Financial planning is a must for your business to grow. You need to develop a strategic plan, find out if your service or product has a demand in the market, know when to hire the right talent, and know when to seek financing or investors. However, many small business owners struggle at this due to a lack of knowledge or time.
Do yourself a favor and make this a priority as it will help you avoid expensive mistakes in the future. In this article, you will learn about the benefits and the how-to of creating financial projections for your business.
Financial projections are the forecast of expected revenues and expenses. This is not a guessing or wishful thinking game. The projections should come from good financial planning. Creating financial projections will help you develop performance metrics and goals to track your business progress. The benefits of forecasting your performance include:
- Having focus and direction which will help you to prioritize your work and time.
- Distributing resources where they are needed the most to avoid unnecessary spending.
- Having sound financial information that will empower your ability to anticipate problems and take calculated risks. Making a bad decision or a miscalculation, can cause you expensive mistakes, unnecessary worrisome, and even the business itself.
- Making decisions based on actual financial data and performance.
How to create financial projections.
Step 1: The documents you will need:
- Financial statements (P&L, Balance Sheet and Cash Flow statement).
- Summary of all business debt.
- Financial projection excel sheet template.
Step 2: Start by answering the following questions:
- What are the expected sales this year? For existing companies, this is usually based on your past sales and expected sales combined. Itemized your sources of revenues as much as possible.
- What are your direct costs? The cost of your materials.
- What are your fixed costs? Fixed costs remain the same regardless of how good or how bad the business does. E.g., rent, salaries, utilities, maintenance, insurance, vehicle expenses, legal and professional and other.
- What at are your variable costs? Variable costs are those that vary because they will change depending on the company’s performance – whether sales increase or fall.
- What are your one-time costs? Costs that will only occur once, e.g., the purchase of a machine.
Step 3: Set checkpoints every month to track progress:
- Develop short, mid and long-term financial projections to periodically check your performance and base your management decisions with actual data.
- Set the key financial “drivers” of your business – A driver is a component that has the most impact on your business. In general, businesses share three important key drivers, revenue, costs and working capital. Following the trends of these drivers can alert you of any potential problem early on.
- Set benchmarks – Monitor your business performance by comparing the differences between your prior year (actual) and your expected outcomes (projections) on a quarterly basis. Depending on the findings from this exercise, make any necessary changes.
Creating sound and realistic financial projections takes time, commitment and discipline. Do not make uneducated decisions for your business. Base every move on actual data and past performances, success, and failures. Be proactive, not reactive. Most importantly have in mind that the projections statement is a live management tool that you will monitor and manage during the entire course of each year.