What Are Financial Projections and How to Make For Your Business?

What Are Financial Projections?

Financial projections are documents with financial statements that forecast the expenses and revenue the company will get in the future. It is based on the guessing & estimating concept that uses data on existing revenue and expenses. Thus, financial projections cover net income, cash inflows, expenditures, and overall the company’s financial health.

Key Points about Financial Projections:

• Accuracy in the projection depends upon the realistic and reliable data
• Financial projections need regular update
• Professionals must consider short-term and long-term projections
• Different types of financial projections serve different purposes

Business professionals or managers use this data and financial statements to make major business decisions after reviewing all the financial metrics.

The average period of financial projections is 3 to 5 years, but in some cases, it can be 10 years, depending upon the business.

Financial projections are useful in the following conditions:

• To manage future growth and expenditure management
• To attract investors by presenting the profit margin
• Accurate financial projections are useful decide how to manage the resources
• During the loan process, it assesses the ability of the business to repay the loan amount
• For estimating the tax liabilities
• For allocation of resources that cover inventory, budget marketing, and staffing

Financial Projection Example

Let us understand the financial projection through an example. We are assuming a company called Albert Cloths that manufactures garments. So, as per financial projections example, we are considering the following data:

Albert Cloths
Projection of 2024 Financial Data

Forecast balance sheet: Total revenue is $100,000 and total expenses are $20,000

Forecast statement of operations: Projected net revenue of $200,000

Forecast statement of cash flow: Additions to cash: $10,000 and subtractions in cash $20,000

Conclusion and recommendations: Projecting a hike in cash flow and revenue growth for the year 2024.

How to Create a Financial Projection?

Every business owner must know the real process of creating financial projections. Additionally, professionals must know the best practices to consider for creating accurate financial projections.

Here are the steps for generating an accurate financial projection.

1. Initiate a Sales Forecast

You can create a financial projection. You must know how much sales your business can generate. You can utilize historical data of the company when you are creating a sales projection for your current business. Companies’ historical data offers all the useful information. Startup business owners must invest additional time and effort into researching their industry. New businesses will not have any kind of past data as well-settled businesses possess.

2. Generating Expense Projection

This is the next step and is simpler than sales forecasting. Professionals need to predict their behavior. You need to consider all the expenses that are involved in your business. The point is you need to cover all expenses whether it’s office rent or payroll.

3. Balance Sheet Projections

Balance sheet projections give a lucid picture of the financial position of your business. Therefore, it gives a more holistic picture of overall business financial health.

This task is to the point for a well-established business. Professionals can easily predict their business positions for the coming years by using past and current balance sheets. However, new startups need to perform a lot of work. This is because there is no past data available for the new business.

4. Make Income Statement Projection

Creating an income statement projection is the next step that covers the net income statements of the company. This income is made after considering all the expenses. Company owners can use historical data relevant to the income statement with all the changes between them. This applies to the currently operating business. For the new business, you need to use a rough estimate.

5. Create a Cash Flow Projection at the End

This is the last step in the process. It covers the expected inflow and outflow of cash in the business, net cash flow calculation, and determining the closing cash balance. This is to ensure that the company has sufficient cash.

Types of Financial Projections

There are several types of financial projections. Every type has its purpose. Some of them are as follows:

1. Operating Budget Projections

These kinds of business plan financial projections are useful to determine the amount of money a business needs to operate. Business professionals also get clarity over their decision on whether they need to invest in marketing or not. Professionals also make decisions for the pricing strategy.

2. Pension Plan Cash Flow Projections

This kind of projection represents how much money a business will need to support its pension scheme for employees. Companies can use this data to optimize their financial strategies and retirement plans. It also contributes to reducing liabilities and risks.

3. Treasury Projections

These kinds of projections refer to the amount of money a business needs to finance its investment in the future.

4. Sale of Company Projections

This kind of projection helps identify what will happen if the business gets closed. Additionally, it also helps to determine the amount of money employees will get after the closing of the company.

5. Cash Flow Projections

This statement refers to the company’s expenses and revenue in the coming time. There is clarity over how much cash will be available in the future for the expenses.

What Are the Key Elements of Financial Projections?

Financial projections include the following key components:

1. Cash Flow Statement

Cash flow statement refers to the money that businesses generate or spend in a specific period.

2. Sales Forecast

It refers to the estimation of the quantity of goods and services the business will sell out in the given period.

3. Balance Sheet

This is a picture of the assets and liabilities of the company at a given specific time. It also shows projected financial outcomes.

4. Income Statement

It is also referred to as an income statement, which outlines the company’s revenue and expenses.

How Startups Use Financial Projections?

As startup companies are prone to risk and uncertainty, they never depend much on business plans and financial projections. However, they utilize this document in the following ways:

• To create a business plan and financial strategy
• To decide on any product
• To optimize the pricing model
• To map out the financial plan
• To evaluate risk and find ways to reduce it

The company holder or management team collects data related to sales performance and customer behavior when sales execution is run. This information helps outline their further strategy. Further, after gathering sufficient data, professionals build more granular projections. It helps the business:

• Decision making
• Managing cash flow
• Allocation of resources
• Securing funding

Importance of Financial Projections for New Businesses

Financial projections are valuable for a business as they give a clear picture of its future financial performance. Moreover, these documents are also helpful in the following scenarios:

• Cash flow management
• Guides business strategy and decision-making
• Businesses can calculate their break-even point
• Identifying risk & uncertainty
• Refining operational efficiency
• Helpful with tax & legal compliance
• Helps with the strategic growth of the company

Financial Projection vs. Financial Forecast

Financial projection and financial forecast are two crucial terms in the financial world. Usually, people get into a perplexing situation while considering these two terms. When comparing, there are many differences between them.

Best Tips for Making Financial Projections

Creating financial projections might sound difficult for many professionals. Still, you can follow the below practices to make the process effective.

• Regularly update your projections
• Don’t forget to review historical data
• Always start with clear assumptions
• Break down projections into detailed components
• Identify those Key Performance Indicators (KPIs) that impact your business
• Take feedback from an advisor or mentor
• Always track and analyze the performance against projections
• Consider tax implications

Verdict

It doesn’t matter whether your business is small or big, a startup or a well-established enterprise, financial projections are crucial for all. It will be easy for you to make a firm decision about your business with proper insight details. Also, professionals can set milestones and manage cash flow efficiently.

However, to take the best advantage of financial projections, you must follow the best practices to generate accurate projections. Inaccurate projections are an indicator of missing information that you missed while analyzing.

Frequently Asked Questions