and organize it into a report. You can then share this report with your colleagues and other parties, such as lenders or investors.

When Do People Use Financial Projections?

You can utilize financial projections internally at a basic level. Predictions for specific cases can inform your decision-making. For instance, making a financial prediction, including the possibility of future increases in demand for your product or service, might help you prepare for such an event.

Small business loans are another possible financing option that can benefit from financial projections. You can use them to show how the money you want to borrow will boost your income in the long run. Also, it helps to know how much money you need to borrow.

Investors will likely request a financial projection outlining factors like expenditures, income, and growth trends to guarantee that their investment in your firm will yield a return.

7 Steps for Creating Financial Projections

The following are the 7 steps to follow while making financial projections:

Step 1: Gather all of your financial documents

Gathering your financial documents should be your first order of business. You can use industry data and research to create a startup's prediction. Even if projections are just guesses, a more thorough data set will yield a more accurate record to make better financial predictions.

Step 2: Make a sales forecast

The next step is to estimate your company's revenue. Historical performance data, such as how well sales performed during the same season or at the same time of year, can be used to predict future sales for an existing business. 

However, remember to include the predicted shifts in the economy, the industry, and the supply chain. A new company's best bet for predicting its future sales is to do some preliminary market research.

Step 3: Develop an expense forecast

Future spending is usually easier to foretell than the purchasing patterns of your present and future clients. Consider all of your regular fixed costs, including rent or mortgage, utilities, and payroll, when you're analyzing an existing firm. 

Although it's hard to predict the future, especially when it comes to big, unexpected bills, it's a good idea to include a 15% buffer just in case.

Step 4: Project your income statement

After deducting all of your expenses, an income statement projection will show you your net income. If your business is already running, you can derive income statement predictions for the next one to three years from previous income statements. 

Be mindful that your remarks can vary from one frame to the next. If you anticipate a shift in variables like supply costs, sales prices, or demand, you should account for it. If you are just launching your business, you must make educated guesses about how much money you may expect to generate. Try not to be too optimistic, though.

Step 5: Make a cash flow forecast

Every month, money comes into and goes out of a company. You may figure out your cash flow by adding up all your receivables, subtracting all your payables, and then adding any cash you have on hand.

One way to plan for the future is to create a cash flow prediction that details your anticipated inflows and outflows. If you want to know if it's a good moment to invest in your company or put it away for later, a prediction like this can help. Your cash flow estimate can demonstrate to lenders that you can repay loans if you determine that it's the right time to obtain credit.

An existing business can make a cash flow prediction by looking at past financial records. A startup will need to research the industry to create a cash flow prediction.

Step 6: Put together a projected balance sheet

The balance sheet details your company's assets, liabilities, and net value as of a specific date. If you want to know how your business is financially healthy, a balance sheet projection is an excellent place to start. Predicting the company's future one to three years from now is a projection of historical and present balance sheet totals.

If you’re starting a new business without financial records to reference, your balance sheet projection should rely on research specific to your industry.

Step 7: Create a report

After completing the procedures above and the computations, you can arrange your data in a report format that suits your company. You can include tables and charts to make the information easier to understand and summarize.

Strategic Forecasting for Smarter Decisions

If you want your business to succeed, you need to make accurate financial estimates. With these forecasts in hand, you can better assess the overall condition of your company and win over financiers and investors.

Financial projections aren't something you do once and then forget about; you have to review and tweak them often to make sure they align with your business goals. You can avoid issues and make the most of opportunities with a well-thought-out financial strategy that lays out a solid path forward for your business.