How Small Businesses Can Incorporate Financial Projections
A big part of being an entrepreneur is spending time developing ideas for your business. How will you get off to a great start? Moreover, how will you achieve healthy growth over time?
Growthink suggests that financial projections are critical to all types of businesses because they provide a picture of the potential financial implications of your ideas. Along with helping you to create viable plans, financial projections will also help you appeal to investors.
If you have a minimal understanding of what financial projections are, how they can help your company, and how you can create them accurately, you’ve come to the right place. Today, Cardbaro provides some essential information and advice below.
The Importance of Financial Projections
Financial projections are never precise, but if you prepare and dedicate the time and energy necessary, your team can make excellent predictions based on the core assumptions of your company. These predictions will give you a picture of the capital you need, according to LivePlan, as well as the risks and rewards involved if you execute your plans.
As you make financial projections, you will build a framework from which you can measure your performance and progress – metrics that will eventually be included with your required annual report service. For example, if your performance is trailing your projections, then you can use the framework to evaluate the potential of reducing expenses and increasing revenue. And if you’re right in step with your projections – or ahead of them – then your framework can be used to accelerate growth.
The Three Statements
A typical financial projection will include three primary statements:
Income Statement — Also known as a profit and loss statement, an income statement will showcase your company’s expenses and revenue for a specified period of time.
Cash Flow Statement — Cash flow essential refers to the money going in and out of your business. Your cash flow statements will factor in all the cash involved in your business operations, investments, and financing activities.
Balance Sheet — Your company’s assets, liabilities, and owner’s equity will all be part of the balance sheets you create. The primary purpose of this type of statement is to ensure that your assets total your liabilities and equity. If they don’t, then you will see that it’s time to re-evaluate your processes.
Practical Tips for Creating Projections
Now that you have a bird’s-eye view of how good financial statements can benefit your business, consider these quick tips for creating them:
Use helpful tools.
Making accurate projections requires effective management of your team’s time and productivity. Software that helps you track time, be more productive, and manage your payroll via a mobile device helps in this regard. Beyond that, MAXQDA notes that you need a platform that provides deeper insights into how your business is performing financially (computer-assisted data analysis), keeping an eye on cash flow, profitability, and other KPIs (key performance indicators) so you know which revenue streams to focus on and spot and address issues as or even before they arise.
Use ratio analyses.
To prevent your financial projections from becoming too optimistic or pessimistic, you need a standard to which to compare them. The key is to conduct analyses of industry financial ratios like profitability, operating, and ROI ratios. Such analyses can reveal overlooked costs in your projections, supporting data for your predicted performance, and more. Again, a robust financial reporting platform will help you here.
Plan for three to five years.
Accurate financial projections can quickly attract investors. But you need more than just one year’s worth of predictions. If possible, create multi-year projections (three to five years is best) when you begin pitching to investors. While your first-year projections should show monthly predictions, you can use annual projections for the following years.
Accurate financial projections are critical to the growth and health of your company. Consider the information and advice above as you begin to develop projections that will move your company in the right direction. And don’t stop here—a lot goes into making good projections, so keep learning about how your team can improve your process!
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