The Importance of Accurate Financial Projections for Your Business and How to Make Them

When helping a fellow business owner put together financial projections so that she could apply for a loan, I realized how this important step is often overlooked. When Chelsea from Business Pop reached out to write this post on the topic, I was happy to accept.
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​Financial projections are the foundation on which businesses run. These projections encompass current and future income and expenses, representing the business’ present condition and expected growth. In this article, we’ll explore the importance of financial projections and how to accurately create them for your business.
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Sound financial projections are vital for two reasons:

• Creating a Business Plan: A strong business plan provides the structure needed for a business to run efficiently. It includes budget spends for product development, manufacturing, marketing, and more. Without financial projections, you may end up pursuing activities that incur high expenses with low returns. Projections provide clarity on when and how much to spend on each activity and also ascertaining your price points.
• Securing Funding: A key factor all investors look at is the growth and profit-making potential of a business. Additionally, they will compare your current performance and scrutinize it against your future plans and projections. Having accurate financial projections reflects a strong understanding of the market, strategy, competitors, pricing, and improves your chances of securing funding.

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How to Make Projection

​Accurate projections are drawn from data. These include sales forecasts, expense predictions, and consumer research. Your sales forecasts include the revenue you expect to generate, insights about the economy, and monthly sales predictions for at least one year. Additionally, for expenses, you include the combination of fixed and variable expenses and how they will fluctuate with time.

Being a small business looking for funding, you understandably may not have a ton of data. However, there are various open-source resources to help you understand current market trends, customer preferences, and more to make predictions. Additionally, before choosing to start a business you may have worked in the same industry for some time. Utilize this experience to make projections about key factors such as – growth rate, profit margins, price points, etc.

Based on the predictions you’ve made; you will create the three key financial statements for your business:

1. Profit and Loss Statement: According to PayChex, this statement reflects the financial performance of your business over a specified period. Your statement should include the following:

• Net income
• Non-operating expenses
• Non-operating profit
• Operating expenses
• Operating profit

 
2. Balance Sheet: This indicates your business’s financial health and includes the following:

• Current, long-term, and fixed assets
• Current and long-term liabilities
• Retained earnings i.e. any amount remaining after paying off all liabilities

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3. Cash Flow Statement: This statement tracks the inflow and outflow of cash from your business. Your statement should include cash predictions from the following:

• Operating Activities: Covers expenses from day-to-day activities such as accounts payable, accounts receivable, inventory and depreciation.
• Investing Activities: These include the movement of money in the long-term from investment in or sale of assets.
• Financial Activities: These show inflow of cash from investors or lenders and outflow from paying dividends.

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Your financial statements need to be as detailed as possible. Additionally, they should include projections for at least three years. As reported by JumpStart, on average it takes a new business two to three years to start making a profit. Hence, future projections are important to convey to investors when they can expect their investment to pay dividends in addition to providing you a roadmap for sustainability.

To simplify the process of creating financial statements, use software such as QuickBooks, Freshbooks, and the like, allowing you to automate the process of collecting financial data, creating statements, and sharing with required stakeholders. Moreover, you will be able to accurately track trends and make informed business decisions.
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As the owner, you need to have strong control over the business’ finances. However, if you find yourself lacking an understanding of making projections, pursuing an online accounting degree can be beneficial. You will develop the skill of reading and creating financial statements, filing taxes and effectively supervising the work of your accounting team. Additionally, it will improve your confidence when discussing finances with investors. Furthermore, the online format allows you to maintain a balance between running a business and learning new skills.

Try to remain realistic while making your financial statements. Investors and lenders understand that fluctuations happen, however as long as your projections are healthy and accurate your business will continue to grow in the right direction.