Strange as it may seem, creating financial projections is far more important and complex than actual results. More than the numbers, it’s the planning that counts. Or rephrased, it is the means to the end that matters here more than the end.
Without financial projections, doing business is like groping in the dark without a light or a map and you won’t be able to gain investor confidence or secure financing. Even if you are self-funded or have a family business, you need financial projections as a guide and barometer to measure your business performance.
You will need to consider these steps to arrive at your financial projections:
Develop your sales forecasts over 3 to 5 years: You can make your predictions based on past sales data, competitive comparisons and the current economic trend. Usually it is a mixture of each and you have to understand that your optional lenders won’t believe you anyway! We all want to believe that our sales will skyrocket, but keep in mind that your investors are going to hold you accountable in the future. Keep in mind that if you need more capital in 3 years, these same investors are a great source of additional cash, but they will measure your current progress against your initial projections.
Create an Expenses budget: These include expenses for your cost of goods, but also for your operational expenses such as equipment, payroll, rent, marketing, insurance, depreciation, etc. Generally, after estimating the cost of goods, we then break down the operating expenses into broader categories such as: sales and marketing, administration, then research and development or miscellaneous. Production costs.
Design a cash flow statement: It refers to the flow of money in and out of your business and reveals your liquidity, or ability to use cash when needed. (and important to lenders, the ability to repay them!) The cash flow statement is of major interest to investors and lenders, as they will want to ensure that your business plan includes sufficient cash to continue to operate.
Build your revenue projections: This is your financial situation, resulting from revenue and cost of goods sold, gross profit and operating expenses. The amount of revenue you project is important from a long-term viability perspective, but in some cases, such as Internet sales, growth and customer numbers sometimes become just as important.
Consider your assets and liabilities: Assets are things you own that have value, while liabilities are amounts you owe others. When constructing your projections, you should ensure that you have included the buildings, equipment, vehicles and the like that you will need to support your business plan.
Arrive at your break-even analysis: A key area of interest in the projections is when you are on track to make a profit in your business based on a combination of fixed costs, variable costs per unit of sale and revenue per unit of sale . This is the final phase of your business where expenses equal actual sales.