Strange as it may sound, the creation of financial projections is far more important and complex, than the actual results. More than merely the figures, it is the planning that matters. Or restated, it is the means to the end that matters here more than the end.
Without financial projections, business is like fumbling in the dark without a lamp and a map and you will not be able win investor confidence or obtain financing. Even if you are self-funding, or you have a family driven business, you need financial projections as a guide and barometer to measure your company’s performance.
You will need to consider these steps to arrive at your financial projections:
- Develop your 3-5 year Sales forecast: You can make your forecast, based on past sales data, competitive comparisons, and the current economic trend. Typically it is a blend each and you should understand that your optional lenders aren’t going to believe you anyway! We all want to believe that our sales are going to 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 from now, those same investors are a great source of more 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 and so on. Typically after estimating the cost of goods, we then break down the operating expenses into broader categories such as: Sales and Marketing, Administrative and then either Research and Development or Misc. Production Costs.
- Conceive a Cash Flow Statement: This refers to the flow of cash in and out of your business and reveals your liquidity, or the ability to use cash when required. (and important for lenders, the ability to pay them back!) The Cash Flow Statement is of key interest to investors and lenders as they will want to make sure that your business plan includes enough cash to keep operating.
- Build your Income Projections: This refers to your financial position, resulting from revenues, and cost of goods sold, gross profit and operating expenses. The amount of income you project is important from the standpoint of long term viability but in some cases such as internet sales, sometimes growth and number of customers become equally important.
- Consider your Assets and Liabilities: Assets are things you own that have value, while liabilities are the amounts you owe to others. When building your projections, you need to make sure that you have included the buildings, equipment, vehicles and such that you will need to support your business plan.
- Arrive at your Break Even Analysis: A key area of interest in projections is when you are poised to make profits in your business based on a combination of fixed costs, variable costs per unit of sales, and revenue per unit of sales. This is the final phase in your business where expenses are equal to actual sales.