How To Produce Realistic Financial Projections
Posted on 16th May 2022
“If you don't know where you are going, any road will get you there.”
Lewis Carroll
To avoid Alice-like misadventures in your business you will want to have a realistic plan to help you set targets and monitor progress towards your business goals.
If you’re looking for a start-up loan or investment to help your business grow you will be expected to have financial projections. Here we look at what they are and how to produce them.
What is a financial projection?
A financial projection predicts your future revenue and expenses. Part of the process of creating your projection will be a review of your historical financial information, which is why good bookkeeping from the very beginning is so important. You will probably also look at your wider market and economic conditions generally.
To be sure your projections are useful and practical you will want to create both short- and medium-term views. Your short-term projection might look at a single year, month by month. The medium-term view could look three to five years ahead, quarter by quarter and year by year.
How do financial projections help?
While there will be many things that you don’t know or can’t control, your projections will give you an overview of how your business can be expected to perform and whether it is likely to grow and be profitable. They will take account of likely changes and planned growth, rather than forecasting what will happen if everything stays the same.
A forecast can be useful, alongside your projections, to test how your business might perform in different circumstances. You can create ‘what if’ situations such as changing your opening times, increasing or decreasing your prices, to help you assess what might be a good strategy for your business.
Advantages of financial projections
Good financial projections can help you to attract investment, plan for the future, and test the viability of different approaches.
Investment – without projections there’s only a minimal chance you will attract investors or obtain business finance. Before anyone makes a financial commitment they will want to know that you have a well-researched basis for your business plans and that you have looked at a wide range of possibilities.
Viability – by reviewing possibilities you will have a much clearer idea of how your business is likely to perform. You can avoid unnecessary risks and make plans to minimise the impact of possible future events like increases in the cost of materials or labour.
Planning – when you have reviewed all the implications of changes to your business model you will know when you might need to apply for business loans or additional investment to grow your team, move to larger premises, or buy new equipment, for example.
Measuring and managing – with well-researched projections in place you can review real-world events as they unfold and assess how your plans might be affected if things are better or worse than you thought.
What to include in your financial projections
At the very least, you will want to include cash flow forecasts, profit and loss statements, and balance sheets:
Cash flow – understanding where money comes from and where it goes will confirm that you have a sustainable business. As long as you are realistic about your future revenue, this can help you decide whether it’s the right time to look for additional funding or to cut back on expenses, for example.
Profit and loss statement – this will show your revenues, expenses, and profit for a specific period and can be used as the foundation for your projections.
Balance sheet – your balance sheet shows the overall assets, liabilities, and equity value of your business at a specific time.
It’s important that each of these is consistent because you will want to base your plans on accurate information. Potential investors will quickly identify any errors and will be much less likely to take your plans seriously.
Creating realistic financial projections
To be sure your projections are realistic and accurate it’s a good idea to seek a professional second opinion.
If you would like help or advice about your financial projections please get in touch.
Tagged as: Assets, Balance sheet, Cashflow Forecast, Financial Management, Financial Projections, Investment, Planning, Profit and loss, Realistic targets, Viability
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