Gaze into your business crystal ball by learning how to make financial projections. These vital documents help you understand your business's past, present, and potential future. Let's talk about what they are, why they matter, what they include, and how to make one
1. What are financial projections?
Financial projections form a part of your business plan. They are financial statements that use existing and estimated financial data from various statements and reports to help project your business's future performance based on your cash inflows (money coming in) and outlays (money going out), income, and balance sheets.
You can create a short-term or long-term projection. Like a weather forecast letting you know if you need an umbrella, financial projections are a forecast of your incoming and outgoing cash. Many small businesses like to create a minimum two-year financial projection, though most are at least 3-5 years, and some are up to a 10-year forecast — far longer than your average weather forecast! (Note: A financial forecast is similar to a financial projection but is usually shorter term, forecasting for a year or less.)
2. Why are financial projections important for a small business?
When starting or running a business, every day presents opportunities and challenges. Taking the time to consider tomorrow, or a year or years from now, can be daunting. However, creating financial projections can save you headaches and heartache by helping you forecast and plan.
Financial projections can help you create a budget for a new business. If you're looking to take out a business loan, attract investors or a partner, or even woo the right employees to join your team, a financial plan can help show your company's viability.
And, if you aren't yet looking for loans or partners, financial projections can help you maintain a steady cash flow, make business decisions, monitor the results of your projections, plan smartly for growth and assess risk, and ensure your business meets your personal income goals.
Once you're up and running, you can set goals and track your performance with financial projections.
By including different scenarios, financial projections can show how a change in one area (lower profits or higher expenses) may impact your business.
All these steps help you stay accountable, prevent a cash flow crunch, avoid inventory shortfall, sidestep credit problems, and more. On the flip side, they can also help you build a contingency or reserve fund, grow your business, land that business loan, or make smart choices about products or services.
3. Do my financial projections have to be 100% accurate? I don't know how to do that!
That's ok! Some of your numbers will be rough guesses initially as you get a sense of how your sales will do.
While you'll want to be as accurate as possible, a 3-, 5-, or 10-year forecast can't predict things like economic downturns or global events. Do your research to base your financial projections on educated guesses comparing similar businesses and market trends.
As much as you worry about accuracy, worry about being realistic! You don't serve your business with pie-in-the-sky projections, and investors or banks know when something is projected too good to be true. Realistic is better than overly optimistic or impressive.
4. Ok, I'm convinced! How do I make a financial projection?
Generally, your business's financial projections are created by aggregating five types of projections.
- Sales projections estimate what you think you'll earn in sales. You can use past data if you're operating an existing business. New businesses will need to rely on research into industry data. Factoring in external forces can help you create the most realistic projection possible.
- Calculate expense projections by considering all the costs you'll incur to run your business for the timeframes you're exploring. Including an additional margin of 10-20% can help weather whatever comes up.
- Balance sheet projections demonstrate your business's overall health by factoring in assets, liabilities, and equity. Past and current balance sheets may help you extrapolate into the future, though new companies must rely on research.
- Income statement projections forecast net income (your gross income minus expenses). This demonstrates the profit you are expecting to make. Like a balance sheet projection, these are easier to make once you've been in business for six or more months.
- Cash flow projections consider income and expense to estimate the movement of money in and out of your business. As with balance sheet projections and income statement projections, use data you find from industry research if your business is new or not yet started.
5. Are there templates available to make it easier to make financial projections?
Microsoft's support page walks you through making forecasts if you've already been tracking your data for the various projections needed to make financial projections in Excel.
The US Chamber of Commerce also shows how to make projections using the Forecast Sheet tool.
Score has a robust yet easy-to-use template you can download that works in Excel and allows you to create a financial projection from scratch or pull in data from previously made documents. Since being realistic is important, the template's diagnostic tools help ensure your projections are in a range that would be considered reasonable.
Score also has an on-demand class to help you with financial projections.
Many other software options available for small businesses include forecasting tools. If you use accounting software, check the educational content on the website to see what's available — or use one of the free tools listed above!
6. I've made my financial projections. Now what?
As you get down to business, you can monitor your financial projects to see where you were accurate and where changes are needed. Those comparisons can help you dial in your projections and your planning.
As you monitor, you can also keep predicting by testing out what different strategies may do to or for your business — from changing prices or the payment terms of your invoices to paying down debt or getting new equipment.
As you learn about your cash flow cycles and other contingencies, you can start thinking about your next big business steps. Ready to talk about those steps or have questions about getting your business off the ground? A local business banking expert is ready to help.
