Financial projections are one of the most important elements of any business plan, so it’s important to get them right. Helping you win over investors, obtain bank loans, or simply produce a long-term growth strategy for your business, these future revenue forecasts can help your business in a wide range of areas. But what is a financial projection? Find out how to make financial projections for small business with our definitive guide.
What is a financial projection?
In short, financial projections are a forecast of future revenue and expenses. Generally, financial projections account for historical data, while also including a prediction for external market factors. You can create different types of financial projections for startups, including short-term, medium-term, and long-term projections. While short-term projections tend to be focused on the first year of your business, a long-term projection may cover three to five years.
Why are financial projections important?
Financial projections are important for a variety of reasons. Usually, they’re used to attract investors or apply for a bank loan. However, learning how to make financial projections for small business can also have a range of benefits for your business. It enables you to reevaluate your business’s strengths and weaknesses, anticipate problems, take stock of your current position, and establish a clear course of action to generate growth. It’s not just a number-crunching exercise, but a significant element of your company’s long-term strategic planning, helping to translate goals into clearly defined targets.
How to make financial projections for small business
To produce financial projections for startups, you’ll need a couple of key documents: a balance sheet, an income statement, and a cash flow statement. Once you’ve got these documents ready, you can begin making financial projections. Overall, there are five main components to any financial projection. Here’s our step by step guide for how to make financial projections for small business:
Make a sales projection – Put simply, a sales projection is an estimate of the amount of future sales that your business will generate. Take into consideration outside factors, such as the health of the economy, industry downturns, or whether additional tariffs will affect your inventory. You should also include the projected cost of sales (COGS) so that you can work out the gross margin.
Create an expense projection – Next, you’ll need to make an expense projection, so that you can work out how much it’s actually going to cost you to make the sales you’ve predicted. Essentially, an expense projection requires you to predict possible expenses, from fixed costs like rent to recurring costs such as utilities. That should be relatively straightforward, but you’ll also need to predict one-time expenses, such as damage to your inventory, which can be a little trickier.
Produce a balance sheet projection – Now, you’ll have to make a balance sheet projection, which shows the projected financial status of your business, including assets, liabilities, and equity balances. You should be able to base your projection on your existing balance sheet, assuming your business is already up and running.
Write an income statement projection – Using your current income statement, you should make an income statement projection, providing you with an estimated view of your company’s future net income. Put simply, you’ll use the sales projection to work out your gross margin (Sales – Cost of Sales), before using the gross margin to work out net income (Gross Margin – Expenses – Interest – Taxes).
Do a cash flow projection – Finally, you should create a cash flow projection (based on your current cash flow statement), which displays all cash and cash-related activities affecting your business. You can break the cash flow projection down into relatively short periods (a week, for example) to capture the fluctuations in your business’s cash flow.
Using financial projections templates for a business plan
Most businesses use templates when creating their financial projections. There are many online financial projections templates for a business plan that can be a great place to start when you begin drafting your projections. In addition, it may also be a good idea to use accounting software like Xero or QuickBooks, as these software providers can help you produce more accurate data.
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