Creating financial projections is one of the key aspects of any business plan whether it is a start-up or a renowned organization. Every organization requires to build successful financial projections that helps in determining its overall financial position and thereby work on it to improve it.
What is Financial Projection?
A financial projection is an estimate of your cash inflows, income and balance sheet that shows the investors what you intend on doing with your money. They act as a budget and a benchmark that helps convince the prospective buyers that your business is profitable and will offer a good return on the investment made by them. They also help you in identifying your financing needs, managing your expenditures, optimizing your pricing strategy as well as monitoring your cash flow.
However, creating financial projections is not that easy especially for a start-up business. It is both an art and a science that is fairly difficult to
formulate.
Although it might not seem to be an easy nut to crack at first, here is my 6-step guide to help you create better financial projections for your business.
Step #1 Begin with forecasting the sales
Always make it bottoms-up and never tops-down. This means that start by analyzing the unit and the price details of your product and then build up the sales from the specific and concrete assumptions.
Usually, a start-up does not have past results to review. This makes sales forecasting a bit difficult and tricky, to be frank. However, this can be overcome by having a good understanding of the market. So, forecast your sales based on the solid understanding of the industry and the market, not on the basis of assumptions.
This shows the investors that you have done your homework properly and your forecasts are not simply guesswork which might not be as profitable as they seem to be.
Step #2 Project the expenses
Create an expense projection as it is much simpler. It is fairly easy to predict the possible expenses incurred than to predict the purchasing habits of the current or potential buyer.
In case you are working from history, predict your fixed expenses with a full conviction such as your mortgage rate, rent, recurring expenses, and others.
However, in comparison to history, it is much harder to predict one time expenses that have the ability to destroy a business For Eg, what if the roof leaks which can destroy your stocked up goods, what if there is an increase in the import duty in case you want to import some products from China, etc.
These “what ifs” can cost your business so they are to be dealt with by projecting all the expenses no matter they are internal or external.
Step #3 Create a balance sheet projection
A balance sheet shows a detailed overview of the financial health of the business by stating the assets, liabilities and the owner’s equity in a particular time period. These are the items that go beyond the monthly sale expenditures.
Typically an annual balance sheet is created for the financial projections which provide a breakdown of all the assets and liabilities.
Usually, the previous records are used to predict the position of your company, however, a start-up doesn’t have such records, so you can create a balance sheet using the information and the data you have accumulated from the industry research.
Step #4 Formulate an income statement
Current business proprietors can easily and conveniently formulate an income statement projection by looking at the current income to present an estimate of the projected numbers.
An income statement presents a view of the net income of the company after subtracting COGS, tax and other incurred expenses.
This can give a good idea of how well the company is performing currently. It also serves as a basis to determine the net income for the next one to three years.
Step #5 Understand and create a cash flow statement
Unfortunately, an increase in profit does not mean that you have sufficient cash in your bank account. The biggest problem here is that some businesses deal with credit transactions rather than cash transactions. As a result, they are bound to receive the payment for the transaction made quite late and so they sometimes face a shortage of cash in their bank account.
Regardless of the situation, every business needs cash to handle all its running expenses.
However, this problem is usually not faced by businesses that deal in cash rather than credit.
So, it is very important to create a cash flow statement helping you determine the real cash position of your company.
The cash flow statement ties both the income statement and the balance sheet together by displaying all the cash and the activities related to cash that affect your business operations. It shows how much money is being spent which is a must-have for those looking to get funded.
Yet again you can look at your previous cash flow statement if your business is in operation from the last six months to create a feasible cash flow statement.
However, in the case of a start-up, you can use the data and stats collected
during the credible cash projection.
during the credible cash projection.
Step #6 Break-Even Analysis Projection
If you have done a good job in projecting, the sales forecast, expenses, balance sheet, income statement, and cash flow then you should be able to identify the date when your business is most profitable as compared to other days. In other words, the day when more money comes in rather than goes out. This is referred to as the break-even point.
Creating a break-even analysis will help you in determining the number of units you have to sell every day, every month and every year in order to become the most profitable.
However, as a start-up, this is not expected to happen overnight, but potential investors and bankers do want to see that your company delivers what it claims by supporting your financial projections displayed in the business plan.
If you have no clue, and you have business-to-business sales and inventory, then take the assistance of our pre-designed PowerPoint
Templates at slideteam.
Templates at slideteam.
Conclusion
Creating and keeping pace with your business forecast might seem a tedious task at first, but it can help you make better decisions that can help increase your profitability and avoid incurring unnecessary expenses. And because of it being very useful, It is worth the time and effort!
(Disclaimer: The Author is the Business Content Writer at SlideTeam)