Every company needs a living business plan that helps it steer through the ups and downs of an ever-evolving business landscape. One of the essential items of a business plan is financial projections, which forecast how you will spend money on paying off loans, operating your business, and growing.
Failing to create these projections can cost your business dearly in the long run. That’s why Pure Code Digital Agency has provided some practical information and advice for how you can incorporate financial projections into your business plan:
In the most basic sense, a financial projection (also referred to as “forecast”) is a means to estimate your company’s future expenses and revenues. Typically, creating a projection requires you to produce a comparative analysis that imagines various future scenarios for your business. You can use current financial information, economic conditions, and industry trends to make educated estimates.
By creating accurate forecasts, you can better determine the taxes you will owe. While you are learning to create projections annually, at the same time remember to file annual reports in order to comply with state regulations, maintain good standing, and ensure that your business does not dissolve and rights to do business revoked.
Too many companies face significant penalties or fees due to failing to file a report or pay their taxes on time. You can avoid this by setting self-imposed deadlines to complete the tasks.
To get the big picture of your company’s financial health, you will need at least three different types of reports to base your analysis from:
Profit and loss statement — A profit and loss statement, also referred to as an “income statement,” essentially gives an overview of your company’s expenses, revenues, and net income. This report is critical for providing the information necessary to create accurate projections.
Cash Flow Statement — In short, your company’s cash flow is how much money you have available for paying bills and investing in growth. Your cash flow statement will paint a picture of the cash and non-cash flowing in and out of your business.
Balance Sheet — The balance sheet is another key report when it comes to making accurate financial forecasts. In a way, it combines all financial aspects of your company into one document. It serves as an overview of all your company’s assets and liabilities over a particular period.
If you don’t feel comfortable working with these documents, it may be helpful to return to school for an advanced business degree. Obtaining an MBA, for example, will increase your overall business acumen and grant you familiarity with various financial statements. Going to school online can provide you with the flexibility to continue your education in addition to your career.
Finally, when it comes to developing your financial projections, your first step will be to predict your company’s sales so that you can gauge your risks and determine the staffing, funding, and resources you will need. This step also helps you to make critical decisions about inventory, pricing, and other factors. Established businesses have the ability to review their sales history for valuable information, but new companies must rely on the current industry trends.
One thing to look out for when creating your projections is that you don’t want to overlook any fixed costs. Consistently research your industry to figure out what the trends are for fixed expenses like rent payments, utility bills, insurance premiums, and operating expenses. This will not only help you create forecasts but will also ensure you don’t overpay for your needs.
Efforts to improve your projections in the future can include reducing your business expenses. A great way to do that is to leverage free tools for common tasks. A free invoice template, for example, can save you the cost of hiring a professional to design your invoices. You can use the money you save in other areas of your business or increase your net profits.
If your company is not creating financial projections, you could be missing out on big opportunities for growth. Consider the information and advice above as you lay the foundation for a brighter financial future. And never stop researching your industry and other advice to ensure that you are developing the most accurate forecast possible.