Picasso once said, “our goals can only be reached through a vehicle of a plan in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.”
For the finance sector, this vehicle comes in the form of financial planning. Making financial projections helps your company keep in good financial standing.
Success never happens by accident. It requires continuous planning and adjustments of plans.
Keep reading to learn about how to build financial projections.
Why Do Businesses Need Financial Projections
Successfully managing your finances means constantly keeping track of your financial health. One example of this is making predictions or forecasts about future dividends. It also considers how much money you need to cover future costs.
Creating financial projections happens for a couple of different reasons, including:
- Making business plans
- Impressing potential investors
- Applying for loans
- creating growth strategies
- Showing information to stakeholders
Business leaders can have a good view of their company’s performance based on cash flow coming in. They can also assess how much profit versus how much debt they have.
You can predict how long it will take to pay off some debt. Also they tracks how much they should expect to receive in profit over a certain period.
What You Need to Prepare Financial Projections
To put together financial projections for your business, you need to gather your data. You should compile these three different types of documents, which include:
- Income statements
- Balance sheets
- Cash flow statements
Income statements give a summary of the company’s revenues, expenses, as well as net income. They track profits as well as losses.
Balance sheets show the big picture of the companys financial situation. It does this by tracking the amount it has in assets or tracking future assets it anticipates.
These documents also keep a record of debt, or how much a company owes. They also record equity, or how much in dividends it receives from other entities.
Cash flow statements track money that flows into the company and money being spent. It records net income before subtracting taxes, interest, and depreciation.
Financial projections also take data from other statements. This includes COGS, or cost of goods sold and operating expenses.
The Five Things You Need to Include in Your Financial Projections
The most comprehensive projections for your business include the following five things. Companies want to create a big-picture view. This means looking at many different factors and what that means in different areas.
The following projections provide the most accurate information that show how well a business handles their finances. This includes measuring the following things:
- How much money a business makes
- How much it spends
- How much it receives from dividends
- How much it owes in debt.
All this information lets analysts predict a business’s future earnings and value. Projections also help businesses make important spending decisions. Prospective lenders will want to see a business’s projections before investing.
Balance Sheets
Balance sheet projections take an account of the current financial state of your company, and project how it will do financially 1-3 years into the future. A typical balance sheet projection lists the following items:
- Assets
- Liabilities
- Equity balances
Looking at current balance sheets will help make forecasts for a specific future time frame. For newer companies that have limited data, researching companies within your industry will provide the information you need to project future financial outcomes.
Expense Forecasting
Expense projections mostly come from tracking historical data of what your company spends its money on. Future predictions of company spending can be inferred from current and past spending patterns, and based on anticipated future costs.
It’s easy to make predictions about fixed expenses, such as payroll expenses, rent and utilities, and operating costs. However, even the best projections cant account for sudden expenses that come up from unexpected or catastrophic events.
Therefore, your projections should include flexibility, factoring in an anticipated need of up to an extra 10-15%.
Forecasting future sales performances often comes from financial statements. This data tracks how much a company makes from the sale of products, and includes information about peak sales seasons and whether products sell well or not.
Sales projections should take into account some nuances in the analysis of data. This means forecasting economic conditions and happenings in your industry. Forecasting future sales helps companies decide whether to continue with certain products as well as consideration to add new products.
Income Statements
A company’s net income takes the gross income, or all the money earned, and subtracts expenses. It accounts for the following data, including:
- Goods sold
- Taxes
- Business Expenses
Market research firms can help by providing helpful data for newer companies to create income statement projections before theyve had enough time of earning income to get that data. These firms provide key industry information such as sales, target demographics, and expected growth over the next few years.
Cash Flow Analysis
These projections track all cash-related data, displaying how companies spend their money. This takes information from balance sheets, income statements, and cash flow statements.
When accounting for company spending, analysts focus on key factors such as operational costs and how much money it owes in liabilities. Cash flows can show if companies can break even or make a profit.
This information proves crucial when presenting to potential investors as well as getting financing for new lines of credit.
Your Company’s Future Started Yesterday
Future predictions are highly educated guesses based on past data. Financial projections, in making predictions of a companys financial future, take into account everything a company has already done.
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